-----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, QA5QiTTzGPowYBFXFU8yaEz8LvoXQnfvrvAu8147FyXCgugIehxEKXcdRmBvfASF JplL7Xv3Yf8e3k7BfPEAug== 0000950137-99-000210.txt : 19990311 0000950137-99-000210.hdr.sgml : 19990311 ACCESSION NUMBER: 0000950137-99-000210 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENNECO INC /DE CENTRAL INDEX KEY: 0001024725 STANDARD INDUSTRIAL CLASSIFICATION: FARM MACHINERY & EQUIPMENT [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: 99561661 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 ANNUAL REPORT 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1998 [ ] 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.) 1275 KING STREET 06831 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:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- 6.70% Notes due 2005; 7.45% Debentures due 2025; 8.075% New York Stock Exchange Notes due 2002; 8.20% Notes due 1999; 9.20% Debentures due 2012; 10.075% Notes due 2001; 10.20% Debentures due 2008 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 OF SHARES MARKET VALUE HELD BY HELD BY NON-AFFILIATES AT JANUARY 31, 1999 NON-AFFILIATES - ------------------------------------------ -------------------- Common Stock, 168,628,528 shares $5,206,405,802*
- ------------------------- * Based upon the closing sale price on the Composite Tape for the Common Stock on January 29, 1999. 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, 169,073,896 shares outstanding as of January 31, 1999. DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K DOCUMENT INTO WHICH INCORPORATED -------- ----------------------- Tenneco Inc.'s Definitive Proxy Statement for the Annual Meeting of Shareowners to be Held May 11, 1999 Part III
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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 "will," "may," "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 bases underlying the forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases 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 Specialty and Paperboard 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 certain packaging products is also subject to changes in consumer preferences. Demand and pricing of Tenneco Automotive, Specialty Packaging and Paperboard 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 Paperboard Packaging's markets had an adverse influence on its results of operations in the fourth quarter of 1998 and in 1997 and 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Years 1998 and 1997" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Years 1997 and 1996." 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 certain Specialty Packaging and Paperboard 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. Similarly, a number of Tenneco employees are represented by unions under collective bargaining 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 significant customer or the Company could have an adverse impact on the Company. For example, the General Motors i 3 strike in 1998 reduced second and third quarter revenue and income growth in Tenneco Automotive's original equipment business. Risks Associated with International Operations. The Company operates facilities and sells products in countries throughout the world. As a result, the Company is subject to risks associated with selling and operating in foreign countries, including devaluations and fluctuations in currency exchange rates, imposition of limitations on conversion of foreign currencies into U.S. dollars or remittance of dividends and other payments by foreign subsidiaries, 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, regulatory changes and other governmental actions, including the ability to receive regulatory approvals and the timing of such approvals; (ii) results of analyses regarding the Company's strategic alternatives; (iii) material substitution; (iv) 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; (v) new technologies; (vi) the Company's ability to integrate operations of acquired businesses quickly and in a cost-effective manner; (vii) changes in distribution channels or competitive conditions in the markets and countries where the Company operates; (viii) capital availability or costs, including changes in interest rates, market perceptions of the industries in which the Company operates or ratings of securities; (ix) increases in the cost of compliance with regulations, including environmental regulations, and environmental liabilities in excess of the amount reserved; (x) changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies; and (xi) the timing and occurrence (or non-occurrence) of transactions and events which may be subject to circumstances beyond the Company's control. ii 4 TABLE OF CONTENTS PART I Item 1. Business.................................................... 1 Tenneco Inc. ............................................. 1 Contributions of Major Businesses......................... 2 Automotive................................................ 3 Specialty Packaging....................................... 10 Paperboard Packaging...................................... 14 Tenneco Business Services................................. 17 Environmental Matters..................................... 18 Certain Reorganization Agreements......................... 18 Item 2. Properties.................................................. 18 Item 3. Legal Proceedings........................................... 20 Item 4. Submission of Matters to a Vote of Security Holders......... 21 Item 4.1. Executive Officers of the Registrant........................ 21 PART II Item 5. Market for Registrant's Common Equity and Related 22 Stockholder Matters......................................... Item 6. Selected Financial Data..................................... 23 Item 7. Management's Discussion and Analysis of Financial Condition 25 and Results of Operations................................... Item 8. Financial Statements and Supplementary Data................. 40 Item 9. Changes in and Disagreements with Accountants on Accounting 76 and Financial Disclosure.................................... PART III Item 10. Directors and Executive Officers of the Registrant.......... 76 Item 11. Executive Compensation...................................... 76 Item 12. Security Ownership of Certain Beneficial Owners and 76 Management.................................................. Item 13. Certain Relationships and Related Transactions.............. 76 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 76 8-K.........................................................
iii 5 PART I ITEM 1. BUSINESS. TENNECO INC. Tenneco Inc., a Delaware corporation, is a global manufacturing company with operations in automotive parts ("Automotive"), specialty packaging ("Specialty Packaging"), and folding carton and containerboard packaging ("Paperboard 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. Specialty Packaging is among the world's leading and most diversified packaging manufacturers, providing packaging products for food service, supermarket, consumer, institutional and industrial markets. Paperboard Packaging manufactures and sells containerboard, corrugated, folding carton, lumber and building products. As used herein, the term "Tenneco" or the "Company" refers to Tenneco Inc. and its consolidated subsidiaries and, as the context requires, "Automotive," "Specialty Packaging" and "Paperboard Packaging" refer to the subsidiaries and affiliates of Tenneco Inc. engaged in the automotive parts, specialty packaging, and folding carton and containerboard packaging businesses, respectively. 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, Specialty Packaging, Paperboard 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. On July 21, 1998, Tenneco announced that its Board of Directors had authorized management to develop a broad range of strategic alternatives designed to better realize the long-term value of its businesses for shareowners. Among the options is the separation of the automotive, containerboard packaging and specialty packaging businesses. In addition, Tenneco announced a cost reduction program expected to result in annual savings of $135 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Strategic Alternatives Analysis" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Years 1998 and 1997 -- Restructuring and Other Charges." On January 26, 1999, Tenneco announced that it had entered into an agreement to contribute the containerboard assets of its Paperboard Packaging business into a new joint venture with Madison Dearborn Partners in exchange for cash and debt assumption totaling approximately $2 billion, assumption of the containerboard business liabilities and a 45% common equity interest in the joint venture. These assets represent substantially all of the assets of the Paperboard Packaging segment and include four mills, 67 corrugated products facilities and an ownership or controlling interest in approximately 950,000 acres of timberland. Paperboard Packaging's folding carton business is not included in the transaction. The joint venture entity (to be called Packaging Corporation of America) will be headed by Paul T. Stecko, who will serve as its chairman and chief executive officer. Upon closing of the transaction, Mr. Stecko will resign his position as president and chief operating officer of Tenneco, but will continue to serve on Tenneco's Board of Directors. The transaction is expected to close during the first half of 1999, subject to the satisfaction of customary conditions including entering into certain financing arrangements. Tenneco believes that this strategic repositioning of the business will reduce the impact of the containerboard business's cyclicality on 1 6 Tenneco's earnings, generate cash proceeds and still allow Tenneco to benefit, to the extent of its 45% common equity interest, from this business. See "Business -- Paperboard Packaging" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Strategic Alternatives Analysis." Tenneco continues to analyze the alternatives for Tenneco Automotive and Specialty Packaging as well as Paperboard Packaging's folding carton business. Those alternatives include a sale, merger, spin-off or public offering. Tenneco will make public announcements of the expected transactions as those transactions are determined. CONTRIBUTIONS OF MAJOR BUSINESSES Information concerning Tenneco's operating segments, geographic areas and major products or groups of products is set forth in Note 12 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. The following tables summarize for each of the operating segments 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. NET SALES AND OPERATING REVENUES FROM CONTINUING OPERATIONS:
1998 1997 1996 --------------- ------------- ------------- (DOLLAR AMOUNTS IN MILLIONS) Automotive..................................... $3,237 43% $3,226 45% $2,980 45% Specialty Packaging............................ 2,785 37 2,553 35 1,987 30 Paperboard Packaging........................... 1,674 22 1,521 21 1,683 26 Intergroup sales and other..................... (99) (2) (80) (1) (78) (1) ------ --- ------ --- ------ --- Total..................................... $7,597 100% $7,220 100% $6,572 100% ====== === ====== === ====== ===
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST:
1998 1997 1996 --------------- ------------- ------------- (DOLLAR AMOUNTS IN MILLIONS) Automotive..................................... $248 39% $407 53% $249 40% Specialty Packaging............................ 328 51 308 40 249 40 Paperboard Packaging........................... 131 20 63 9 152 24 Other.......................................... (66) (10) (14) (2) (22) (4) ------ --- ------ --- ------ --- Total..................................... $641 100% $764 100% $628 100% ====== === ====== === ====== ===
CAPITAL EXPENDITURES FOR CONTINUING OPERATIONS:
1998 1997 1996 --------------- ------------- ------------- (DOLLAR AMOUNTS IN MILLIONS) Automotive..................................... $195 33% $211 38% $177 31% Specialty Packaging............................ 190 32 227 41 172 30 Paperboard Packaging........................... 203(1) 34 108 19 169 30 Other.......................................... 4 1 12 2 55 9 ------ --- ------ --- ------ --- Total................................... $592 100% $558 100% $573 100% ====== === ====== === ====== ===
Interest expense, income taxes, and minority interest related to continuing operations that were not allocated to the operating segments of Tenneco are:
1998 1997 1996 ------ ------ ------ (MILLIONS) Interest expense (net of interest capitalized)................................. $240 $216 $195 Income tax expense............................. 116 163 194 Minority interest.............................. 30 24 21
- ------------------------- (1) Includes $84 million related to the purchase of certain leased timberlands in anticipation of the transfer of the containerboard assets to the joint venture entity described above. 2 7 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 products and systems primarily under the Walker(R) brand name and its ride control products and systems 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 $520 billion in 1998. This market was comprised of approximately $420 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 on emerging markets for additional growth opportunities, particularly China, Eastern Europe, India and South 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 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 largely 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 1996 through 1998 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, -------------------------- 1998 1997 1996 ---- ---- ---- EXHAUST SYSTEMS PRODUCTS Aftermarket............................................... $ 590 $ 686 $ 710 OE Market................................................. 1,224 1,067 989 ------ ------ ------ 1,814 1,753 1,699 ------ ------ ------ RIDE CONTROL PRODUCTS Aftermarket............................................... 685 782 768 OE Market................................................. 738 691 513 ------ ------ ------ 1,423 1,473 1,281 ------ ------ ------ Total Tenneco Automotive............................... $3,237 $3,226 $2,980 ====== ====== ======
3 8
PERCENTAGE OF NET SALES ------------------------------ YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ---- ---- ---- EXHAUST SYSTEMS PRODUCTS Aftermarket............................................... 33% 39% 42% OE Market................................................. 67 61 58 --- --- --- 100% 100% 100% === === === RIDE CONTROL PRODUCTS Aftermarket............................................... 48% 53% 60% OE Market................................................. 52 47 40 --- --- --- 100% 100% 100% === === ===
Brands Tenneco Automotive manufactures and markets leading brand names. Monroe(R) ride control products and systems and Walker(R) exhaust products and 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 more than 25 different OE customers on a global basis, and has its products on 11 of the 15 top selling global car models. Its OE customers include the following: NORTH AMERICA EUROPE INDIA CAMI BMW Maruti Suzuki DaimlerChrysler DaimlerChrysler Ford DAF AUSTRALIA Freightliner Daihatsu Ford General Motors Fiat General Motors/Holden Honda Ford Mitsubishi Mazda Jaguar Toyota Mitsubishi Lada Navistar Leyland JAPAN Nissan Mitsubishi Mazda NUMMI Nissan Nissan Toyota Opel Suzuki Volkswagen Peugeot/Citroen Toyota Porsche SOUTH AMERICA Renault/Matra OTHER ASIA DaimlerChrysler Rover/Land Rover DaimlerChrysler Fiat Saab/Scania Citroen Ford Toyota General Motors Volkswagen/Audi/SEAT/Skoda Honda Volvo Renault Toyota Volkswagen
4 9 Tenneco Automotive's aftermarket customers include such wholesalers and retailers as National Auto Parts Association ("NAPA"), Monro Muffler Brake and Advance Auto in North America and Temot, Autodistribution International 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 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 10 of the 15 top-selling 1998 new car models worldwide and seven of the top ten 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 suppliers. Manufacturing and Engineering Walker operates 32 manufacturing facilities outside the U.S. In the U.S., Walker operates 12 manufacturing facilities, three engineering and technical facilities and seven distribution centers. See Item 2, "Properties." It also has a controlling interest in two joint ventures that own manufacturing facilities in China. Walker locates OE manufacturing facilities close to its OE customers, when feasible, to provide just-in-time delivery opportunities. Walker has established two engineering centers in North America and Europe, near where its OE customers develop vehicles. Walker's engineering capabilities include advanced predictive design tools, advanced prototyping processes and state-of-the-art testing equipment. This allows Walker to provide just-in-time delivery and when feasible in-line sequencing of exhaust systems. During the 1990's, Walker expanded its converter and emission system design development, test and manufacturing capabilities. These capabilities resulted in new converter and emission control systems in 1998. This expanded technology makes Walker a "full system" supplier, supplying complete exhaust systems from the manifold to the tailpipe, in order to provide full emission and noise control. Strategic Acquisitions/Joint Ventures As part of its international growth strategy, 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 Minuzzi, 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. In 1998, Tenneco Automotive established a second joint venture in China (Shanghai) to supply exhaust systems to the Central and Southern Chinese automotive markets. Also in 1998, Tenneco Automotive established a joint venture in India (Pune) to supply exhaust systems to OE customers and the aftermarket. 5 10 The following table sets forth for each of the years 1996 through 1998 information relating to Tenneco Automotive's sales of exhaust systems:
PERCENTAGE OF NET SALES ------------------------ YEAR ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- UNITED STATES SALES Aftermarket............................................... 37% 43% 46% OE Market................................................. 63 57 54 --- --- --- 100% 100% 100% === === === FOREIGN SALES Aftermarket............................................... 30% 36% 38% OE Market................................................. 70 64 62 --- --- --- 100% 100% 100% === === === TOTAL SALES BY GEOGRAPHIC AREA(a) United States............................................. 41% 44% 44% European Union............................................ 44 41 43 Canada.................................................... 7 7 6 Other areas............................................... 8 8 7 --- --- --- 100% 100% 100% === === ===
- ------------------------- (a) See Note 12 to the Tenneco Inc. and Consolidated Subsidiaries Financial Statements for certain information about foreign and domestic operations. 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 five manufacturing facilities and three engineering and technical facilities in the United States and 16 manufacturing operations in other jurisdictions. Monroe also has controlling interests in joint 6 11 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 generally compromise either ride comfort or vehicle control. Monroe's innovative 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. In late 1997, Monroe further enhanced this technology by adding the Safe-Tech(TM) fluon piston band, which improves shock absorber performance and durability. Strategic Acquisitions/Joint Ventures As a means of expanding its product lines and offering OE manufacturers more complete modular ride control systems, 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, engine mounts and control arms, for the auto, light truck and heavy truck markets. With this acquisition, Tenneco Automotive has full capability to deliver complete suspension systems to 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. 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. In 1997, Tenneco Automotive entered into a joint venture which resulted in its acquisition of majority ownership of Armstrong, a leading South African manufacturer of ride control products. 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. 7 12 The following table sets forth for each of the years 1996 through 1998 information relating to Tenneco Automotive's sales of ride control equipment:
PERCENTAGE OF NET SALES ------------------------ YEAR ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- UNITED STATES SALES Aftermarket............................................... 43% 50% 62% OE Market................................................. 57 50 38 --- --- --- 100% 100% 100% === === === FOREIGN SALES Aftermarket............................................... 53% 56% 59% OE Market................................................. 47 44 41 --- --- --- 100% 100% 100% === === === TOTAL SALES BY GEOGRAPHIC AREA(a) United States............................................. 47% 48% 48% European Union............................................ 32 27 34 Canada.................................................... 3 3 3 Other areas............................................... 18 22 15 --- --- --- 100% 100% 100% === === ===
- ------------------------- (a) See Note 12 to Tenneco Inc. and Consolidated Subsidiaries Financial Statements for certain information about foreign and domestic operations. 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 of 95%. Tenneco Automotive sells its OE products directly. With respect to the aftermarket, Tenneco Automotive employs six primary distribution techniques: (i) the traditional three-step distribution system: warehouse distributors, jobbers and installers; (ii) the specialty two-step distribution system: specialty warehouse distributors and installers; (iii) sales to program marketing groups; (iv) direct sales to retailers; (v) direct sales to installer chains; and (vi) direct sales to car dealers. 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 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. Tenneco Automotive is also aggressively responding to aftermarket customer consolidation and merging channels of distribution. 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. 8 13 Continue to Develop Value-Added Products Tenneco Automotive, a Tier 1 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, strategic alliances and cooperation development agreements in order to increase Tenneco Automotive's ability to deliver such full-system capabilities. To this end, in 1998 Tenneco Automotive concluded agreements with Siemens Automotive and Ohlins Racing A.B. 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, Tenneco Automotive has made 11 international acquisitions and entered into five 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. 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. Branding Tenneco Automotive, whose major strategic strength is the performance of its leading Monroe(R) and Walker(R) brand names, continues to emphasize product value differentiation. Tenneco Automotive's primary brand names include: (i) the Monroe Sensa-Trac(R) product line that has been enhanced by the new Safe- Tech(TM) System technology incorporating a new piston band and piston and valving design to improve performance and durability; (ii) Rancho(R) ride control products for the high performance light truck market; (iii) DynoMax(TM) high performance exhaust systems; and (iv) Walker's new Quiet-Flow(TM) muffler, which features an open-flow design that increases exhaust flow, improves sound quality and significantly reduces exhaust backpressure when compared to other replacement mufflers. Tenneco Automotive is also capitalizing on its brand strength by incorporating newly acquired product lines within existing product families. Tenneco Automotive's brand equity is an important asset in a time of customer consolidation and merging channels of distribution. 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. 9 14 Operating Cost Leadership Tenneco Automotive will continue to seek cost reductions as it standardizes its products 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, 1999, Tenneco Automotive had approximately 23,600 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, marketing and distribution of its products. SPECIALTY PACKAGING Specialty Packaging provides packaging solutions for food service and food storage, product protection during transportation and storage and consumer home storage. Specialty Packaging also provides packaging solutions that assist in merchandising through point of purchase displays. The business produces foam and clear plastic packaging products for the food service industry, polyethylene bags, industrial stretch film, plastic protective and flexible packaging, honeycomb products, molded fiber, aluminum containers, industrial aluminum materials, plastic building products, and disposable cookware, dinnerware and storage and waste bags. Specialty plants convert paper, aluminum, polystyrene, polyolefins (such as polyethylene and polypropylene) and PVC polymers into value-added clear, foamed, flexible or rigid products. 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 One-Zip(R) and E-Z Foil(R). Specialty Packaging's lightweight, rigid plastic packaging for in-store deli, produce, bakery and catering applications maintains quality and enhances presentation. Specialty Packaging also manufactures molded fiber for produce and egg packaging, food service items and institutional tableware. Specialty Packaging also manufactures protective, flexible and cushion packaging that serves multiple industries including food, medical, automotive, electronics, furniture, durable goods, building and construction. Products such as technical and air encapsulated foam 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 protective packaging products include padded mailers, a variety of laminated protective coverings and customized packaging systems including proprietary equipment. 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. The medical products business produces disposable surgical kits custom designed for specific procedures. Specialty Packaging is headquartered in Lake Forest, Illinois. OVERVIEW OF SPECIALTY PACKAGING INDUSTRY The global packaging market is estimated at $400 billion, with nearly one-quarter of the market in the United States, slightly less in Europe and the balance spread throughout the rest of the world. Packaging remains one of the most fragmented industries, with the top five companies comprising less than a 9% worldwide market share. By material type, Specialty Packaging participates in the plastic, paper and 10 15 aluminum categories, which are among the fastest growing. Demand for packaging varies substantially with the end markets served. The food service/supermarket, consumer and packer/processor packaging market segments are benefiting from socio/demographic trends that increasingly favor convenient food consumption practices and are fueling the rapidly growing home meal replacement and carryout market segments. The North American market for food service and food packaging is approximately $10 billion. Protective/flexible packaging in Europe and North America represents a $5 billion market that serves such industries as electronics, furniture, automotive and electronic commerce. Specialty Packaging competes with a range of packaging producers, who represent suppliers of alternative materials and structures, as well as manufacturers serving different geographies and distribution channels. ANALYSIS OF SPECIALTY PACKAGING'S REVENUES The following tables set forth for each of the years 1996 through 1998 information relating to the sales of Specialty Packaging's primary businesses:
NET SALES (MILLIONS) -------------------------------- YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ------ ------ ------ Disposable plastic, fiber, and aluminum packaging products.................................................. $2,126 $2,105 $1,862 Plastic and fiber protective/flexible packaging products.... 607 399 78 Other....................................................... 52 49 47 ------ ------ ------ Total Specialty Packaging.............................. $2,785 $2,553 $1,987 ====== ====== ======
PERCENTAGE OF NET SALES ------------------------------ YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ---- ---- ---- Disposable plastic, fiber, and aluminum packaging products.................................................. 76% 83% 94% Plastic and fiber protective/flexible packaging products.... 22 15 4 Other....................................................... 2 2 2 --- --- --- Total Specialty Packaging.............................. 100% 100% 100% === === === Sales by Geographic Area(a) United States............................................... 80% 83% 89% European Union.............................................. 17 15 8 Canada...................................................... 1 1 2 Other areas................................................. 2 1 1 --- --- --- 100% 100% 100% === === ===
- ------------------------- (a) See Note 12 to Tenneco Inc. and Consolidated Subsidiaries Financial Statements for certain information about foreign and domestic operations. SALES AND MARKETING Specialty Packaging's businesses utilize a sales and marketing organization of 500 people to sell its products through three main business units: (i) protective/flexible packaging, (ii) consumer products and (iii) food service/supermarket. Specialty Packaging's protective and flexible packaging group sells cushion and surface protection to distributors, fabricators and directly to end-users focusing on electronics, furniture and automotive markets worldwide. The consumer group sells trash bags, food storage bags, disposable plates and bowls and disposable aluminum cookware primarily to grocery stores and mass merchandisers. These products are sold through a direct sales force and a national network of brokers and manufacturers representatives. 11 16 The food service/supermarket and packer/processor sales organizations sell a broad line of disposable, rigid and flexible packaging made from plastic, aluminum, molded fiber and pressed paperboard materials. Product lines consist of disposable plates and bowls, carry out containers, rigid display containers, microwavable and dual ovenable food containers, food and specialty retail bags and foil wrap. The food service/supermarket sales are made primarily through a network of independent distributors. A portion of sales are direct to end users. The packer/processor organization primarily sells directly to large processors with a portion of its sales going through distribution. The industrial business groups sell stretch film, aluminum roll stock, foam insulation and house wrap products. These businesses use a combination of direct and distributor sales to reach their customer base. MANUFACTURING AND ENGINEERING In North America, Specialty Packaging operates 67 specialty business facilities in 18 states, Canada and Mexico. Plastic and aluminum disposable food service and consumer products, stretch films and building products are manufactured at 25 plants. The protective operations convert paperboard into honeycomb products at 12 plants, and 16 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) and kraft papers. Molded fiber packaging is produced at seven locations; an eighth location manufactures tooling for the molded fiber plants. Finally, ovenable paperboard products are manufactured at two facilities. A research and development center for food packaging and process development is located in a new facility in Canandaigua, New York. Design centers for protective and flexible packaging and process development are located in Buffalo Grove, Illinois, Grand Rapids and Troy, Michigan and Santa Fe Springs, California. Specialty Packaging currently operates or has an ownership interest in 27 international manufacturing operations. Eleven protective packaging plants in Belgium, England, France, Germany, Italy, The Netherlands, Poland, Spain and Hungary 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 a European manufacturer of molded fiber and cushion packaging with manufacturing facilities in Elsfleth, Germany and Great Yarmouth, England. Specialty Packaging's Alupack operation in Belp, Switzerland produces smoothwall aluminum portion packs and specialty food applications. In plastics, Specialty Packaging is a manufacturer of single-use thermoformed plastic food containers and films in the United Kingdom, with four manufacturing facilities in England, Scotland and Wales. Specialty Packaging also has built a wood products operation in Romania. It participates in several international joint ventures, including a folding carton plant in Dongguan, China, a recycling venture in Budapest, Hungary and a corrugated converting facility in Shaoxing, China. STRATEGIC ACQUISITIONS/JOINT VENTURES Specialty Packaging sales more than doubled with the acquisition of Mobil Plastics in late 1995, growing its product portfolio to include foam containers, meat and poultry trays, disposable plates and bowls, polyethylene film products, produce bags and stretch film. The acquisition brought in well-known consumer products including Hefty(R) trash bags and tableware and Baggies(R) food bags. The Mobil Plastics acquisition also contributed state-of-the-art manufacturing capabilities and new product technologies including the "OneZip" closure system to Tenneco. The acquisition of Amoco Foam Products Company ("Amoco Foam Products") in August 1996 enhanced Specialty Packaging's distribution capabilities and market coverage, especially among the food packer/processors. Amoco Foam Product's portfolio also included foam tableware, hinged lid containers and food trays as well as residential and commercial insulation products. In line with its strategy of growing in value-added specialty packaging applications, Tenneco entered the protective packaging sector through the acquisition of Hexacomb, a kraft honeycomb producer, in 1995. 12 17 By acquiring Koninklijke KNP BT's protective and flexible packaging businesses in 1997, Tenneco broadened the scope of its protective packaging business to include plastic foam, technical and air encapsulated foam and mailer applications and entered the European and North African protective and flexible packaging markets. Tenneco also acquired two honeycomb plants in 1997. Tenneco acquired Richter Manufacturing, a West Coast manufacturer of foam protective packaging products, in April 1998, expanding the geographical coverage of its North American protective packaging operation. Tenneco also augmented its ovenable paperboard manufacturing capacity in September 1998, through the acquisition of a Champion International facility in Belvidere, Illinois, allowing Tenneco to serve all segments of the market for this product. In December 1998 Tenneco acquired the foam packaging business of Sentinel Products Corp., a global leader in specialty polyolefin foams, to further diversify its protective packaging product offering and to increase manufacturing capacity. Tenneco also formed a joint venture with Sentinel to produce and market polyolefin foam applications in a wide variety of non-packaging markets including automotive, sports and leisure, medical and adhesive tapes. BUSINESS STRATEGY The business has embarked upon an aggressive growth plan to be the leading specialty packaging company, offering a broad line of products that provide customers with the best packaging solutions. Since 1995, Specialty Packaging has grown from $845 million to $2.785 billion in revenues through both acquisitions and internal growth. Key elements of Specialty Packaging's strategy include actions and plans to: Drive Strong Internal Growth Base businesses continue to exceed industry average growth rates by targeting fast growing niche markets within foodservice, consumer, protective and flexible business segments. With its geographical coverage and broad product line, Specialty Packaging is a primary supplier to nationwide distributors and has developed long-term relationships with key players in the consolidating packaging and food service distribution sector. Leverage Strong Brand Franchises Specialty Packaging is leveraging the Hefty(R) brand, its leading consumer brand, through product line extensions, including Hefty One-Zip(R) storage/freezer bags and foam applications. Specialty Packaging has the leading market share for consumer disposable aluminum foil in the United States with its E-Z Foil(R) brand. Focus on New Product and Process Innovation Specialty Packaging emphasizes investing in technology and innovation to maintain a leadership position in new product development. A successful example of Specialty Packaging's development efforts is Hefty One-Zip(R), a patented zipper closure system that has helped Specialty Packaging establish a strong position in the consumer zipper storage/freezer market since the full-scale launch of those products in 1996. Specialty Packaging is leveraging its position in zipper closures through expansion of other slider closure applications. Examples include Fast-Pak(TM) deli/bakery bags and Hefty SlideRite(TM) bags for baby wipes, medical lab samples and other specialized applications. New protective packaging introductions included Profiles(R) foams, a polyethylene foam based material used in various markets such as building products and furniture, and polypropylene foams with applications in both the automotive and sport and leisure markets. Flexible packaging innovations included the Propyflex(R) medical bag for fluids, which is chlorine free and satisfies all the product requirements for transport reliability, flexibility and transparency even after sterilization. Additionally, food processor product innovations are underway such as ActiveTech(TM) packaging, a proprietary modified atmospheric package ("MAP") for case-ready red meat. Active Tech(TM) extends shelf life and maintains aesthetic qualities through an oxygen "scavenger" technology. 13 18 Grow Protective Packaging Specialty Packaging has established a global protective packaging growth platform with the acquisitions of Hexacomb, KNP-BT's protective packaging business and, most recently, Richter and the foam packaging business of Sentinel. With over $600 million in worldwide protective sales, Specialty Packaging is a leading producer of protective packaging in Europe and is one of the largest in the United States. Specialty Packaging's strategy is to secure future growth from custom engineering and design capabilities that will provide multi-material packaging solutions to market segments which are currently growing at three times the rate of overall packaging growth. Achieve Operating Cost Leadership The volume and timing of Specialty Packaging's purchases of materials provide opportunities to obtain a competitive advantage by reducing resin and other raw material costs. Specialty Packaging also leverages its volumes and the geographical reach of its end products to reduce transportation costs. Internally, aggressive investment in retooling, rationalization and facility integration allows Specialty Packaging to realize efficiencies and lower costs in production. Additional initiatives are in place to streamline supply chain costs, re-engineer operations and reduce working capital. OTHER As of January 1, 1999, Specialty Packaging had approximately 15,700 employees. It owns a number of domestic and foreign patents and trademarks and other intellectual property relating to its products which are important to the manufacture, marketing and distribution of such products. The principal raw materials used by Specialty Packaging are plastic resin, aluminum rollstock, recycled fiber and kraft linerboard. Each material is obtained from a variety of suppliers, many of whom provide raw materials under long-term contracts which minimize market volatility. PAPERBOARD PACKAGING Paperboard Packaging manufactures and sells corrugated containers, containerboard, folding cartons and lumber and related wood products. In the containerboard market, Paperboard Packaging ranks as the sixth largest producer of containerboard in North America, producing 2.1 million tons annually, which are converted by its corrugated container plants or sold to both domestic and export customers. Its corrugated products include containers, sheets and pads and value-added enhanced graphics packaging and displays. It also manufactures and sells high-quality, innovative folding carton packaging featuring enhanced graphics. Paperboard Packaging also participates in the wood products business and has access to approximately 950,000 acres of timberland in the United States through both owned and controlled properties. Paperboard Packaging is headquartered in Lake Forest, Illinois. OVERVIEW OF PAPERBOARD PACKAGING INDUSTRY The United States packaging industry's 1998 production is estimated at $90-$95 billion, with paperboard making up nearly 40% or $35 billion. Paperboard packaging consists of three broad categories: containerboard (converted into corrugated containers), boxboard (converted into folding cartons) and other industrial converted products. Domestic containerboard companies produced 34 million tons in 1998. The containerboard market can be characterized as highly cyclical and fragmented, with the top five producers making up just under 44% of the total. However, the industry recently has seen some consolidation. With the recently announced Smurfit-Stone and International Paper-Union Camp mergers, the top five producers are expected to account for just under 52% of capacity. Containerboard demand is dependent on both domestic corrugated box production, which closely tracks industrial production and export activity. Corrugated box shipments have grown at an annual rate of 2.5% over the past ten years. 14 19 The $5.7 billion folding carton market is also highly fragmented, with more than 300 producers. The top five producers currently account for less than half of the industry. Folding carton demand is influenced by food packaging and other non-durable goods demand. Paperboard Packaging's operations face competition from other manufacturers of packaging products, including manufacturers of alternative products, in each of its geographic and product markets. ANALYSIS OF PAPERBOARD PACKAGING'S REVENUES The following tables set forth for each of the years 1996 through 1998 information relating to the sales of Paperboard Packaging's primary businesses:
NET SALES (MILLIONS) -------------------------- YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ---- ---- ---- Corrugated shipping containers and containerboard products.................................................. $1,463 $1,326 $1,412 Folding cartons and recycled paperboard mill products....... 103 112 151 Other....................................................... 108 83 120 ------ ------ ------ Total Paperboard Packaging............................. $1,674 $1,521 $1,683 ====== ====== ======
PERCENTAGE OF NET SALES -------------------------- YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ---- ---- ---- Corrugated shipping containers and containerboard products.................................................. 87% 87% 84% Folding cartons and recycled paperboard mill products....... 6 7 9 Other....................................................... 7 6 7 --- --- --- Total Paperboard Packaging............................. 100% 100% 100% === === === Sales by Geographic Area(a) United States............................................... 100% 100% 100% === === ===
- ------------------------- (a) See Note 12 to Tenneco Inc. and Consolidated Subsidiaries Financial Statements for certain information about foreign and domestic operations. SALES AND MARKETING AND NEW PRODUCT DEVELOPMENT Paperboard Packaging's corrugated container plants consume approximately 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 close to each mill. The balance of containerboard production is exported or sold to other domestic converters and users. Paperboard Packaging maintains a direct sales and marketing organization of over 380 sales personnel serving both local and national accounts. The sales organization consists primarily of sales representatives and a sales manager at each manufacturing facility serving local and regional accounts, while corporate account managers are positioned to correspond to customer locations. General marketing support is maintained at Paperboard Packaging's headquarters. Paperboard Packaging 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, 11 graphics facilities and approximately 70 sales personnel, new product development engineers, and product graphics and design specialists. These centers feature state-of-the-art computers and equipment for 24-hour design turnaround and reduced product delivery times. 15 20 MANUFACTURING AND ENGINEERING Paperboard Packaging has two kraft linerboard mills and two corrugating medium mills, located in Tennessee, Georgia, Michigan and Wisconsin, respectively, which in 1998 collectively produced 2.1 million tons, or over 6% of the industry's annual U.S. production. Over the last four years, Paperboard Packaging has invested approximately $80 million at the Counce, Tennessee mill to add more than 60,000 tons of annual capacity and enable 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. Paperboard Packaging operates three paperstock recycling facilities that provide certain recycled fiber for the Counce, Tennessee mill. Domestically, Paperboard Packaging's corrugated container network includes 67 geographically dispersed plants in 26 states. Based on 1998 volume, these plants manufacture approximately 6% of the industry's total annual U.S. corrugated shipments. Engineers at Paperboard Packaging's headquarters and at its manufacturing support center located in Skokie, Illinois provide technical support to its plant and mill operations. In addition, Paperboard 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. Paperboard Packaging operates five folding carton plants in the West and Midwest. These plants produce high quality, innovative folding carton products utilizing the latest in printing and cutting technology for the sheet-fed offset and narrow-web flexo processes. Their annual production of 53,000 tons represents 2% of the industry's annual U.S. production. As of January 1, 1999, Paperboard Packaging owned, leased, managed or had cutting rights on approximately 950,000 acres of timberland in Alabama, Florida, Georgia, Mississippi, Tennessee, and Wisconsin. In 1998, 1997 and 1996, approximately 36%, 35% and 37%, respectively, of the virgin fiber used by Paperboard Packaging's mill operations was obtained from owned or controlled timberlands. The balance of virgin fiber was purchased from numerous open market wood sellers. To maximize the value of the timber harvested or purchased, Paperboard Packaging operates a wood drying facility and three wood products operations which produce hardwood and pine lumber. Paperboard Packaging is also a party to a joint venture in a chip mill. STRATEGIC ACQUISITIONS/JOINT VENTURES Paperboard Packaging has a value added growth strategy, which was advanced in 1995 with the acquisition of seven corrugated container manufacturing facilities. For example, four of these facilities expanded Paperboard Packaging's graphics and printing capabilities and broadened its offering of products and services to include a variety of point-of-purchase displays and point-of-sale packaging, rotogravure preprint, litho-lamination and advanced graphics design. In June 1996, Paperboard Packaging entered into a joint venture with Caraustar Industries pursuant to which Paperboard Packaging contributed two recycled paperboard mills and a recovered paper stock and brokerage operation. In exchange, Tenneco received cash and a 20% equity position in the joint venture, which interest it sold to Caraustar in June 1998. The aforementioned mills continue to supply recycled paperboard to Paperboard Packaging's folding carton plants. In 1997, Paperboard Packaging acquired an additional specialty sheet plant in Allentown, Pennsylvania, and a set-up box plant in Rochester, New York. In 1998, Paperboard Packaging acquired a wax cascading plant in Eaton Park, Florida to enhance its Winter Haven, Florida container plant's produce packaging product lines. BUSINESS STRATEGY Paperboard Packaging's strategy consists of: (i) improving customer and product mix; (ii) increasing the value-added product offerings and (iii) continuing to focus on cost reductions. Since 1995, acquisitions in specialty corrugated graphics products have reduced Paperboard Packaging's sensitivity to raw material prices and provided capabilities to penetrate greater value-added market segments. Currently, approximately 10% of 16 21 Paperboard Packaging's business is in higher margin enhanced graphics, point-of-purchase displays and point-of-sale packaging. In 1997, Paperboard Packaging's Counce, Tennessee linerboard mill substantially increased its capabilities to produce lightweight linerboard, which represents higher margin and higher growth potential. From late 1996 through 1998, cost reductions of approximately $80 million were achieved at the containerboard mills. A key element in achieving these cost savings has been Paperboard Packaging's fiber flexibility, which allows the containerboard mills to manage their mix of virgin and recycled fiber sources to take advantage of changing market conditions. In the folding carton market segment, new product and process innovations have included structural innovations like the EconoPour(R) family of integral paper pour spouts and the RepelKote(TM) anti-infestation coating for dry food packaging. As part of the strategic alternatives announced in 1998, in January 1999 Tenneco entered into an agreement to contribute the containerboard assets of Paperboard Packaging into a new joint venture with Madison Dearborn Partners in exchange for cash and debt assumption totaling approximately $2 billion and a 45% common equity interest in the joint venture. These assets represent substantially all of the assets of the Paperboard Packaging segment and include four mills, 67 corrugated products facilities and an ownership or controlling interest in approximately 950,000 acres of timberland. Paperboard Packaging's folding carton business is not included in the transaction. The joint venture entity (to be called Packaging Corporation of America) will be headed by Paul T. Stecko, who will serve as its chairman and chief executive officer. Upon closing of the transaction, Mr. Stecko will resign his position as president and chief operating officer of Tenneco, but will continue to serve on Tenneco's Board of Directors. The transaction is expected to be completed during the first half of 1999, subject to the satisfaction of customary conditions including entering into certain financing arrangements. See "Business -- Tenneco Inc." and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Strategic Alternative Analysis." OTHER As of January 1, 1999, Paperboard Packaging had approximately 8,400 employees. Paperboard 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 Paperboard Packaging are important in the manufacturing, marketing and distribution of its products. The principal raw materials used by Paperboard Packaging in its manufacturing operations are pulpwood, sawtimber and recycled fiber. Paperboard Packaging obtains its pulpwood and sawtimber from timberland owned or controlled by it as well as from outside purchases. Recycled fiber is supplied from outside contractual sources as well as internally from its three recycling facilities and its own containerboard clippings and trim. TENNECO BUSINESS SERVICES Tenneco Business Services ("TBS") designs, implements and administers shared administrative service programs and data processing 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, financial reporting, general accounting, accounts payable, 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; (iv) mainframes and distributed systems operations; (v) telecommunications and network operations and management; (vi) help desk support; and (vii) disaster recovery support. 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, 1999, TBS had approximately 350 employees. TBS is headquartered in The Woodlands, Texas, and its data center is located in Lincolnshire, Illinois. 17 22 ENVIRONMENTAL MATTERS The Company estimates that its subsidiaries will make capital expenditures for environmental matters of approximately $39 million in 1999 and that capital expenditures for environmental matters will be approximately $110 million in the aggregate for the years 1999 through 2009. 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 Tenneco Inc. and Consolidated Subsidiaries. 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, Specialty Packaging and Paperboard 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 Supply Participation Agreement which permits Newport News to participate in certain national supplier relationships; (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 owns its executive offices at 1275 King Street, Greenwich, Connecticut 06831, and its telephone number at that address is (203) 863-1000. In connection with the Company's strategic actions, previously discussed, the Company is studying a number of options including the potential disposition of its 18 23 headquarters facility in Greenwich, Connecticut and the consolidation of its executive offices with the existing operational headquarters in Lake Forest, Illinois. Automotive In the United States, Walker operates 12 manufacturing facilities and three engineering and technical facilities. In addition, Walker operates 32 manufacturing facilities located in Argentina, Australia, Brazil, Canada, China, 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 five 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, South Africa, Spain, 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 sales offices in Japan and Singapore. Of the 72 properties described above, 54 are owned and 18 are leased. Eight 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. Specialty Packaging In North America, Specialty Packaging operates a total of 63 manufacturing facilities, of which 35 are owned and 28 are leased. These facilities consist of 35 specialty products manufacturing facilities and 28 protective packaging facilities. The specialty products manufacturing facilities consist of seven molded fiber product plants, one molded fiber tooling fabrication facility, two ovenable paperboard plants, and 25 plants that manufacture disposable plastic and aluminum packaging products. The 28 protective package facilities include 12 paperboard honeycomb products plants, 15 other plants that manufacture plastic, foam and other protective packaging products. In addition, Specialty Packaging participates in a protective plastics joint venture in Chihuahua, Mexico. In addition to the 63 manufacturing facilities, there are four research and design centers. Internationally, Specialty Packaging operates 24 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 four are leased. In addition, Specialty Packaging participates in three joint venture operations in China and Hungary. The international operations include two folding carton operations, one paperboard honeycomb products operation, one corrugated container plant, a waste paper recycling center, a wood products operation, 18 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. Paperboard Packaging Paperboard Packaging operates a total of 84 manufacturing facilities, of which 56 are owned, 27 are leased, and one is held by a joint venture. These facilities consist of 67 corrugated products facilities (65 box plants, one corrugated products wax cascading facility and one machine rebuild facility), five folding carton plants, four wood products facilities, and four mills with nine containerboard machines. Two of the mills (located in Georgia and Wisconsin), including substantially all of the equipment associated with both mills, are held under lease. Additionally, Paperboard Packaging participates in a joint venture chip mill. Three recycled paperstock facilities provide raw materials for the Counce, Tennessee mill. All facilities are located within the continental United States. 19 24 TBS TBS operates out of its headquarters in The Woodlands, Texas, and its data center is located in Lincolnshire, Illinois. Both facilities 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 1, 1999, the Company had been designated as a potentially responsible party in seven "Superfund" sites. The Company has estimated its share of the remediation costs for these sites to be approximately $4 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, 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"), which covers salaried employees of Newport News and other Tenneco divisions, and the 1986 asset valuation for the TRP and its cost accounting treatment. On January 15, 1999, Newport News entered into a settlement agreement with the Federal Government regarding the TRP. Under a separate agreement, Tenneco agreed to pay Newport News $14.5 million with respect to this and other matters. This payment had no material impact on Tenneco's financial condition or results of operations. The Company and its subsidiaries are parties to various 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 financial position or results of operations. 20 25 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 1998. ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below is a list of the executive officers of Tenneco Inc. at March 1, 1999. 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 EFFECTIVE DATE DECEMBER 31, 1998) OFFICES HELD* OF TERM ------------------ ------------- -------------- Dana G. Mead (62)................... 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 (54)................. Director November 1998 President November 1998 Chief Operating Officer January 1997 Theodore R. Tetzlaff (54)........... General Counsel July 1992 Robert T. Blakely (57).............. Executive Vice President May 1996 Chief Financial Officer July 1981 John J. Castellani (47)............. Executive Vice President January 1997 Karl A. Stewart (55)................ 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 November 1998 Paul T. Stecko has been serving as a Director and from December 1993 to June 1997 served 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 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. 21 26 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.
SALE PRICES ----------------- DIVIDENDS QUARTER HIGH LOW PAID ------- ---- --- --------- 1998 1st....................................... 45 36 .30 2nd....................................... 47 1/2 37 .30 3rd....................................... 38 7/8 30 7/8 .30 4th....................................... 37 7/16 29 1/2 .30 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
As of January 31, 1999, there were approximately 81,896 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, 1998, 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. 22 27 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)
1998(a) 1997(a) 1996(a) 1995 1994 ----------- ----------- ----------- ----------- ----------- STATEMENTS OF INCOME DATA(b): Net sales and operating revenues from continuing operations -- Automotive........................... $ 3,237 $ 3,226 $ 2,980 $ 2,479 $ 1,989 Specialty Packaging.................. 2,785 2,553 1,987 845 636 Paperboard Packaging................. 1,674 1,521 1,683 1,923 1,560 Intergroup sales and other........... (99) (80) (78) (26) (19) ----------- ----------- ----------- ----------- ----------- Total............................. $ 7,597 $ 7,220 $ 6,572 $ 5,221 $ 4,166 =========== =========== =========== =========== =========== Income from continuing operations before interest expense, income taxes, and minority interest -- Automotive........................... $ 248 $ 407 $ 249 $ 240 $ 223 Specialty Packaging.................. 328 308 249 39 68 Paperboard Packaging................. 131 63 152 391 141 Other................................ (66) (14) (22) 2 24 ----------- ----------- ----------- ----------- ----------- Total............................. 641 764 628 672 456 Interest expense (net of interest capitalized)(c)........................ 240 216 195 160 104 Income tax expense....................... 116 163 194 231 114 Minority interest........................ 30 24 21 23 -- ----------- ----------- ----------- ----------- ----------- Income from continuing operations........ 255 361 218 258 238 Income from discontinued operations, net of income tax(d)....................... -- -- 428 477 214 Extraordinary loss, net of income tax(e)................................. -- -- (236) -- (5) Cumulative effect of changes in accounting principles, net of income tax(f)................................. -- (46) -- -- (39) ----------- ----------- ----------- ----------- ----------- Net income............................... 255 315 410 735 408 Preferred stock dividends................ -- -- 12 12 60 ----------- ----------- ----------- ----------- ----------- Net income to common stock............... $ 255 $ 315 $ 398 $ 723 $ 348 =========== =========== =========== =========== =========== Average number of shares of common stock outstanding(g) -- Basic................................ 168,505,573 170,264,731 169,609,373 172,764,198 162,307,189 Diluted.............................. 168,834,531 170,801,636 170,526,112 173,511,654 162,912,425 Earnings per average share of common stock(g) -- Basic: Continuing operations............. $ 1.52 $ 2.12 $ 1.29 $ 1.49 $ 1.17 Discontinued operations(d)........ -- -- 2.45 2.70 1.25 Extraordinary loss(e)............. -- -- (1.39) -- (.03) Cumulative effect of changes in accounting principles(f)........ -- (.27) -- -- (.24) ----------- ----------- ----------- ----------- ----------- $ 1.52 $ 1.85 $ 2.35 $ 4.19 $ 2.15 =========== =========== =========== =========== =========== Diluted: Continuing operations............. $ 1.51 $ 2.11 $ 1.28 $ 1.48 $ 1.17 Discontinued operations(d)........ -- -- 2.44 2.69 1.24 Extraordinary loss(e)............. -- -- (1.38) -- (.03) Cumulative effect of changes in accounting principles(f)........ -- (.27) -- -- (.24) ----------- ----------- ----------- ----------- ----------- $ 1.51 $ 1.84 $ 2.34 $ 4.17 $ 2.14 =========== =========== =========== =========== =========== Cash dividends per common share.......... $ 1.20 $ 1.20 $ 1.80 $ 1.60 $ 1.60
23 28 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA YEARS ENDED DECEMBER 31, -- (CONTINUED) (MILLIONS)
1998(a) 1997(a) 1996(a) 1995 1994 ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA(b): Net assets of discontinued operations.... $ -- $ -- $ -- $ 1,045 $ 1,858 Total assets............................. 8,791 8,332 7,587 7,413 5,853 Short-term debt(c)....................... 1,071 278 236 384 108 Long-term debt(c)........................ 2,360 2,633 2,067 1,648 1,039 Minority interest........................ 421 424 304 301 301 Shareowners' equity...................... 2,504 2,528 2,646 3,148 2,900 STATEMENT OF CASH FLOWS DATA(b): Net cash provided by operating activities............................. $ 532 $ 519 $ 253 $ 1,443 $ 450 Net cash used by investing activities.... (759) (897) (693) (1,146) (117) Net cash provided (used) by financing activities............................. 216 354 147 (356) (151) Capital expenditures for continuing operations............................. (592) (558) (573) (562) (280)
- ------------------------- (a) For a discussion of the significant items affecting comparability of the financial information for 1998, 1997, and 1996, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." See also Notes 1 and 2 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 Specialty 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 Automotive's acquisition of Clevite for $328 million in July 1996. See Note 4 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information. (c) Debt amounts for 1995 and 1994 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 for additional information. (d) 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. (e) 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 2 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. (f) 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 ("FAS") 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. (g) The average number of shares of common stock outstanding and 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 8 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for information regarding the computation of earnings per share of common stock. 24 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. STRATEGIC ALTERNATIVES ANALYSIS On July 21, 1998, Tenneco announced that its Board of Directors had authorized management to develop a broad range of strategic alternatives designed to better realize the long-term value of its businesses for its shareowners. Among the options is the separation of the automotive, containerboard packaging and specialty packaging businesses. On January 26, 1999, Tenneco announced that it had entered into an agreement to contribute the containerboard assets of its Paperboard Packaging business into a new joint venture with Madison Dearborn Partners, in exchange for cash and debt assumption totaling approximately $2 billion and a 45 percent common equity interest in the joint venture. These assets represent substantially all of the assets of the Paperboard Packaging segment and include four mills, 67 corrugated products plants and an ownership or controlling interest in approximately 950,000 acres of timberland. Paperboard Packaging's folding carton business is not included in the transaction. In connection with the transaction, Tenneco Packaging Inc. will borrow approximately $1.8 billion, the majority of which will be used to acquire assets used by the containerboard business pursuant to operating leases and timber cutting rights, with the remainder remitted to Tenneco for corporate debt reduction. Tenneco Packaging Inc. will then contribute the containerboard business assets (subject to the new indebtedness and the containerboard business liabilities) to a joint venture in exchange for approximately $240 million in cash and a 45 percent common equity interest in the joint venture, valued at approximately $200 million. As a result of the sale transaction, Tenneco expects to recognize a pre-tax loss in 1999 of approximately $380 million to $395 million. Subject to certain customary closing conditions, the transaction is expected to close during the first half of 1999. Subsequent to closing, Tenneco will account for its remaining 45 percent interest in the containerboard business on the equity method of accounting. Tenneco continues to analyze the alternatives for Automotive and Specialty Packaging as well as Paperboard Packaging's folding carton business. Those alternatives include a sale, merger, spin-off or public offering. Tenneco will make public announcements of the expected transactions as those transactions are determined. 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 1998 AND 1997 RESULTS OF CONTINUING OPERATIONS Tenneco reported income from continuing operations of $255 million for the year ended December 31, 1998, compared to $361 million for the same period in 1997. The 1998 figure includes a $64 million after-tax charge to restructure the Company's automotive aftermarket business and to reduce overhead and manufacturing costs throughout every part of Tenneco's business. Excluding the restructuring charge, Tenneco's income from continuing operations for the 1998 period was $319 million compared to $361 million for the year ended December 31, 1997. The decline results from lower earnings at Automotive combined with costs related to Tenneco's data center consolidation effort, offset in part by stronger results in Paperboard Packaging and record results in Specialty Packaging. Higher interest expense and minority interest also contributed to the earnings decline. NET SALES AND OPERATING REVENUES
% 1998 1997 CHANGE ------ ------ ------ (MILLIONS) Automotive............................................ $3,237 $3,226 --% Specialty Packaging................................... 2,785 2,553 9 Paperboard Packaging.................................. 1,674 1,521 10 Intergroup sales and other............................ (99) (80) NM ------ ------ $7,597 $7,220 5% ====== ======
25 30 Automotive's revenue for 1998 was essentially flat with 1997 as increases in original equipment revenue in North America and Europe of $215 million were offset by a $165 million decline in aftermarket revenues throughout the world, a $54 million reduction due to the adverse impact of a strong U.S. dollar, with the remaining change due to the mix of products sold. Original equipment revenue was up as Automotive continued to place its ride control and exhaust products on many of the world's best-selling vehicles. Lower aftermarket demand was driven by customer consolidations that temporarily increased field inventory levels in North America and Europe; milder than normal winter weather; and continuing soft Asian and South American replacement markets. Additionally, Tenneco Automotive continued to reduce its quarterly promotional programs in an effort to better balance supply and demand going into 1999. Specialty Packaging's revenue increase of $232 million resulted primarily from full year inclusion of the protective and flexible packaging businesses acquired from NV Koninklijke KNP BT ("KNP") in 1997 and from the May 1998 acquisition of Richter Manufacturing, a leading producer of protective packaging for the western United States. The KNP businesses contributed $160 million of incremental revenue in 1998 measured through the first anniversary of their acquisition in late April 1997. Richter Manufacturing revenue during 1998 was $39 million. The remaining revenue increase reflects higher volumes in numerous product lines which more than offset lower pricing. Paperboard Packaging's revenue increased by $153 million over 1997 levels. This increase is primarily attributable to improved pricing which occurred during the first three quarters of the year, offset in part by lower pricing during the fourth quarter. Favorable volume accounted for the remaining revenue increase. INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST (OPERATING INCOME) RESTRUCTURING AND OTHER CHARGES On July 21, 1998, Tenneco announced its intention to initiate a restructuring plan designed to reduce administrative and operational overhead costs in every part of Tenneco's business. In the fourth quarter of 1998, Tenneco's Board of Directors approved an extensive restructuring plan to accomplish the overhead reduction goals as well as to consolidate the manufacturing and distribution operations of Automotive's North American aftermarket business and certain manufacturing operations in the Paperboard Packaging and Specialty Packaging businesses. The restructuring plan is expected to result in $135 million in annual savings, 80 percent of which is expected to be realized in 1999. Tenneco recorded a pre-tax charge of $100 million, $64 million after-tax or 38 cents per share, in the fourth quarter of 1998 related to this restructuring plan. Of the pre-tax charge, for operational restructuring actions, $36 million is related to the Automotive aftermarket restructuring, $10 million is related to the Specialty Packaging restructuring, and $10 million is related to the Paperboard Packaging restructuring. The staff and related cost reduction plan, which covers staff reductions at both the operating units and at corporate, is expected to cost $44 million. The charge was recognized in the results of operations for each segment where the costs will be incurred. Including the charges for the staff and related cost reductions, Automotive recorded a charge of $53 million, Specialty Packaging a charge of $18 million, Paperboard Packaging a charge of $17 million and Tenneco's corporate operations a charge of $12 million. The Automotive aftermarket restructuring involves closing two plant locations and five distribution centers and the elimination of 302 positions at those locations. The Paperboard Packaging restructuring plan involves closing four box plants and the elimination of 78 positions at those plants. The Specialty Packaging restructuring plan involves the elimination of production lines at two plants and the closure of one plant. Additionally, Specialty Packaging will exit four joint ventures. These actions involve the elimination of 104 positions. The staff and related cost reduction plan involves the elimination of 834 administrative positions in Tenneco's three business units and its corporate operations. The fixed assets at the locations to be closed and for the production lines to be eliminated, as well as the joint venture investments, were written down to their estimated fair value. No significant cash proceeds are expected to be received from the ultimate disposal of these assets. 26 31 As of December 31, 1998, approximately 500 employees had been terminated pursuant to the restructuring plan. Amounts related to the restructuring plan are shown in the following table:
FOURTH 1998 QUARTER CHARGED BALANCE AT RESTRUCTURING 1998 TO ASSET DECEMBER 31, CHARGE PAYMENTS ACCOUNTS 1998 ------------- -------- -------- ------------ (MILLIONS) Severance............................ $ 44 $10 $-- $34 Asset impairments.................... 49 -- 49 -- Facility exit costs.................. 7 -- -- 7 ---- --- --- --- $100 $10 $49 $41 ==== === === ===
Tenneco expects the balance of the restructuring liability will be expended during 1999 and that the restructuring actions will be complete by the fourth quarter of 1999. OPERATING INCOME Excluding these restructuring charges, a comparison of Tenneco's 1998 and 1997 operating income is as follows:
% 1998 1997 CHANGE ---- ---- ------ (MILLIONS) Automotive............................................... $301 $407 (26)% Specialty Packaging...................................... 346 308 12 Paperboard Packaging..................................... 148 63 135 Other.................................................... (54) (14) NM ---- ---- $741 $764 (3)% ==== ====
Automotive's operating income in 1998 reflected strong volume growth in the original equipment business which was more than offset by lower volumes in the aftermarket. The net impact of volume was a decline in operating income of $43 million. Adverse currency movements caused a further deterioration of $14 million. The 1997 operating income included $10 million related to the favorable resolution of a legal action and a net reduction of $4 million in certain reserves, primarily related to ongoing reorganization initiatives which had proceeded more rapidly and efficiently than planned, allowing Automotive to adjust its cost estimate for completing the initiatives. Charges in 1998 for bad debts, a higher level of costs related to customer acquisition activity and marketing, and pricing adjustments in the original equipment business produced the balance of the earnings decline. Specialty Packaging's operating income increase reflected $24 million from acquired businesses through the one-year anniversary of their acquisitions as well as higher unit volumes, primarily in Hefty One-Zip(R), food service foam, and consumer tableware products. Lower raw material costs approximately offset price reductions to customers. In addition, Specialty Packaging incurred approximately $7 million in one-time costs related to an information systems project in North America. The operating income of Paperboard Packaging's business in 1998 included a $15 million pre-tax gain on the sale of its remaining 20 percent interest in a recycled paperboard joint venture with Caraustar Industries and a $17 million gain on the sale of non-strategic timberland assets. In 1997, operating income included a $38 million gain on refinancing of two containerboard mill leases and a $5 million gain from a timberland management transaction. Excluding these items, Paperboard Packaging's operating income increased by $96 million, primarily as a result of higher linerboard and medium pricing, and higher volumes during the year. 27 32 Tenneco's "Other" operating loss increased in 1998 over 1997 levels primarily as a result of higher costs related to Tenneco's data center consolidation effort, which more than offset lower unabsorbed costs at Tenneco's administrative services operation. Tenneco began consolidating its North American data center operations in 1998. The operating costs of the data center will continue into 1999 and beyond. OUTLOOK Automotive anticipates improved results in 1999. In the original equipment market, Automotive was awarded 44 new platforms during 1998. Its products are incorporated in 11 of the 15 top selling global car models. The growth generated in the original equipment market from the award of new platforms and placement of Automotive's products on top selling models will be partially offset by engineering costs for new automobile original equipment platforms, which must be expensed as they are incurred beginning in 1999 pursuant to the previously described change in accounting principle for start-up costs. The inventory position of Automotive's North American aftermarket customers which contributed to the 1998 results is expected to continue to gradually improve in 1999, while consolidation in the automotive aftermarket parts distribution business in Europe is expected to contribute to low sales growth levels there as well. Nevertheless, the recently announced aftermarket restructuring and overhead cost reduction program should position Automotive to deliver both revenue growth and improved operating margins in 1999. Specialty Packaging's future is primarily based on the strength of its brands. The breadth of the Hefty brand was enhanced during 1998 with the introduction of new products including Easy Flaps(R) waste bags and Fast-Pak(TM) deli bags with Slide Rite(TM) technology. The Hexacomb(R) and Jiffy(TM) brand names have helped to make Specialty Packaging a leading producer of protective packaging in Europe and one of the largest in the United States. During 1998 Specialty Packaging introduced the Big Breakfast deluxe foam package for the new breakfast meal from McDonalds. This, other new product introductions, acquisitions including Richter Manufacturing, and the higher growth rate of Specialty Packaging's market segments should lead to volume increases. Mix management and cost reductions should combine with the volume gains to produce increased earnings in 1999. The sale of the containerboard packaging business is expected to reduce the cyclicality of Tenneco's earnings while Tenneco will still benefit from its 45 percent common equity interest in the joint venture to be formed as a result of the transaction. 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 $240 million, a $24 million increase over 1997. The increase reflects a higher borrowing level during 1998, resulting from inclusion for the full year of amounts used to acquire the protective and flexible packaging business of KNP in late April 1997, a higher level of working capital to support higher revenue levels and Tenneco's share repurchase activity. INCOME TAXES Tenneco's effective tax rate for 1998 was 29 percent, compared to 30 percent for 1997. The 1998 effective tax rate was lower than the statutory rate as a result of certain non-recurring foreign and state tax benefits, lower foreign tax rates and a reduction in Tenneco's estimated tax liabilities related to certain global tax audits. The 1997 effective tax rate benefitted from the non-recurring impact of certain foreign tax benefits and the benefit of previously unrecognized deferred tax assets. MINORITY INTEREST Minority interest was $30 million in 1998, compared to $24 million in 1997. This primarily represents dividends on the preferred stock of a U.S. subsidiary. In December 1997, this subsidiary issued additional 28 33 preferred stock. See Note 10 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information. CHANGES IN ACCOUNTING PRINCIPLES Tenneco's 1997 net income included a $46 million after-tax charge for the cumulative effect of a change in accounting principle related to requirements of the Financial Accounting Standards Board's ("FASB") 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 March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which establishes new accounting and reporting standards for the costs of computer software developed or obtained for internal use. This statement will be applied prospectively and is effective for fiscal years beginning after December 15, 1998. Tenneco currently capitalizes costs for purchase and development of software which is used in its business operations. Consequently, the impact of this new standard will not have a significant effect on Tenneco's financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities to be expensed as incurred. This statement is effective for fiscal years beginning after December 15, 1998. The statement requires previously capitalized costs related to start-up activities to be expensed as a cumulative effect of a change in accounting principle when the statement is adopted. Tenneco capitalizes certain costs related to start-up activities, primarily engineering costs for new automobile original equipment platforms. Tenneco expects to record an after-tax charge for the cumulative effect of this change in accounting principle upon adoption of approximately $100 million. Tenneco will adopt this new accounting principle in the first quarter of 1999. In June 1998, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting standards requiring that all derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. This statement cannot be applied retroactively and is effective for all fiscal years beginning after June 15, 1999. Tenneco is currently evaluating the new standard but has not yet determined the impact it will have on its financial position or results of operations. In the fourth quarter of 1998, Tenneco adopted the provisions of SFAS No. 131, "Disclosures About Segments of An Enterprise and Related Information." As a result, Tenneco began reporting Automotive, Specialty Packaging and Paperboard Packaging segments in its financial statements. Segment data for all prior periods has been restated to reflect the new segment reporting requirements. EARNINGS PER SHARE Income from continuing operations was $1.51 per share on a diluted basis for 1998, compared to $2.11 per share in 1997. (All references to earnings per share in this Management's Discussion and Analysis are on a diluted basis unless otherwise noted.) For 1997, Tenneco also recorded the cumulative effect of a change in accounting principle noted above of $.27 per share, resulting in net income of $1.84 per share. For 1998, net income was equal to income from continuing operations. 29 34 LIQUIDITY AND CAPITAL RESOURCES Cash Flows
1998 1997 ----- ----- (MILLIONS) Cash provided (used) by: Operating activities...................................... $ 532 $ 519 Investing activities...................................... (759) (897) Financing activities...................................... 216 354
OPERATING ACTIVITIES Cash flow provided by operating activities was $13 million higher in 1998 than in 1997. Income before depreciation, depletion and amortization was $23 million lower than in 1997, as a result of the restructuring charge taken during the fourth quarter of 1998, for which the bulk of the cash outflows will occur during 1999. Without this charge, income before depreciation, depletion and amortization would have been $41 million higher in 1998 than in 1997. Noncash charges for deferred income taxes were higher in 1997 than in 1998, primarily as a result of tax benefits derived from the 1996 reorganization and debt realignment and a 1996 tax net operating loss which was carried back to earlier years. Components of working capital used significantly less cash in 1998, primarily as a result of payment of certain liabilities in 1997, including those incurred in connection with the 1996 reorganization, combined with increases in liabilities in 1998 associated with the restructuring charge. Other operating activities improved by $38 million primarily resulting from the absence in 1998 of an adjustment to offset non-cash income from the mill lease refinancing which occurred in 1997. INVESTING ACTIVITIES Investing activities used $138 million less cash in 1998 than in 1997. Acquisitions were lower by $210 million. During 1998, the most significant acquisitions were Richter Manufacturing, a North American protective packaging business, and the Belvidere, Illinois ovenable paperboard tray manufacturing facility of Champion International. Acquisition activity in 1997 primarily related to the purchase of KNP's protective and flexible packaging business. Partially offsetting this lower level of acquisition activity was an increase in capital expenditures. Capital expenditures in 1998 included $84 million spent to acquire certain leased timberlands in contemplation of the separation of the containerboard assets from Tenneco's other businesses. In January 1999, Tenneco spent $50,000 to complete the transaction to purchase these timberlands. Absent this transaction, which was necessary to position the containerboard business for its eventual sale, capital expenditures declined $50 million in 1998, reflecting lower spending in both the Automotive and Specialty Packaging segments. FINANCING ACTIVITIES Financing activities in 1998 generated $138 million less cash than in 1997. During 1997, a Tenneco subsidiary issued preferred stock, the net proceeds of which were $99 million. During 1998, Tenneco repurchased $22 million more of its common stock than in 1997. 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 of these debt offerings was $593 million. During 1998, Tenneco's short-term debt (excluding current maturities on long-term debt) increased by $540 million. LIQUIDITY At December 31, 1998, Tenneco's 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 30 35 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 $576 million at December 31, 1998. There were no borrowings under this credit facility at December 31, 1998. 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 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, 1998, Tenneco's ratio of debt to total capitalization as defined in the credit facility was 57.9 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. Following Tenneco's July 21, 1998 announcement regarding its analysis of strategic alternatives, Standard and Poor's and Moody's debt rating agencies placed the rating on Tenneco's debt in review, pending the outcome of Tenneco's strategic alternatives analysis. In consideration of the rating agency actions and the possibility that the strategic alternatives analysis could result in the separation of the automotive, specialty packaging, and containerboard businesses, which could require a realignment of Tenneco's long-term debt, Tenneco has financed its capital needs with short-term debt during the year. Consequently, Tenneco's short-term debt at December 31, 1998 was $549 million higher than at December 31, 1997. Tenneco believes that its existing committed credit facility, supplemented by the net proceeds from the sale of the containerboard business, are adequate to meet its 1999 capital requirements, including scheduled long-term debt retirements of $250 million. However, should additional financing be required, Tenneco's current debt covenants would allow it to borrow up to an additional $2.3 billion which Tenneco believes it could obtain at commercially reasonable rates. CAPITAL COMMITMENTS Tenneco estimates that expenditures of approximately $305 million will be required after December 31, 1998, to complete facilities and projects authorized at such date, and substantial commitments have been made in connection therewith. Of this amount, $49 million is in support of the containerboard business, which Tenneco has reached an agreement to sell as discussed above. CAPITALIZATION
% 1998 1997 CHANGE ------ ------ ------ (MILLIONS) Short-term debt and current maturities.............. $1,071 $ 278 285% Long-term debt...................................... 2,360 2,633 (10) Minority interest................................... 421 424 (1) Common shareowners' equity.......................... 2,504 2,528 (1) ------ ------ Total capitalization...................... $6,356 $5,863 8% ====== ======
Tenneco's debt to capitalization ratio was 54.0 percent at December 31, 1998, compared to 49.7 percent at December 31, 1997. The increase in the ratio is attributable to the additional debt issued during 1998 as described under "Cash Flow-Financing Activities" above, as well as a decline in equity resulting from net income in 1998 being more than offset by dividends and share repurchases. DIVIDENDS ON COMMON STOCK Tenneco Inc. declared dividends on its common shares of $.30 per share for each quarter in 1998. Declaration of dividends is at the discretion of the Board of Directors. The Board has not adopted a dividend 31 36 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 are evaluated separately from the liability and, when assured, are recorded and reported separately from the associated liability in the financial statements. At February 1, 1999, Tenneco had been designated as a potentially responsible party in seven "Superfund" sites. Tenneco has estimated its share of the remediation costs for these sites to be approximately $4 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 $35 million in 1999 and that capital expenditures for environmental matters will be approximately $104 million in the aggregate for the years 1999 through 2009. 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. 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 32 37 for foreign currency forward purchase and sale contracts as of December 31, 1998. All contracts in the following table mature in 1999.
DECEMBER 31, 1998 -------------------------------------------------------- WEIGHTED NOTIONAL AMOUNT AVERAGE FAIR VALUE IN FOREIGN CURRENCY SETTLEMENT RATES IN U.S. DOLLARS ------------------- ---------------- --------------- (MILLIONS EXCEPT SETTLEMENT RATES) Belgian Francs -Purchase 594 0.029 $ 17 -Sell (644) 0.029 (19) British Pounds -Purchase 98 1.660 163 -Sell (152) 1.660 (252) Canadian Dollars -Purchase 112 0.654 73 -Sell (176) 0.654 (115) Danish Krone -Purchase 79 0.157 12 -Sell -- -- -- French Francs -Purchase 497 0.179 89 -Sell (97) 0.179 (17) German Marks -Purchase 3 0.599 2 -Sell (56) 0.599 (33) Portuguese Escudo -Purchase 1,947 0.006 11 -Sell (30) 0.006 -- Spanish Pesetas -Purchase 4,545 0.007 32 -Sell (325) 0.007 (2) U.S. Dollars -Purchase 105 1.000 105 -Sell (33) 1.000 (33) Other -Purchase 395 .043 17 -Sell (719) 0.068 (49) ----- $ 1 =====
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. The table below provides information about Tenneco's financial instruments that are sensitive to interest rate risk.
ESTIMATED MATURITY DATES FAIR VALUE AT ---------------------------------------------------------- DECEMBER 31, 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998(a) ---- ---- ---- ---- ---- ---------- ------ ------------- (MILLIONS EXCEPT EFFECTIVE INTEREST RATES) Short-term debt (excluding current maturities)......... $821 $ -- $ -- $ -- $ -- $ -- $ 821 $ 821 Average effective interest rate..................... 5.9% --% --% --% --% --% Long-term debt (including current maturities)......... $250 $ 10 $187 $498 $ 7 $1,583 $2,535 $2,606 Average effective interest rate..................... 6.4% 12.0% 6.8% 6.8% 11.2% 7.6%
- ------------------------- (a) Fair value of short-term debt was considered to be the same as or was not determined to be materially different from the carrying amount. The fair value of fixed-rate long term debt was generally based on the market value of Tenneco debt offered in open market exchanges at December 31, 1998. 33 38 Tenneco also has other obligations which are sensitive to changes in the market rate of interest. A subsidiary has issued preferred stock with a rate amount of $400 million which pays a dividend based upon the current market rate of interest. See Note 10 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 $825 million. See Note 13 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. 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 utilizing date-sensitive data, were structured to use a two-digit date field meaning that they will not be able to properly recognize dates in the Year 2000. 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 and equipment are expected to remain in place beyond 1999, Tenneco has a detailed process in place to identify and assess Year 2000 issues and to remediate, replace or establish alternative procedures addressing non-Year 2000 compliant systems, hardware, and equipment. Tenneco has substantially completed inventorying its systems and equipment including computer systems and business applications as well as date-sensitive technology embedded in its equipment and facilities. Tenneco continues to plan for and undertake remediation, replacement, or alternative procedures for non- compliant Year 2000 systems and equipment; and test remediated, replaced, or alternative procedures for systems and equipment. Tenneco has confirmed that none of its products are date-sensitive. Remediation, replacement, or alternative procedures for systems and equipment are being undertaken on a business priority basis. This is ongoing and was completed at some locations in 1998 with the remainder to be completed through the third quarter of 1999. Testing will occur in the same time frame. Also, Tenneco is contacting its major customers, suppliers, financial institutions, and others with whom it conducts business to determine whether they will be able to resolve in a timely manner Year 2000 problems possibly affecting Tenneco. As part of its planning and readiness activities, Tenneco is developing Year 2000 contingency plans for critical business processes such as banking, data center operations and just-in-time manufacturing operations. Contingency plans also will be developed on a business unit basis, where needed, to respond to previously undetected Year 2000 problems and business interruption from suppliers. Based upon current estimates, Tenneco believes it will incur costs which may range from approximately $50 to $60 million to address Year 2000 issues and implement the necessary changes to its existing systems and equipment. As of December 31, 1998, approximately $14 million of the costs have already been incurred. These costs are being expensed as they are incurred, except that in certain instances Tenneco may determine that replacing existing computer systems or equipment may be more effective and efficient, particularly where additional functionality is available. These replacements would be capitalized and would reduce the estimated expense associated with Year 2000 issues. In the event Tenneco is unable to complete the remediation, replacement, or alternative procedures for critical systems and equipment in a timely manner or if those with whom Tenneco conducts business are unsuccessful in implementing timely solutions, Year 2000 issues could have a material adverse effect on Tenneco's results of operations. At this time, the potential effect in the event Tenneco and/or third parties are unable to timely resolve Year 2000 problems is not determinable; however, Tenneco believes it will be able to resolve its own Year 2000 issues. EURO CONVERSION The European Monetary Union resulted in the adoption of a common currency, the "Euro", among eleven European nations. The Euro is being adopted over a three-year transition period beginning January 1, 1999. In October 1997, Tenneco established a cross-functional Euro Committee, comprised of representatives of the 34 39 Company's operational divisions as well as its corporate offices. That Committee had two principal objectives: (i) to determine the impact of the Euro on the Company's business operations, and (ii) to recommend and facilitate implementation of those steps necessary to ensure that Tenneco would be fully prepared for the Euro's introduction. As of January 1, 1999, Tenneco has implemented those Euro conversion procedures that it had determined to be necessary and prudent to adopt by that date, and is on track to becoming fully "Euro ready" on or before the conclusion of the three-year Euro transition period. Tenneco believes that the costs associated with transitioning to the Euro will not be material to its consolidated financial position or the results of its operations. YEARS 1997 AND 1996 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 ("Automotive"), packaging ("Specialty Packaging" and "Paperboard 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 Automotive, Specialty Packaging and Paperboard 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 2 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. 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 Automotive and Specialty Packaging, offset by lower results at Paperboard Packaging reflecting lower containerboard pricing. A lower effective tax rate for 1997 compared to 1996 also contributed to the improved results. 35 40 NET SALES AND OPERATING REVENUES
% 1997 1996 CHANGE ------ ------ ------ (MILLIONS) Automotive............................................ $3,226 $2,980 8% Specialty Packaging................................... 2,553 1,987 28 Paperboard Packaging.................................. 1,521 1,683 (10) Intergroup sales and other............................ (80) (78) NM ------ ------ $7,220 $6,572 10% ====== ======
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 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. Specialty Packaging experienced gains of $566 million during 1997 over 1996. This growth was primarily generated by unit volume sales growth and revenues earned by companies acquired in 1996 and 1997. The protective and flexible packaging businesses acquired from KNP in late April 1997, along with revenues from the 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 decline in revenues in Paperboard Packaging of $162 million was primarily attributable to lower linerboard and medium prices. 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) Automotive............................................... $407 $249 63% Specialty Packaging...................................... 308 249 24 Paperboard Packaging..................................... 63 152 (59) Other.................................................... (14) (22) NM ---- ---- $764 $628 22% ==== ====
During 1996, 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 36 41 income of more than $30 million. During the third quarter of 1997, 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 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. 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'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 $90 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. 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. 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 Specialty Packaging and 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 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 10 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information. 37 42 CHANGE IN ACCOUNTING PRINCIPLE As required by the FASB's Emerging Issues Task Force Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation," 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. 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 per share. 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 8 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
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 Automotive acquired Clevite and Specialty Packaging acquired the foam products business. There were other less significant acquisitions in both years at both Automotive and Specialty 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. 38 43 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. 39 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS OF TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
PAGE ---- Report of independent public accountants.................... 41 Statements of income for each of the three years in the period ended December 31, 1998............................ 42 Balance sheets -- December 31, 1998 and 1997................ 43 Statements of cash flows for each of the three years in the period ended December 31, 1998............................ 44 Statements of changes in shareowners' equity for each of the three years in the period ended December 31, 1998......... 45 Statements of comprehensive income for each of the three years in the period ended December 31, 1998............... 46 Notes to financial statements............................... 47
40 45 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, 1998 and 1997, and the related statements of income, cash flows, changes in shareowners' equity and comprehensive income for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 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, 1999 41 46 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) REVENUES Net sales and operating revenues -- Automotive............................................ $ 3,237 $ 3,226 $ 2,980 Specialty Packaging................................... 2,785 2,553 1,987 Paperboard Packaging.................................. 1,674 1,521 1,683 Intergroup sales and other............................ (99) (80) (78) ----------- ----------- ----------- 7,597 7,220 6,572 Other income, net....................................... 8 98 76 ----------- ----------- ----------- 7,605 7,318 6,648 ----------- ----------- ----------- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)... 5,344 5,206 4,762 Engineering, research, and development.................. 66 68 92 Selling, general, and administrative.................... 1,106 915 857 Depreciation, depletion, and amortization............... 448 365 309 ----------- ----------- ----------- 6,964 6,554 6,020 ----------- ----------- ----------- INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST................................................ 641 764 628 Interest expense (net of interest capitalized)........ 240 216 195 Income tax expense.................................... 116 163 194 Minority interest..................................... 30 24 21 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS......................... 255 361 218 Income from discontinued operations, net of income tax.... -- -- 428 ----------- ----------- ----------- Income before extraordinary loss.......................... 255 361 646 Extraordinary loss, net of income tax..................... -- -- (236) ----------- ----------- ----------- Income before cumulative effect of change in accounting principle............................................... 255 361 410 Cumulative effect of change in accounting principle, net of income tax........................................... -- (46) -- ----------- ----------- ----------- NET INCOME................................................ 255 315 410 Preferred stock dividends................................. -- -- 12 ----------- ----------- ----------- NET INCOME TO COMMON STOCK................................ $ 255 $ 315 $ 398 =========== =========== =========== EARNINGS PER SHARE Average shares of common stock outstanding -- Basic................................................. 168,505,573 170,264,731 169,609,373 Diluted............................................... 168,834,531 170,801,636 170,526,112 Basic earnings per share of common stock -- Continuing operations................................. $ 1.52 $ 2.12 $ 1.29 Discontinued operations............................... -- -- 2.45 Extraordinary loss.................................... -- -- (1.39) Cumulative effect of change in accounting principle... -- (.27) -- ----------- ----------- ----------- $ 1.52 $ 1.85 $ 2.35 =========== =========== =========== Diluted earnings per share of common stock -- Continuing operations................................. $ 1.51 $ 2.11 $ 1.28 Discontinued operations............................... -- -- 2.44 Extraordinary loss.................................... -- -- (1.38) Cumulative effect of change in accounting principle... -- (.27) -- ----------- ----------- ----------- $ 1.51 $ 1.84 $ 2.34 =========== =========== =========== Cash dividends per share of common stock.................. $ 1.20 $ 1.20 $ 1.80 =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements of income. 42 47 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES BALANCE SHEETS
DECEMBER 31, ---------------- 1998 1997 ------ ------ (MILLIONS) ASSETS Current assets: Cash and temporary cash investments....................... $ 36 $ 41 Receivables -- Customer notes and accounts, net....................... 773 729 Income taxes........................................... 18 63 Other.................................................. 73 17 Inventories............................................... 988 950 Deferred income taxes..................................... 59 63 Prepayments and other..................................... 210 252 ------ ------ 2,157 2,115 ------ ------ Other assets: Long-term notes receivable, net........................... 46 49 Goodwill and intangibles, net............................. 1,613 1,577 Deferred income taxes..................................... 37 55 Pension assets............................................ 843 747 Other..................................................... 467 334 ------ ------ 3,006 2,762 ------ ------ Plant, property, and equipment, at cost..................... 5,737 5,284 Less -- Reserves for depreciation, depletion, and amortization........................................... 2,109 1,829 ------ ------ 3,628 3,455 ------ ------ $8,791 $8,332 ====== ====== LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt (including current maturities on long-term debt).................................................. $1,071 $ 278 Trade payables............................................ 701 687 Taxes accrued............................................. 57 96 Accrued liabilities....................................... 368 344 Other..................................................... 190 256 ------ ------ 2,387 1,661 ------ ------ Long-term debt.............................................. 2,360 2,633 ------ ------ Deferred income taxes....................................... 649 614 ------ ------ Postretirement benefits..................................... 310 228 ------ ------ Deferred credits and other liabilities...................... 160 244 ------ ------ Commitments and contingencies Minority interest........................................... 421 424 ------ ------ Shareowners' equity: Common stock.............................................. 2 2 Premium on common stock and other capital surplus......... 2,710 2,679 Accumulated other comprehensive income.................... (91) (122) Retained earnings......................................... 142 89 ------ ------ 2,763 2,648 Less -- Shares held as treasury stock, at cost............ 259 120 ------ ------ 2,504 2,528 ------ ------ $8,791 $8,332 ====== ======
The accompanying notes to financial statements are an integral part of these balance sheets. 43 48 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ----- ----- ------- (MILLIONS) OPERATING ACTIVITIES Income from continuing operations........................... $ 255 $ 361 $ 218 Adjustments to reconcile income from continuing operations to cash provided (used) by continuing operations-- Depreciation, depletion, and amortization............... 448 365 309 Deferred income taxes................................... 73 235 23 (Gain) loss on sale of businesses and assets, net....... (5) 21 (64) Changes in components of working capital-- (Increase) decrease in receivables.................... (44) (56) 104 (Increase) decrease in inventories.................... (20) (31) 18 (Increase) decrease in prepayments and other current assets............................................... 29 (108) 45 Increase (decrease) in payables....................... (56) 74 (70) Increase (decrease) in taxes accrued.................. (31) (45) 31 Increase (decrease) in interest accrued............... -- 29 5 Increase (decrease) in other current liabilities...... 35 (136) (98) Other................................................... (152) (190) (18) ----- ----- ------- Cash provided (used) by continuing operations............... 532 519 503 Cash provided (used) by discontinued operations............. -- -- (250) ----- ----- ------- Net cash provided (used) by operating activities............ 532 519 253 ----- ----- ------- INVESTING ACTIVITIES Net proceeds related to the sale of discontinued operations................................................ -- -- 1,051 Net proceeds from sale of businesses and assets............. 32 29 149 Expenditures for plant, property, and equipment............. (592) (558) (573) Acquisitions of businesses.................................. (104) (314) (748) Expenditures for plant, property, and equipment and business acquisitions--discontinued operations..................... -- -- (398) Investments and other....................................... (95) (54) (174) ----- ----- ------- Net cash provided (used) by investing activities............ (759) (897) (693) ----- ----- ------- FINANCING ACTIVITIES Issuance of common, treasury, and SECT shares............... 50 48 164 Purchase of common stock.................................... (154) (132) (172) Issuance of NPS Preferred Stock............................. -- -- 296 Issuance of equity securities by a subsidiary............... -- 99 -- Redemption of preferred stock............................... -- -- (20) Issuance of long-term debt.................................. 4 597 2,800 Retirement of long-term debt................................ (21) (23) (2,288) Net increase (decrease) in short-term debt excluding current maturities on long-term debt.............................. 540 (31) (221) Cash transferred in Merger and Distributions................ -- -- (99) Dividends (common and preferred)............................ (203) (204) (313) ----- ----- ------- Net cash provided (used) by financing activities............ 216 354 147 ----- ----- ------- Effect of foreign exchange rate changes on cash and temporary cash investments................................ 6 3 1 ----- ----- ------- Increase (decrease) in cash and temporary cash investments............................................... (5) (21) (292) Cash and temporary cash investments, January 1.............. 41 62 354 ----- ----- ------- Cash and temporary cash investments, December 31 (Note)..... $ 36 $ 41 $ 62 ===== ===== ======= Cash paid during the year for interest...................... $ 259 $ 206 $ 489 Cash paid during the year for income taxes (net of refunds).................................................. $ 80 $(145) $ 685
- ------------------------- 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. 44 49 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 1998 1997 1996 --------------------- --------------------- --------------------- 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................................ 172,569,889 2 171,567,658 2 191,351,615 957 Issued pursuant to benefit plans............... 1,100,308 -- 1,002,231 -- 84,796 -- Recapitalization of New Tenneco................ -- -- -- -- (19,868,753) (955) ----------- ------ ----------- ------ ----------- ------ Balance December 31.............................. 173,670,197 2 172,569,889 2 171,567,658 2 =========== ------ =========== ------ =========== ------ STOCK EMPLOYEE COMPENSATION TRUST (SECT) Balance January 1................................ -- -- (215) Shares issued.................................. -- -- 216 Adjustment to market value..................... -- -- (1) ------ ------ ------ Balance December 31.............................. -- -- -- ------ ------ ------ PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS Balance January 1................................ 2,679 2,642 3,602 Premium on common stock issued pursuant to benefit plans................................ 31 37 28 Adjustment of SECT to market value............. -- -- 1 Merger of energy business...................... -- -- (372) Distribution of shipbuilding business.......... -- -- (270) Recapitalization of New Tenneco................ -- -- (348) Other.......................................... -- -- 1 ------ ------ ------ Balance December 31.............................. 2,710 2,679 2,642 ------ ------ ------ ACCUMULATED OTHER COMPREHENSIVE INCOME Balance January 1................................ (122) 23 26 Other comprehensive income..................... 31 (145) (3) ------ ------ ------ Balance December 31.............................. (91) (122) 23 ------ ------ ------ RETAINED EARNINGS (ACCUMULATED DEFICIT) Balance January 1................................ 89 (21) (469) Net income..................................... 255 315 410 Dividends-- Preferred stock.............................. -- -- (9) Common stock................................. (202) (205) (312) Accretion of excess of redemption value of preferred stock over fair value at date of issue........................................ -- -- (3) Recapitalization of New Tenneco................ -- -- 362 ------ ------ ------ Balance December 31.............................. 142 89 (21) ------ ------ ------ LESS -- COMMON STOCK HELD AS TREASURY STOCK, AT COST Balance January 1................................ 2,928,189 120 -- -- 16,422,619 753 Shares acquired................................ 4,380,382 161 3,280,755 134 5,118,904 267 Shares issued pursuant to benefit and dividend reinvestment plans........................... (550,893) (22) (352,566) (14) (1,672,770) (79) Recapitalization of New Tenneco................ -- -- -- -- (19,868,753) (941) ----------- ------ ----------- ------ ----------- ------ Balance December 31.............................. 6,757,678 259 2,928,189 120 -- -- =========== ------ =========== ------ =========== ------ Total........................................ $2,504 $2,528 $2,646 ====== ====== ======
The accompanying notes to financial statements are an integral part of these statements of changes in shareowners' equity. 45 50
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------------- ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED ACCUMULATED OTHER OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME INCOME INCOME ------------- ------------- ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME........................ $ 255 $ 315 $ 410 ------------- ------------- ------------- ACCUMULATED OTHER COMPREHENSIVE INCOME CUMULATIVE TRANSLATION ADJUSTMENT Balance January 1............... $ (122) $ 23 $ 26 Translation of foreign currency statements......... 40 40 (160) (160) 39 39 Hedges of net investment in foreign subsidiaries........ -- -- 23 23 (47) (47) Income tax benefit (expense)................... -- -- (8) (8) 16 16 Reclassification adjustment for disposition of investments in foreign subsidiaries................ -- -- -- -- (11) (11) ------------- ------------- ------------- Balance December 31............. (82) (122) 23 ------------- ------------- ------------- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance January 1............... -- -- -- Additional minimum pension liability adjustment........ (15) (15) -- -- -- -- Income tax benefit (expense)................... 6 6 -- -- -- -- ------------- ------------- ------------- Balance December 31............. (9) -- -- ------------- ------------- ------------- Balance December 31............... $ (91) $ (122) $ 23 ============= ============= ============= ------------- ------------- ------------- Other comprehensive income........ 31 (145) (3) ------------- ------------- ------------- COMPREHENSIVE INCOME.............. $ 286 $ 170 $ 407 ============= ============= =============
The accompanying notes to financial statements are an integral part of these statements of comprehensive income. 46 51 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 ("Automotive"), packaging ("Specialty Packaging" and "Paperboard Packaging") and administrative services ("Tenneco Business Services") businesses of Old Tenneco. These transactions and their accounting treatment are described in more detail in Note 2, "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. Changes in Accounting Principles In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting standards requiring that all derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. This statement cannot be applied retroactively and is effective for all fiscal years beginning after June 15, 1999. Tenneco is currently evaluating the new standard but has not yet determined the impact it will have on its financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities to be expensed as incurred. This statement is effective for fiscal years beginning after December 15, 1998. The statement requires previously capitalized costs related to start-up activities to be expensed as a cumulative effect of a change in accounting principle when the statement is adopted. Tenneco capitalizes certain costs related to start-up activities, primarily engineering costs for new automobile original equipment platforms. Tenneco expects to record an after-tax charge for the cumulative effect of this change in accounting principle upon adoption of approximately $100 million. Tenneco will adopt this new accounting principle in the first quarter of 1999. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which establishes new accounting and reporting standards for the costs of computer software developed or obtained for internal use. This statement will be applied prospectively and is effective for fiscal years beginning after December 15, 1998. The impact of this new standard will not have a significant effect on Tenneco's financial position or results of operations. 47 52 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Tenneco adopted FAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," and FAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," in 1998. Disclosures required by these statements for earlier periods presented have been restated on a comparative basis. As required by the FASB's Emerging Issues Task Force ("EITF") Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation," 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. Inventories At December 31, 1998 and 1997, inventory by major classification was as follows:
1998 1997 ---- ---- (MILLIONS) Finished goods.............................................. $484 $467 Work in process............................................. 139 100 Raw materials............................................... 226 265 Materials and supplies...................................... 139 118 ---- ---- $988 $950 ==== ====
Inventories are stated at the lower of cost or market. A portion of total inventories (49% and 44% at December 31, 1998 and 1997, 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 $16 million and $45 million higher at December 31, 1998 and 1997, respectively. Customer Acquisition Costs Tenneco capitalizes certain costs it incurs in connection with the acquisition of new customer contracts to sell its automotive aftermarket products. These new customer acquisition costs are incurred in exchange for contracts in which the aftermarket customer agrees to purchase Tenneco's automotive aftermarket products exclusively for periods of time ranging up to three years. These costs are amortized over the initial contract period. At December 31, 1998 and 1997, the net capitalized costs related to these activities was $54 million and $47 million, respectively. 48 53 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Goodwill and Intangibles, net At December 31, 1998 and 1997, goodwill and intangibles, net of amortization, by major category were as follows:
1998 1997 ------ ------ (MILLIONS) Goodwill.................................................... $1,225 $1,212 Trademarks.................................................. 178 182 Patents..................................................... 153 160 Other....................................................... 57 23 ------ ------ $1,613 $1,577 ====== ======
Goodwill is being amortized on a straight-line basis over periods ranging from 20 years to 40 years. Such amortization amounted to $41 million, $36 million, and $21 million for 1998, 1997, and 1996, respectively, and is included in the statements of income caption "Depreciation, depletion, and amortization." 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 $22 million, $24 million, and $26 million in 1998, 1997, and 1996, respectively, and is included in the statements of income caption "Depreciation, depletion, and amortization." Plant, Property, and Equipment, at Cost At December 31, 1998 and 1997, plant, property, and equipment, at cost, by major category was as follows:
1998 1997 ------ ------ (MILLIONS) Land, buildings, and improvements........................... $1,428 $1,371 Machinery and equipment..................................... 3,869 3,411 Other, including construction in progress................... 440 502 ------ ------ $5,737 $5,284 ====== ======
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 $88 million and $60 million were outstanding at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, the short and long-term allowance for doubtful accounts on accounts and notes receivable was $55 million and $35 million, respectively. Other Long-Term Assets Tenneco capitalizes certain costs related to start-up activities, primarily engineering costs for new automobile original equipment platforms, which are included in the balance sheet caption "Other assets -- Other." The platform engineering costs are amortized over the life of the underlying supply agreements and 49 54 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) other start-up costs are amortized over the periods benefited, generally two years. Start-up costs capitalized, net of amortization, at December 31, 1998 and 1997, were $152 million and $99 million, respectively. Tenneco will adopt a new accounting standard in the first quarter of 1999, which will require these costs to be expensed. Refer to "Changes in Accounting Principles" discussed previously in this footnote. Tenneco capitalizes certain costs related to the purchase and development of software which is used in its business operations. The costs attributable to these software systems are amortized over their estimated useful lives based on various factors such as the effects of obsolescence, technology and other economic factors. Capitalized software development costs, net of amortization, were $207 million and $151 million at December 31, 1998 and 1997, respectively. As described previously in this footnote, Tenneco will adopt SOP 98-1 regarding software cost capitalization. The impact of this new standard will not have a significant effect on Tenneco's financial position or results of operations. Environmental Liabilities Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments indicate that remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. All available evidence is considered including prior experience in remediation of contaminated sites, other companies' clean-up experience, and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. These liabilities are included in the balance sheet at their undiscounted amounts. Recoveries are evaluated separately from the liability and, when assured, are recorded and reported separately from the associated liability in the financial statements. For further information on this subject, refer to Note 13, "Commitments and Contingencies." 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 $850 million at December 31, 1998. 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. 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 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 50 55 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. In 1996, 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 2, "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 2, "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 $58 million, $53 million, and $60 million for 1998, 1997, and 1996, 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 Paperboard Packaging's folding carton operations and the realignment of 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. All actions related to the realignment plan have been completed. 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 "Accumulated other comprehensive income." 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 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 51 56 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 "Accumulated other comprehensive income." 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" and "Environmental Liabilities" sections of this footnote and Notes 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 1998 presentations. 2. DISCONTINUED OPERATIONS, DISPOSITION OF ASSETS, AND EXTRAORDINARY LOSS Strategic Alternatives Analysis On July 21, 1998, Tenneco announced that its Board of Directors had authorized management to develop a broad range of strategic alternatives. Among the options to be considered is the separation of the automotive, containerboard packaging, and specialty packaging businesses. On January 26, 1999, Tenneco announced that it had entered into an agreement to contribute the containerboard assets of its Paperboard Packaging business into a new joint venture with Madison Dearborn Partners, in exchange for cash and debt assumption totaling approximately $2 billion, and a 45 percent common equity interest in the joint venture. These assets represent substantially all of the assets of the Paperboard Packaging segment and include four mills, 67 corrugated products plants and an ownership or controlling interest in approximately 950,000 acres of timberland. Paperboard Packaging's folding carton business is not included in the transaction. In connection with the transaction, Tenneco Packaging Inc. will borrow approximately $1.8 billion, the majority of which will be used to acquire assets used by the containerboard business pursuant to operating leases and timber cutting rights, with the remainder remitted to Tenneco for corporate debt reduction. Tenneco Packaging Inc. will then contribute the containerboard business assets (subject to the new indebtedness and the containerboard business liabilities) to a joint venture in exchange for approximately $240 million in cash and a 45 percent common equity interest in the joint venture, valued at approximately $200 million. As a result of the sale transaction, Tenneco expects to recognize a pre-tax loss in 1999 of approximately $380 million to $395 million. Subject to certain customary closing conditions, the transaction is expected to close during the first half of 1999. Subsequent to closing, Tenneco will account for its remaining 45 percent interest in the containerboard business on the equity method of accounting. Tenneco continues to analyze the alternatives for Automotive and Specialty Packaging as well as Paperboard Packaging's folding carton business. Those alternatives include a sale, merger, spin-off or public offering. Tenneco will make public announcements of the expected transaction as those transactions are determined. 52 57 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 Automotive, Specialty Packaging, Paperboard 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 Natural Gas Company ("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 Automotive, Specialty Packaging and Paperboard 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." Results of operations for the year ended December 31, 1996, for the energy business were as follows:
(MILLIONS) Net sales and operating revenues............................ $2,512 ====== Income before income taxes and interest allocation.......... $ 291 Income tax expense.......................................... (78) ------ Income before interest allocation........................... 213 Allocated interest expense, net of income tax (Note)........ (86) ------ Income from discontinued operations before transaction costs..................................................... $ 127 ======
- ------------------------- 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. 53 58 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. Results of operations for the year ended December 31, 1996, for the shipbuilding business were as follows:
(MILLIONS) Net sales and operating revenues............................ $1,822 ====== Income before income taxes and interest allocation.......... $ 133 Income tax expense.......................................... (43) ------ Income before interest allocation........................... 90 Allocated interest expense, net of income tax (Note)........ (20) ------ Income from discontinued operations before transaction costs..................................................... $ 70 ======
- ------------------------- 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 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. 54 59 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Results of operations for the year ended December 31, 1996, for the farm and construction equipment segment were as follows:
(MILLIONS) Net sales and operating revenues............................ $ -- ==== Income before income taxes and interest allocation.......... $ 1 Income tax benefit.......................................... -- ---- Income before interest allocation........................... 1 Allocated interest expense, net of income tax (Note)........ (2) ---- Loss from operations........................................ (1) ---- Gain on disposition......................................... 423 Income tax expense from disposition......................... (83) ---- Net gain on disposition..................................... 340 ---- Income from discontinued operations......................... $339 ====
- ------------------------- 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. Disposition of Assets In the second quarter of 1996, Paperboard Packaging entered into an agreement to form a joint venture with Caraustar Industries whereby Paperboard 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. Paperboard Packaging sold its remaining interest in the joint venture and recognized a $15 million pre-tax gain in the second quarter of 1998. In addition, Paperboard Packaging recognized a $17 million pre-tax gain on the sale of non-strategic timberland assets in the third quarter of 1998. 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. 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. 3. RESTRUCTURING AND OTHER CHARGES On July 21, 1998, Tenneco announced its intention to initiate a restructuring plan designed to reduce administrative and operational overhead costs in every part of Tenneco's business. In the fourth quarter of 55 60 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1998, Tenneco's Board of Directors approved an extensive restructuring plan to accomplish the overhead reduction goals as well as to consolidate the manufacturing and distribution operations of Automotive's North American aftermarket business and certain manufacturing operations in the Paperboard Packaging and Specialty Packaging businesses. Tenneco recorded a pre-tax charge of $100 million, $64 million after-tax or 38 cents per share, in the fourth quarter of 1998 related to this restructuring plan. Of the pre-tax charge, for operational restructuring actions, $36 million is related to the Automotive aftermarket restructuring, $10 million is related to the Specialty Packaging restructuring, and $10 million is related to the Paperboard Packaging restructuring. The staff and related cost reduction plan, which covers staff reductions at both the operating units and at corporate, is expected to cost $44 million. The charge was recognized in the results of operations for each segment where the costs will be incurred. Including the charges for the staff and related cost reductions, Automotive recorded a charge of $53 million, Specialty Packaging a charge of $18 million, Paperboard Packaging a charge of $17 million and Tenneco's corporate operations a charge of $12 million. The Automotive aftermarket restructuring involves closing two plant locations and five distribution centers and the elimination of 302 positions at those locations. The Paperboard Packaging restructuring plan involves closing four box plants and the elimination of 78 positions at those plants. The Specialty Packaging restructuring plan involves the elimination of production lines at two plants and the closure of one plant. Additionally, Specialty Packaging will exit four joint ventures. These actions involve the elimination of 104 positions. The staff and related cost reduction plan involves the elimination of 834 administrative positions in Tenneco's three business units and its corporate operations. The fixed assets at the locations to be closed and for the production lines to be eliminated, as well as the joint venture investments, were written down to their estimated fair value. No significant cash proceeds are expected to be received from the ultimate disposal of these assets. As of December 31, 1998, approximately 500 employees had been terminated pursuant to the restructuring plan. Amounts related to the restructuring plan are shown in the following table:
FOURTH 1998 QUARTER CHARGED BALANCE AT RESTRUCTURING 1998 TO ASSET DECEMBER 31, CHARGE PAYMENTS ACCOUNTS 1998 ------------- -------- -------- ------------ (MILLIONS) Severance.................................. $ 44 $10 $-- $34 Asset impairments.......................... 49 -- 49 -- Facility exit costs........................ 7 -- -- 7 ---- --- --- --- $100 $10 $49 $41 ==== === === ===
Tenneco expects the balance of the restructuring liability will be expended during 1999 and that the restructuring actions will be complete by the fourth quarter of 1999. 4. ACQUISITIONS In 1998, Tenneco made three acquisitions in the Specialty Packaging business and one in the Automotive business for approximately $101 million and $3 million, respectively. 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 Specialty 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. 56 61 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 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 Specialty 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. 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." 5. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS Long-Term Debt A summary of long-term debt obligations of Tenneco at December 31, 1998 and 1997, is set forth in the following table:
1998 1997 ------ ------ (MILLIONS) Tenneco Inc. -- Debentures due 2008 through 2027, average effective interest rate 7.5% in 1998 and in 1997 (net of $64 million in 1998 and $68 million in 1997 of unamortized premium)............................................... $1,213 $1,217 Notes due 1999 through 2007, average effective interest rate 6.7% in 1998 and in 1997 (net of $33 million in 1998 and $47 million in 1997 of unamortized premium)... 1,344 1,358 Other subsidiaries -- Notes due 1999 through 2016, average effective interest rate 10.7% in 1998 and 11.2% in 1997 (net of $22 million in 1998 and $24 million in 1997 of unamortized discount).............................................. 53 64 ------ ------ 2,610 2,639 Less -- current maturities.................................. 250 6 ------ ------ Total long-term debt................................... $2,360 $2,633 ====== ======
Approximately $70 million of gross plant, property, and equipment at December 31, 1998 and 1997, was pledged as collateral to secure $17 million and $26 million, respectively, principal amounts of long-term debt. The aggregate maturities and sinking fund requirements applicable to the issues outstanding at December 31, 1998, are $250 million, $10 million, $187 million, $498 million, and $7 million for 1999, 2000, 2001, 2002, and 2003, respectively. 57 62 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, 1998 and 1997, are as follows:
1998 1997 ------------------------- ------------------------- COMMERCIAL CREDIT COMMERCIAL CREDIT PAPER AGREEMENTS* PAPER AGREEMENTS* ---------- ----------- ---------- ----------- (DOLLARS IN MILLIONS) Outstanding borrowings at end of year........... $576 $245 $203 $ 69 Weighted average interest rate on outstanding borrowings at end of year..................... 5.8% 6.3% 5.9% 6.7% Approximate maximum month-end outstanding borrowings during year........................ $576 $245 $613 $123 Approximate average month-end outstanding borrowings during year........................ $447 $157 $372 $ 52 Weighted average interest rate on approximate average month-end outstanding borrowings during year................................... 5.8% 6.9% 5.7% 8.4%
- ------------------------- * 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 $576(b) $1,174 Subsidiaries' credit agreements...................... Various 131 123 8 ------ ---- ------ $1,881 $699 $1,182 ====== ==== ======
- ------------------------- 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, 1998, 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, 1998, Tenneco's ratio of debt to total capitalization as defined in the credit facility was 57.9%. In addition, the credit 58 63 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) facility imposes certain other restrictions, none of which are expected to limit the Company's ability to operate its business in the ordinary course. 6. FINANCIAL INSTRUMENTS The carrying and estimated fair values of Tenneco's financial instruments by class at December 31, 1998 and 1997, were as follows:
1998 1997 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- (MILLIONS) ASSETS (LIABILITIES) Long-term debt (including current maturities)........... $(2,610) $(2,606) $(2,639) $(2,606) Instruments With Off-Balance-Sheet Risk Foreign currency contracts............................ 1 1 2 2 Financial guarantees.................................. -- (13) -- (15)
Asset and Liability Instruments The fair value of cash and temporary cash investments, short and long-term receivables, accounts payable, and short-term debt was considered to be the same as or was not determined to be materially different from the carrying amount. At December 31, 1998 and 1997, respectively, Tenneco's aggregate customer and long-term receivable balance was concentrated by segment as follows: Automotive, 61% and 63%, respectively, Specialty Packaging, 32% and 26%, respectively, and Paperboard Packaging, 7% and 11%, respectively. Long-term debt -- The fair value of fixed-rate long-term debt was based on the market value of debt with similar maturities and interest rates. Instruments With Off-Balance-Sheet Risk Foreign Currency Contracts -- Note 1, "Summary of Accounting Policies -- Risk Management Activities" describes Tenneco's use of and accounting for foreign currency exchange contracts. The following table summarizes by major currency the contractual amounts of foreign currency contracts utilized by Tenneco:
NOTIONAL AMOUNT ------------------------------------ DECEMBER 31, DECEMBER 31, 1998 1997 ---------------- ---------------- PURCHASE SELL PURCHASE SELL -------- ---- -------- ---- (MILLIONS) Foreign currency contracts (in US$): Belgian Francs............................................ $ 17 $ 19 $ 24 $ 6 British Pounds............................................ 163 252 156 257 Canadian Dollars.......................................... 73 115 58 16 French Francs............................................. 89 17 52 1 German Marks.............................................. 2 33 4 121 Spanish Pesetas........................................... 32 2 12 1 U.S. Dollars.............................................. 105 33 92 -- Other..................................................... 40 49 61 55 ---- ---- ---- ---- $521 $520 $459 $457 ==== ==== ==== ====
59 64 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Based on exchange rates at December 31, 1998 and 1997, 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 $13 million and $15 million at December 31, 1998 and 1997, respectively, primarily with respect to letters of credit and other guarantees supporting various financing and operating activities. 7. INCOME TAXES The domestic and foreign components of income from continuing operations before income taxes are as follows:
YEARS ENDED DECEMBER 31, -------------------- 1998 1997 1996 ---- ---- ---- (MILLIONS) U.S. income before income taxes............................. $136 $259 $248 Foreign income before income taxes.......................... 265 289 185 ---- ---- ---- Income before income taxes.................................. $401 $548 $433 ==== ==== ====
Following is a comparative analysis of the components of income tax expense applicable to continuing operations:
YEARS ENDED DECEMBER 31, --------------------- 1998 1997 1996 ---- ----- ---- (MILLIONS) Current -- U.S. ..................................................... $ 27 $(133) $ 92 State and local........................................... (25) 2 23 Foreign................................................... 41 59 56 ---- ----- ---- 43 (72) 171 ---- ----- ---- Deferred -- U.S. ..................................................... 14 190 15 Foreign, state and other.................................. 59 45 8 ---- ----- ---- 73 235 23 ---- ----- ---- Income tax expense.......................................... $116 $ 163 $194 ==== ===== ====
60 65 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, -------------------- 1998 1997 1996 ---- ---- ---- (MILLIONS) Tax expense computed at the statutory U.S. federal income tax rate.................................................. $140 $192 $152 Increases (reductions) in income tax expense resulting from: Foreign income taxed at different rates and foreign losses with no tax benefit.................................... (11) (33) 7 State and local taxes on income, net of U.S. federal income tax benefit..................................... (2) 23 15 Recognition of previously unbenefited loss carryforwards.......................................... (5) (11) -- Amortization of nondeductible goodwill.................... 8 6 7 Other..................................................... (14) (14) 13 ---- ---- ---- Income tax expense.......................................... $116 $163 $194 ==== ==== ====
The components of Tenneco's net deferred tax liability were as follows:
DECEMBER 31, ------------ 1998 1997 ---- ---- (MILLIONS) Deferred tax assets -- Tax loss carryforwards: U.S. .................................................. $199 $101 State.................................................. 14 -- Foreign................................................ 71 81 Postretirement benefits other than pensions............... 56 53 Other..................................................... 52 31 Valuation allowance....................................... (38) (29) ---- ---- Net deferred tax asset............................... 354 237 ---- ---- Deferred tax liabilities -- Tax over book depreciation................................ 510 371 Pensions.................................................. 240 229 Other..................................................... 157 133 ---- ---- Total deferred tax liability......................... 907 733 ---- ---- Net deferred tax liability................................ $553 $496 ==== ====
As reflected by the valuation allowance in the table above, Tenneco had potential tax benefits of $38 million and $29 million at December 31, 1998 and 1997, 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. Of the $568 million of U.S. tax loss carryforwards which exist at December 31, 1998, $354 million expire in 2012 and $214 million expire in 2018. The $192 million of state tax loss carryforwards which exist at December 31, 1998, will expire in varying amounts over the period from 2000 to 2012. Of the $185 million of foreign tax loss carryforwards which exist at December 31, 1998, $136 million do not expire and the remainder expires in varying amounts over the period from 1999 to 2008. In connection with the corporate reorganization transactions discussed in Note 2, "Discontinued Operations, Disposition of Assets, and Extraordinary Loss," Tenneco entered into a tax sharing agreement 61 66 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) with Newport News, Old Tenneco, and El Paso. The tax sharing agreement provides, among other things, for the allocation among the parties of tax liabilities arising before, as a result of, and after the Distributions. For periods after the Distributions, Tenneco will be liable for taxes imposed on its businesses, Old Tenneco will be liable for taxes imposed on the energy business, and Newport News will be liable for taxes imposed on the shipbuilding business. In the case of federal income taxes imposed on the activities of the Old Tenneco consolidated group before the Distributions, Tenneco and Newport News are generally liable to Old Tenneco for federal income taxes attributable to their respective businesses, and those entities have been allocated an agreed-upon share of estimated tax payments made by Old Tenneco. 8. COMMON STOCK Tenneco Inc. has authorized 350 million shares ($.01 par value) of common stock, of which 173,670,197 shares and 172,569,889 shares were issued at December 31, 1998 and 1997, respectively. Tenneco Inc. held 6,757,678 shares and 2,928,189 shares of treasury stock at December 31, 1998 and 1997, respectively. Stock Repurchase Plans During 1997, Tenneco initiated a common stock repurchase program to acquire up to 8.5 million shares. Approximately 7.5 million shares have been acquired under this program at a total cost of approximately $289 million. All purchases executed through this program were in the open market or negotiated purchases. Reserved The total number of shares of Tenneco Inc. common stock reserved at December 31, 1998 and 1997, were as follows:
DECEMBER 31, ----------------------- ORIGINAL ISSUE SHARES 1998 1997 --------------------- ---------- ---------- Thrift Plan............................................ 74,576 167,223 Restricted Stock Plans................................. -- 33,796 Stock Ownership Plan................................... 16,199,114 16,556,126 Employee Stock Purchase Plan........................... 1,642,037 2,255,232 ---------- ---------- 17,915,727 19,012,377 ========== ========== TREASURY STOCK -------------- Thrift Plan............................................ 201,541 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 ("SARs"), 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. 62 67 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 1998, 1997, and 1996, Tenneco granted 640,810, 494,350, and 465,075 shares and units, respectively, with a weighted average fair value based on the price of Tenneco's stock on the grant date of $38.03, $43.08, and $48.54 per share, respectively. Any restricted stock and performance shares awarded after the Distributions are issued under the 1996 Stock Ownership Plan. At December 31, 1998, 351,220 restricted shares at an average price of $37.76 per share, 562,145 performance shares at an average price of $41.35 per share, and 31,000 restricted units at an average price of $37.72 per unit 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. From January 1, 1996, through October 31, 1996, 3,300 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 per share. On November 1, 1996, all outstanding restricted shares were vested. 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 1998, 1997, and 1996, 1,700, 5,040, and 23,464 restricted shares and units, respectively, were issued under the new plan at a weighted average fair value of Tenneco Inc.'s stock on the grant date of $37.31, $45.19, and $45.31 per share, respectively. At December 31, 1998, 27,696 restricted shares at an average price of $44.80 per share and 300 restricted units at an average price of $45.19 per unit 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 613,195, 244,768, and 657,936 shares to employees in 1998, 1997, and 1996, 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 $6.31, $11.16, and $10.84 in 1998, 1997, and 1996, respectively. 63 68 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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:
1998 1997 1996 --------------------- --------------------- --------------------- 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.... 11,924,072 $43.42 10,877,758 $43.41 3,019,116 $46.99 Granted -- Options.............. 1,745,480 37.30 2,928,669 42.91 8,178,600 46.17 Exercised -- Options............ (122,609) 38.58 (312,979) 39.64 (817,212) 45.29 -- SARs.............. -- -- -- -- (25,741) 36.23 Issuance of New Tenneco options...................... -- -- -- -- 5,015,258 41.19 Cancelled....................... (1,123,639) 43.53 (1,569,376) 43.19 (4,492,263) 46.01 ---------- ---------- ---------- Outstanding, end of year.......... 12,423,304 $42.58 11,924,072 $43.42 10,877,758 $43.41 ========== ========== ========== Options exercisable at end of year............................ 3,989,654 $40.66 2,703,948 $40.84 1,809,596 $41.67 Weighted average fair value of options granted during the year............................ $ 10.82 $ 12.62 $ 11.37
The fair value of each option granted during 1998, 1997, and 1996 is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions for grants in 1998, 1997, and 1996, respectively: (i) risk-free interest rates of 5.7%, 6.6%, and 5.9%; (ii) expected lives of 9.9, 7.5, and 5.0 years; (iii) expected volatility 25.6%, 25.6%, and 25.1%; and (iv) dividend yield of 3.2%, 2.8%, and 3.4%. The following table reflects summarized information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ---------------------- WEIGHTED AVG. WEIGHTED WEIGHTED NUMBER REMAINING AVG. NUMBER AVG. OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICE AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE ----------------------- ----------- ------------- -------- ----------- -------- $31 to $38............................... 2,525,490 13.8 years $36.40 1,323,014 $35.82 $38 to $44............................... 2,771,004 11.7 40.91 1,638,084 41.10 $44 to $51............................... 7,126,810 11.9 45.42 1,028,556 46.18 ---------- --------- 12,423,304 3,989,654 ========== =========
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 1998 of $3 million, 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. 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, 1998, 1997, and 1996, would have been lower by $33 million or $.19 per both basic and diluted common share, $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 for 1997 versus 1996 was primarily the result of stock options issued subsequent to the Transaction. 64 69 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. Grantor Trust In August 1998, Tenneco established a grantor trust and issued 1.9 million shares of common stock to the trust. This grantor trust is a so-called "rabbi trust" designed to assure the payment of deferred compensation and supplemental pension benefits. The trust is consolidated in Tenneco's financial statements and the shares are reflected in the financial statements as treasury stock. Consequently, the shares of common stock issued to the trust are not considered to be outstanding in the computation of earnings per share. Qualified Offer Rights Plan On September 9, 1998, Tenneco adopted a Qualified Offer Rights Plan and established an independent Board committee to review it every three years. The Qualified Offer Rights 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 shareholders. Generally, under the Qualified Offer Rights Plan, if a person becomes the beneficial owner of 20 percent or more of Tenneco's outstanding common stock, other than pursuant to a "qualified offer", each right will entitle its holder to purchase, at the right's exercise price, a number of shares of common stock of Tenneco or, under certain circumstances, of the acquiring person having a market value of twice the right's exercise price. Rights held by the 20 percent or more holder will become void and will not be exercisable. The rights will not become exercisable in connection with a "qualified offer," which is an all-cash tender offer for all outstanding common stock that is fully financed, remains open for a period of at least 60 business days, results in the offeror owning at least 85% of the common stock after consummation of the offer, assures a prompt second-step acquisition of shares not purchased in the initial offer, at the same price as the initial offer, and meets certain other requirements. In connection with the adoption of the Qualified Offer Rights Plan, the Board of Directors also adopted a three-year independent director evaluation ("TIDE") mechanism. Under the TIDE mechanism, an independent Board committee will review, on an ongoing basis, the Qualified Offer Rights Plan and developments in rights plans generally, and, if it deems appropriate, recommend modification or termination of the Qualified Offer Rights Plan. The independent committee will report to Tenneco's Board at least every three years as to whether the Qualified Offer Rights Plan continues to be in the best interests of Tenneco's shareholders. 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. 65 70 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Earnings Per Share Earnings per share of common stock outstanding were computed as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) Basic Earnings Per Share -- Income from continuing operations(a)................ $ 255 $ 361 $ 218 =========== =========== =========== Average shares of common stock outstanding(b)....... 168,505,573 170,264,731 169,609,373 =========== =========== =========== Earnings from continuing operations per average share of common stock............................ $ 1.52 $ 2.12 $ 1.29 =========== =========== =========== Diluted Earnings Per Share -- Income from continuing operations(a)................ $ 255 $ 361 $ 218 =========== =========== =========== Average shares of common stock outstanding(b)....... 168,505,573 170,264,731 169,609,373 Effect of dilutive securities: Restricted stock............................... 52,930 -- 516,336 Stock options.................................. 88,236 452,867 400,403 Performance shares............................. 187,792 84,038 -- ----------- ----------- ----------- Average shares of common stock outstanding including dilutive securities.............................. 168,834,531 170,801,636 170,526,112 =========== =========== =========== Earnings from continuing operations per average share of common stock............................ $ 1.51 $ 2.11 $ 1.28 =========== =========== ===========
- ------------------------- Notes: (a) All preferred stock outstanding before the Merger was acquired by El Paso. Therefore, preferred stock dividends were included in the computation of earnings per share from discontinued operations for 1996. There was no preferred stock outstanding in 1998 or 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 the year ended December 31, 1996, the SECT used 4,358,084 shares. At December 31, 1996, all shares were used. Stock repurchase plans also affect common stock outstanding. Refer to "Stock Employee Compensation Trust (SECT)" and "Stock Repurchase Plans" discussed previously in this footnote. 9. PREFERRED STOCK Tenneco had 50 million shares of preferred stock ($.01 par value) authorized at December 31, 1998 and 1997. No shares of preferred stock were outstanding at the respective dates. Tenneco has designated and reserved 2.0 million shares of the preferred stock as junior preferred stock for the Qualified Offer 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, 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 66 71 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 ----------------------- SHARES AMOUNT ---------- ------ (MILLIONS EXCEPT SHARE AMOUNTS) Balance January 1........................................... 1,390,993 $ 130 Shares redeemed........................................... (195,751) (20) Merger of energy business................................. (1,195,242) (113) Accretion of excess of redemption value over fair value at date of issue.......................................... -- 3 ---------- ----- Balance December 31......................................... -- $ -- ========== =====
10. MINORITY INTEREST At December 31, 1998 and 1997, Tenneco reported minority interest in the balance sheet of $421 million and $424 million, respectively. At December 31, 1998, $394 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 Specialty 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 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, 1998, 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 6.66%, 6.92%, and 6.83% for 1998, 1997, and 1996, respectively. Additionally, the holder of the preferred stock is entitled to receive, when and if 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." 11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Tenneco has pension plans that cover substantially all of its employees. Benefits are based on years of service and, for most salaried employees, on final average compensation. 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. Tenneco has postretirement health care and life insurance plans that cover a majority 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 67 72 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. A summary of the change in benefit obligation, the change in plan assets, the development of net amount recognized, and the amounts recognized in the statement of financial position for the pension plans and postretirement benefit plans follows:
PENSION POSTRETIREMENT --------------- --------------- 1998 1997 1998 1997 ------ ------ ------ ------ (MILLIONS) Change in benefit obligation: Benefit obligation at September 30 of the previous year... $3,145 $2,805 $ 178 $ 167 Currency rate conversion.................................. 1 -- -- -- Service cost.............................................. 41 35 5 5 Interest cost............................................. 235 211 13 12 Plan amendments........................................... 45 8 -- -- Actuarial loss (gain)..................................... 334 283 8 5 Acquisitions.............................................. -- 13 -- -- Benefits paid............................................. (224) (210) (16) (12) Participants' contributions............................... -- -- 1 1 ------ ------ ----- ----- Benefit obligation at September 30........................ $3,577 $3,145 $ 189 $ 178 ====== ====== ===== ===== Change in plan assets: Fair value at September 30 of the previous year........... $4,109 $3,459 $ -- $ -- Currency rate conversion.................................. (1) 4 -- -- Actual return on plan assets.............................. 463 835 -- -- Employer contributions.................................... 12 9 15 11 Participants' contributions............................... 2 -- 1 1 Acquisitions.............................................. -- 12 -- -- Benefits paid............................................. (224) (210) (16) (12) ------ ------ ----- ----- Fair value at September 30................................ $4,361 $4,109 $ -- $ -- ====== ====== ===== ===== Development of net amount recognized: Funded status at September 30............................. $ 784 $ 964 $(189) $(178) Contributions during the fourth quarter................... 2 2 4 3 Unrecognized cost: Actuarial loss (gain).................................. (128) (328) 38 33 Prior service cost..................................... 83 71 (5) (8) Transition liability (asset)........................... (50) (73) -- -- ------ ------ ----- ----- Net amount recognized at December 31...................... $ 691 $ 636 $(152) $(150) ====== ====== ===== ===== Amounts recognized in the statement of financial position: Prepaid benefit cost...................................... $ 745 $ 674 $ -- $ -- Accrued benefit cost...................................... (95) (42) (152) (150) Intangible asset.......................................... 26 4 -- -- Accumulated other comprehensive income.................... 15 -- -- -- ------ ------ ----- ----- Net amount recognized..................................... $ 691 $ 636 $(152) $(150) ====== ====== ===== =====
- ------------------------- Note: Assets of one plan may not be utilized to pay benefits of other plans. Additionally, the prepaid (accrued) benefit cost has been recorded based upon certain actuarial estimates as described below. Those estimates are subject to revision in future periods given new facts or circumstances. 68 73 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension costs (income) from continuing operations for the years 1998, 1997, and 1996, consist of the following components:
1998 1997 1996 ----- ----- ----- (MILLIONS) Service cost -- benefits earned during the year............. $ 41 $ 35 $ 31 Interest on prior year's projected benefit obligation....... 235 211 148 Expected return on plan assets.............................. (333) (310) (208) Net amortization: Actuarial loss (gain)..................................... 2 -- 3 Prior service cost........................................ 12 12 12 Transition liability (asset).............................. (21) (21) (15) ----- ----- ----- Net pension costs (income).................................. $ (64) $ (73) $ (29) ===== ===== =====
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for all pension plans with accumulated benefit obligations in excess of plan assets were $203 million, $191 million, and $95 million, respectively, as of September 30, 1998, and $52 million, $50 million, and $10 million, respectively, as of September 30, 1997. The weighted average discount rates (which are based on long-term market rates) used in determining the 1998, 1997, and 1996 actuarial present value of the benefit obligations were 7.0%, 7.75%, and 7.75%, respectively. The rate of increase in future compensation was 4.8%, 5.0%, and 5.0%, for 1998, 1997, and 1996, respectively. The weighted average expected long-term rate of return on plan assets for 1998, 1997, and 1996 was 10.0% for each year. Net periodic postretirement benefit cost from continuing operations for the years 1998, 1997, and 1996 consist of the following components:
1998 1997 1996 ---- ---- ---- (MILLIONS) Service cost -- benefits earned during the year............. $ 5 $ 5 $ 4 Interest on accumulated postretirement benefit obligation... 13 12 11 Net amortization: Prior service cost........................................ (2) (2) (2) Actuarial loss (gain)..................................... 2 1 1 --- --- --- Net periodic postretirement benefit cost.................... $18 $16 $14 === === ===
The initial weighted average assumed health care cost trend rate used in determining the 1998, 1997, and 1996 accumulated postretirement benefit obligation was 5%, 5%, and 6%, respectively, declining to 5% in 1997 and remaining at that level thereafter. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the 1998, 1997, and 1996 accumulated postretirement benefit obligations by approximately $15 million, $14 million, and $13 million, respectively, and would increase the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost by approximately $2 million each year for 1998, 1997, and 1996. Decreasing the assumed health care cost trend rate by one percentage point in each year would decrease the 1998 accumulated postretirement benefit obligation by approximately $14 million and would decrease the aggregate of service cost and interest cost components of the net periodic postretirement benefit cost by $2 million. 69 74 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The discount rates (which are based on long-term market rates) used in determining the 1998, 1997, and 1996 accumulated postretirement benefit obligations were 7.00%, 7.75%, and 7.75%, respectively. 12. SEGMENT AND GEOGRAPHIC AREA INFORMATION Tenneco is a global manufacturer with the following major operating segments: Automotive -- Manufacture and sale of exhaust and ride control systems for both the original equipment and replacement markets. Specialty Packaging -- Manufacture and sale of specialty and protective packaging products for consumer, institutional, and industrial markets. Paperboard Packaging -- Manufacture and sale of packaging materials, cartons, and containers for industrial markets. The accounting policies of the segments are the same as those described in Note 1, "Summary of Accounting Policies." Tenneco evaluates operating performance based primarily on income before interest expense, income taxes, and minority interest. Individual operating segments have not been aggregated within these reportable segments. Products are transferred between segments and geographic areas on a basis intended to reflect as nearly as possible the "market value" of the products. The following table sets forth information relating to Tenneco's external customer and intersegment revenues for each product or each group of similar products:
NET SALES AND OPERATING REVENUES YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ (MILLIONS) AUTOMOTIVE Exhaust systems products.................................. $1,814 $1,753 $1,699 Ride control products..................................... 1,423 1,473 1,281 ------ ------ ------ Total Automotive....................................... 3,237 3,226 2,980 ------ ------ ------ SPECIALTY PACKAGING Disposable plastic, fiber, and aluminum packaging products............................................... 2,126 2,105 1,862 Plastic and fiber protective and flexible packaging products............................................... 607 399 78 Other..................................................... 52 49 47 ------ ------ ------ Total Specialty Packaging.............................. 2,785 2,553 1,987 ------ ------ ------ PAPERBOARD PACKAGING Corrugated shipping containers and containerboard products............................................... 1,463 1,326 1,412 Folding cartons and recycled paperboard mill products..... 103 112 151 Other..................................................... 108 83 120 ------ ------ ------ Total Paperboard Packaging............................. 1,674 1,521 1,683 ------ ------ ------ INTERGROUP SALES AND OTHER.................................. (99) (80) (78) ------ ------ ------ CONSOLIDATED................................................ $7,597 $7,220 $6,572 ====== ====== ======
70 75 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 SPECIALTY PAPERBOARD & AUTOMOTIVE PACKAGING PACKAGING OTHER ELIMS CONSOLIDATED ---------- --------- ---------- ------ ------- ------------ (MILLIONS) AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED Revenues from external customers................... $3,237 $2,785 $1,570 $ 5 $ -- $7,597 Intersegment revenues.............................. -- -- 104 -- (104) -- Equity income...................................... -- -- 1 -- -- 1 Interest income.................................... 5 1 1 1 -- 8 Depreciation, depletion, and amortization.......... 150 176 99 23 -- 448 Income before interest, income taxes, and minority interest......................................... 248 328 131 (66) -- 641 Income from discontinued operations................ -- -- -- -- -- -- Extraordinary loss................................. -- -- -- -- -- -- Cumulative effect of change in accounting principle........................................ -- -- -- -- -- -- Total assets (Note)................................ 2,827 3,245 1,497 1,430 (208) 8,791 Investment in affiliated companies................. 1 17 1 -- -- 19 Capital expenditures............................... 195 190 203 4 -- 592 Noncash items other than depreciation, depletion, and amortization................................. (13) 22 (28) (64) -- (83) AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED Revenues from external customers................... $3,226 $2,553 $1,431 $ 10 $ -- $7,220 Intersegment revenues.............................. -- -- 90 -- (90) -- Equity income...................................... -- 1 2 -- -- 3 Interest income.................................... 3 -- 1 1 -- 5 Depreciation, depletion, and amortization.......... 110 143 90 22 -- 365 Income before interest, income taxes, and minority interest......................................... 407 308 63 (14) -- 764 Income from discontinued operations................ -- -- -- -- -- -- Extraordinary loss................................. -- -- -- -- -- -- Cumulative effect of change in accounting principle........................................ (7) (11) (4) (24) -- (46) Total assets (Note)................................ 2,754 3,208 1,423 1,166 (219) 8,332 Investment in affiliated companies................. 2 9 16 -- -- 27 Capital expenditures............................... 211 227 108 12 -- 558 Noncash items other than depreciation, depletion, and amortization................................. (23) 10 (38) (69) -- (120) AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED Revenues from external customers................... $2,980 $1,987 $1,605 $ -- $ -- $6,572 Intersegment revenues.............................. -- -- 78 -- (78) -- Equity income...................................... -- -- -- -- -- -- Interest income.................................... 3 -- 1 4 -- 8 Depreciation, depletion, and amortization.......... 94 123 82 10 -- 309 Income before interest, income taxes, and minority interest......................................... 249 249 152 (22) -- 628 Income from discontinued operations................ -- -- -- 428 -- 428 Extraordinary loss................................. -- -- -- (236) -- (236) Cumulative effect of change in accounting principle........................................ -- -- -- -- -- -- Total assets (Note)................................ 2,557 2,557 1,345 1,236 (108) 7,587 Investment in affiliated companies................. 2 9 15 1 -- 27 Capital expenditures............................... 177 172 169 55 -- 573 Noncash items other than depreciation, depletion, and amortization................................. (3) (2) (45) (49) -- (99)
- ------------------------- Note: The Other segment's total assets includes pension assets retained by Tenneco related to certain employees of Tenneco's discontinued operations. 71 76 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC AREA ------------------- UNITED RECLASS & STATES FOREIGN(a) ELIMS CONSOLIDATED ------ ---------- --------- ------------ (MILLIONS) AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED Revenues from external customers(b)................... $5,214 $2,383 $ -- $7,597 Long-lived assets(c).................................. 3,918 1,066 -- 4,984 Total assets.......................................... 6,582 2,287 (78) 8,791 AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED Revenues from external customers(b)................... $5,049 $2,171 $ -- $7,220 Long-lived assets(c).................................. 3,680 905 -- 4,585 Total assets.......................................... 6,345 2,053 (66) 8,332 AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED Revenues from external customers(b)................... $4,708 $1,864 $ -- $6,572 Long-lived assets(c).................................. 3,511 752 -- 4,263 Total assets.......................................... 5,977 1,685 (75) 7,587
- ------------------------- Notes: (a) Revenues from external customers and long-lived assets for individual foreign countries are not material. (b) Revenues are attributed to countries based on location of the seller. (c) Long-lived assets include all long-term assets except goodwill, intangibles, and deferred tax assets. 13. COMMITMENTS AND CONTINGENCIES Capital Commitments Tenneco estimates that expenditures aggregating approximately $305 million will be required after December 31, 1998, to complete facilities and projects authorized at such date, and substantial commitments have been made in connection therewith. Of this amount, $49 million is in support of the containerboard business, which Tenneco has reached an agreement to sell. See Note 2, "Discontinued Operations, Disposition of Assets, and Extraordinary Loss." Lease Commitments Tenneco holds certain of its facilities, equipment, and other assets under long-term leases. Excluding certain leases held by Tenneco's containerboard business, the minimum lease payments under non-cancelable operating leases with lease terms in excess of one year are $69 million, $55 million, $43 million, $34 million, and $72 million for the years 1999, 2000, 2001, 2002, and 2003, respectively, and $150 million for subsequent years. Tenneco's containerboard business holds certain mill and timberland assets under operating leases with financial investors (the "Lessor"). In connection with the pending sale of the containerboard business described in Note 2 to these financial statements, Tenneco may purchase the mill and timberland assets prior to the sale. At December 31, 1998, minimum lease payments under the containerboard leases are $68 million for the years 1999, 2000, and 2001, $18 million for the years 2002 and 2003, and $34 million for subsequent years. 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, 72 77 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 1998, 1997, and 1996, was $163 million, $163 million, and $179 million, respectively, including minimum rentals under non-cancelable operating leases of $139 million, $155 million, and $151 million for the corresponding periods. Certain of Tenneco Packaging Inc.'s various lease agreements, all related to the containerboard business, require that it complies 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, and subsequent amendments, in order to incur funded debt, Tenneco Packaging Inc. must maintain a pre-tax cash flow coverage ratio, as defined, on a cumulative four quarter basis of a minimum of 1.75, 2.00, and 1.25 at December 31, 1998, 1997, and 1996, respectively. Tenneco Packaging Inc. was in compliance with all of its covenants at December 31, 1998. 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"), which covers salaried employees of Newport News and other Tenneco divisions and the 1986 asset valuation for the TRP and its cost accounting treatment. On January 15, 1999, Newport News entered into a settlement agreement with the Federal Government regarding the TRP. Tenneco agreed to pay Newport News $14.5 million with respect to this and other matters. This payment had no material impact on Tenneco's 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. 73 78 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
CUMULATIVE INCOME BEFORE EFFECT OF INTEREST INCOME CHANGE IN NET SALES EXPENSE, BEFORE CUMULATIVE ACCOUNTING AND INCOME TAXES, EFFECT OF CHANGE PRINCIPLE, OPERATING AND MINORITY IN ACCOUNTING NET OF NET INCOME QUARTER REVENUES INTEREST PRINCIPLE INCOME TAX (LOSS) ------- --------- ------------- ----------------- ---------- ---------- (MILLIONS) 1998 1st............................. $1,809 $186 $ 75 $ -- $ 75 2nd............................. 1,996 276 137 -- 137 3rd............................. 1,915 206 103 -- 103 4th............................. 1,877 (27) (60) -- (60) ------ ---- ---- ----- ---- $7,597 $641 $255 $ -- $255 ====== ==== ==== ===== ==== 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 ====== ==== ==== ===== ====
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK ------------------------------------------------- CUMULATIVE BEFORE CUMULATIVE EFFECT OF EFFECT OF CHANGE CHANGE IN IN ACCOUNTING ACCOUNTING NET INCOME QUARTER PRINCIPLE PRINCIPLE (LOSS) ------- ----------------- ---------- ---------- 1998 1st................................................. $ .44 $ -- $ .44 2nd................................................. .81 -- .81 3rd................................................. .62 -- .62 4th................................................. (.36) -- (.36) ----- ----- ----- $1.52 $ -- $1.52 ===== ===== ===== 1997 1st................................................. $ .44 $ -- $ .44 2nd................................................. .61 -- .61 3rd................................................. .62 -- .62 4th................................................. .45 (.27) .18 ----- ----- ----- $2.12 $(.27) $1.85 ===== ===== =====
74 79 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK -------------------------------------- BEFORE CUMULATIVE CUMULATIVE EFFECT OF EFFECT OF CHANGE IN CHANGE IN ACCOUNTING ACCOUNTING NET INCOME QUARTER PRINCIPLE PRINCIPLE (LOSS) ------- ---------- ---------- ---------- 1998 1st....................................................... $ .44 $ -- $ .44 2nd....................................................... .81 -- .81 3rd....................................................... .62 -- .62 4th....................................................... (.36) -- (.36) ----- ----- ----- $1.51 $ -- $1.51 ===== ===== ===== 1997 1st....................................................... $ .44 $ -- $ .44 2nd....................................................... .61 -- .61 3rd....................................................... .62 -- .62 4th....................................................... .44 (.27) .17 ----- ----- ----- $2.11 $(.27) $1.84 ===== ===== =====
- ------------------------- Note: Reference is made to Notes 1, 2, 3, 4 and 8 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.) 75 80 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 11, 1999, 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." 76 81 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, 1998............................. 78 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..........................
77 82 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 CHARGED CHARGED AT TO 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, 1998............ $35 $ 25 $ 4 $ 9 $55 === ==== === === === Year Ended December 31, 1997............ $32 $ 7 $ 7 $11 $35 === ==== === === === Year Ended December 31, 1996............ $24 $ 12 $-- $ 4 $32 === ==== === === ===
78 83 REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the quarter ended December 31, 1998. EXHIBITS The following exhibits are filed with Tenneco Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, 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 (incorporated herein by reference from Exhibit 3.1(a) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(b) -- Certificate of Amendment, dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(c) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997 (incorporated herein by reference from Exhibit 3.1(d) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(d) -- Certificate of Designation of Series B Junior Participating Preferred Stock dated September 9, 1998 (incorporated herein by reference from Exhibit 3.1(d) of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(e) -- Certificate of Elimination of the Series A Participating Junior Preferred Stock of Tenneco Inc. dated September 11, 1998 (incorporated herein by reference from Exhibit 3.1(e) of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). *3.2 -- Amended By-laws of Tenneco Inc. 4.1 -- Form of Specimen Stock Certificate of Tenneco Inc. Common Stock (incorporated herein by reference from Exhibit 4.1 of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 4.2 -- Qualified Offer Plan Rights Agreement dated as of September 9, 1998 by and between Tenneco Inc. and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.1 of Tenneco Inc.'s Current Report on Form 8-K dated September 24, 1998, 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).
79 84
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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). 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). *4.3(l) -- Registration Rights Agreement dated as of August 28, 1998 by and between Tenneco Inc. and Dana G. Mead, Theodore R. Tetzlaff, Paul T. Stecko and Robert T. Blakely, not individually but solely as trustees under that certain Tenneco Inc. Rabbi Trust dated as of August 28, 1998. 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).
80 85
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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). 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 (incorporated herein by reference from Exhibit 10.11 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 10.12 -- Executive Incentive Compensation Plan (incorporated herein by reference from Exhibit 10.12 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 10.13 -- Tenneco Inc. Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.13 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). *10.14 -- Amended and Restated Tenneco Inc. Supplemental Executive Retirement Plan. 10.15 -- 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).
81 86
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.16 -- Amended and Restated Tenneco Benefits Protection Trust (incorporated herein by reference from Exhibit 10.17 of Tenneco's Form 10, File No. 1-12387). 10.17 -- 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). 10.18 -- 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). 10.19 -- 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). 10.20 -- 1996 Tenneco Inc. Stock Ownership Plan, as amended (incorporated herein by reference from Exhibit 10.11 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 10.21 -- Release Agreement dated July 6, 1998 between Stacy S. Dick, Pamela Dick and Tenneco Management Company (incorporated herein by reference from Exhibit 10.22 of Tenneco's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 1-12387). 10.22 -- 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). 10.23 -- 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). 10.24 -- Timberland Lease, dated January 31, 1991, by and between Four States Timber Venture and Packaging Corporation of America, as amended (incorporated herein by reference from Exhibit 10.26 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 10.25 -- 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). 10.26 -- Tenneco Inc. Rabbi Trust (incorporated herein by reference from Exhibit 10.22 of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 10.27 -- Letter Agreement dated September 24, 1998 between Robert T. Blakely and Tenneco Inc. (incorporated herein by reference from Exhibit 10.23 of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). *10.28 -- Letter Agreement dated September 24, 1998 between John J. Castellani and Tenneco Inc. 10.29 -- Tenneco Benefits Protection Trust Appointment of Successor Trustee dated September 28, 1998 (incorporated herein by reference from Exhibit 10.24 of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). *10.30 -- Contribution Agreement, dated as of January 25, 1999, among Tenneco Packaging Inc., PCA Holdings LLC, and Packaging Corporation of America. 11 -- None. *12 -- Computation of Ratio of Earnings to Fixed Charges. 13 -- None. 16 -- None.
82 87
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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 Henry U. Harris, Jr. Belton K. Johnson Sir David Plastow Roger B. Porter Paul T. Stecko William L. Weiss Clifton R. Wharton, Jr. *27 -- Financial Data Schedule, 12/31/98. 28 -- None. 99 -- None.
83 88 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. By /s/ DANA G. MEAD ------------------------------------ Dana G. Mead Chairman and Chief Executive Officer Date: March 10, 1999 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 10, 1999 - -------------------------------------------------------- Officer and Director Dana G. Mead /s/ ROBERT T. BLAKELY Principal Financial and March 10, 1999 - -------------------------------------------------------- Accounting Officer Robert T. Blakely Mark Andrews, W. Michael Blumenthal, Directors March 10, 1999 Larry D. Brady, M. Kathryn Eickhoff, Henry U. Harris, Jr., Belton K. Johnson, Sir David Plastow, Roger B. Porter, Paul T. Stecko, William L. Weiss, Clifton R. Wharton, Jr. By: /s/ THEODORE R. TETZLAFF ----------------------------------------------- Theodore R. Tetzlaff Attorney-in-fact
84 EX-3.2 2 AMENDED BY-LAWS 1 EXHIBIT 3.2 BY-LAWS OF TENNECO INC. AS AMENDED DECEMBER 2, 1998 2 BY-LAWS OF TENNECO INC. AS AMENDED DECEMBER 2, 1998 ARTICLE I PLACE OF STOCKHOLDER MEETINGS Section 1. All meetings of the stockholders of the corporation shall be held at such place or places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors of the corporation (the "Board"), or as shall be specified or fixed in the respective notices or waivers of notice thereof. ANNUAL MEETING Section 2. The Annual Meeting of Stockholders shall be held on such date and at such time as may be fixed by the Board and stated in the notice thereof, for the purpose of electing directors and for the transaction of only such other business as is properly brought before the meeting in accordance with these By-Laws. To be properly brought before the meeting, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (b) otherwise properly brought before the meeting by or at the direction of the Board, or (c) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the Annual Meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 65 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the Annual Meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the Annual Meeting (i) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be transacted at the Annual Meeting except in accordance with the procedures set forth in this Section, provided, however, that nothing in this Section shall be deemed to preclude discussion by any stockholder of any business properly brought before the Annual Meeting. The Chairman of the Annual Meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 3 2 SPECIAL MEETING Section 3. Subject to the rights of the holders of any series of preferred stock, par value $.01 per share, of the corporation (the "Preferred Stock") to elect additional directors under specified circumstances, special meetings of the stockholders shall be called by the Board. The business transacted at a special meeting shall be confined to the purposes specified in the notice thereof. Special meetings shall be held at such date and at such time as the Board may designate. NOTICE OF MEETING Section 4. Written notice of each meeting of stockholders, stating the place, date and hour of the meeting, and the purpose or purposes thereof, shall be mailed not less than ten nor more than sixty days before the date of such meeting to each stockholder entitled to vote thereat. QUORUM Section 5. Unless otherwise provided by statute, the holders of shares of stock entitled to cast a majority of votes at a meeting, present either in person or by proxy, shall constitute a quorum at such meeting. The Secretary of the corporation or in his absence an Assistant Secretary or an appointee of the presiding officer of the meeting, shall act as the Secretary of the meeting. VOTING Section 6. Except as otherwise provided by law or the Restated Certificate of Incorporation, each stockholder entitled to vote at any meeting shall be entitled to one vote, in person or by proxy, for each share held of record on the record date fixed as provided in Section 4 of Article V of these By-Laws for determining the stockholders entitled to vote at such meeting. Except as otherwise provided by law, the Restated Certificate of Incorporation or these By-Laws, the vote of a majority of any quorum shall be sufficient to elect directors and to pass any resolution within the power of the holders of all the outstanding shares. Elections of directors need not be by written ballot; provided, however, that by resolution duly adopted, a vote by written ballot may be required. PROXIES Section 7. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the corporation. In order to be exercised at a meeting of stockholders, proxies shall be delivered to the Secretary of the corporation or his representative at or before the time of such meeting. 4 3 INSPECTORS Section 8. At each meeting of the stockholders the polls shall be opened and closed; the proxies and ballots shall be received and be taken in charge, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by three Inspectors, two of whom shall have power to make a decision. Such Inspectors shall be appointed by the Board before the meeting, or in default thereof by the presiding officer at the meeting, and shall be sworn to the faithful performance of their duties. If any of the Inspectors previously appointed shall fail to attend or refuse or be unable to serve, substitutes shall be appointed by the presiding officer. CONDUCT OF MEETINGS Section 9. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the chairman of the meeting. The Board may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. ARTICLE II BOARD OF DIRECTORS NUMBER; METHOD OF ELECTION; TERMS OF OFFICE AND QUALIFICATION Section 1. The business and affairs of the corporation shall be managed under the direction of the Board. The number of directors which shall constitute the entire Board shall not be less than eight nor more than sixteen and shall be determined from time to time by resolution adopted by a majority of the entire Board. Nominations of persons for election to the Board of the corporation at the Annual Meeting of Stockholders may be made at a meeting of stockholders by or at the direction of the Board of Directors by any nominating committee or person appointed by the Board or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Article II. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 65 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the 5 4 stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation which are beneficially owned by the person and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to the Securities Exchange Act of 1934 as amended; and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director of the corporation. No person shall be eligible for election as a director of the corporation at the Annual Meeting of Stockholders unless nominated in accordance with the procedures set forth herein. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Any director may resign his office at any time by delivering his resignation in writing to the corporation, and the acceptance of such resignation unless required by the terms thereof shall not be necessary to make such resignation effective. No person who shall have attained the age of 72 shall be eligible for election or reelection, as the case may be, as a director of the corporation. MEETINGS Section 2. The Board may hold its meetings and have an office in such place or places within or without the State of Delaware as the Board by resolution from time to time may determine. The Board may in its discretion provide for regular or stated meetings of the Board. Notice of regular or stated meetings need not be given. Special meetings of the Board shall be held whenever called by direction of the Chief Executive Officer, the President or any two of the directors. Notice of any special meeting shall be given by the Secretary to each director either by mail or by telegram, facsimile, telephone or other electronic communication or transmission. If mailed, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least three days before such meeting. If by telegram, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph corporation at least twenty-four hours before such meeting. If by facsimile, telephone or other electronic communication or transmission, such notice shall be transmitted at least twenty-four hours before such meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Except as otherwise provided by applicable law, at any meeting at which every director shall be present, even though without notice, any business may be transacted. No notice of any adjourned meeting need be given. The Board shall meet immediately after election, following the Annual Meeting of Stockholders, for the purpose of organizing, for the election of corporate officers as hereinafter specified, and for the transaction of any other business which may come before it. No notice of such meeting shall be necessary. 6 5 QUORUM Section 3. Except as otherwise expressly required by these By-Laws or by statute, a majority of the directors then in office (but not less than one-third of the total number of directors constituting the entire Board) shall be present at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and the vote of a majority of the directors present at any such meeting at which quorum is present shall be necessary for the passage of any resolution or for an act to be the act of the Board. In the absence of a quorum, a majority of the directors present may adjourn such meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. COMPENSATION OF BOARD OF DIRECTORS Section 4. Each director (other than a director who is a salaried officer of the corporation or of any subsidiary of the corporation), in consideration of his serving as such, shall be entitled to receive from the corporation such amount per annum and such fees for attendance at meetings of the Board or of any committee of the Board (a "Committee"), or both, as the Board shall from time to time determine. The Board may likewise provide that the corporation shall reimburse each director or member of a Committee for any expenses incurred by him on account of his attendance at any such meeting. Nothing contained in this Section shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE III COMMITTEES OF THE BOARD COMMITTEES Section 1. The Board shall elect from the directors an Executive Committee, a Compensation Committee, an Audit Committee, a Nominating and Business Development Committee and any other Committee which the Board may by resolution prescribe. Any such other Committee shall be comprised of such persons and shall possess such authority as shall be set forth in such resolution. PROCEDURE Section 2. (1) Each Committee shall fix its own rules of procedure and shall meet where and as provided by such rules. Unless otherwise stated in these By-Laws, a majority of a Committee shall constitute a quorum. (2) In the absence or disqualification of a member of any Committee, the members of such Committee present at any meeting, and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Fees in connection with such appointments shall be established by the Board. REPORTS TO THE BOARD Section 3. All completed actions by the Executive, Audit and Compensation Committees shall be reported to the Board at the next succeeding Board meeting and shall be subject to revision or alteration by the Board, provided, that no acts or rights of third parties shall be affected by any such revision or alteration. 7 6 EXECUTIVE COMMITTEE Section 4. The Board shall elect an Executive Committee comprised of the Chief Executive Officer and not less than four additional members of the Board. During the interval between the meetings of the Board, the Executive Committee shall possess and may exercise all the powers of the Board in the management and direction of all the business and affairs of the corporation (except the matters hereinafter assigned to the Compensation Committee) including, without limitation, the power and authority to declare dividends and to authorize the issuance of stock, in such manner as the Executive Committee shall deem best for the interests of the corporation in all cases in which specific directions shall not have been given by the Board. COMPENSATION COMMITTEE Section 5. The Board shall elect a Compensation Committee consisting of at least four members of the Board, none of whom shall be officers or employees of the corporation or of any subsidiary corporation. The Board shall appoint a chairman of such Committee who shall be one of its members. The Compensation Committee shall have such authority and duties as the Board by resolution shall prescribe. AUDIT COMMITTEE Section 6. The Board shall elect from among its members an Audit Committee consisting of at least three members. The Board shall appoint a chairman of said Committee who shall be one of its members. The Audit Committee shall have such authority and duties as the Board by resolution shall prescribe. In no event shall a director who is also an officer or employee of the corporation or any of its subsidiary companies serve as a member of such Committee. The Chief Executive Officer shall have the right to attend (but not vote at) each meeting of such Committee. NOMINATING AND MANAGEMENT DEVELOPMENT COMMITTEE Section 7. The Board shall elect from among its members a Nominating and Management Development Committee consisting of at least three members. The Board shall appoint a chairman of said Committee who shall be one of its members. The Nominating and Management Development Committee shall have such authority and duties as the Board by resolution shall prescribe. In no event shall a director who is also an officer or employee of the corporation or any of its subsidiary companies serve as a member of such Committee. The Chief Executive Officer shall have the right to attend (but not vote at) each meeting of such Committee. ARTICLE IV OFFICERS GENERAL PROVISIONS Section 1. The corporate officers of the corporation shall consist of the following: a Chairman and/or a President, one of whom shall be designated Chief Executive Officer and each of whom shall be chosen from the Board; one or more Vice Chairman, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents; a General Counsel, a Secretary, one or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers, a Controller, and such other officers as the Board may from time to time designate. Insofar as permitted by statute, the same person may hold two or more offices. All officers chosen by the Board shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. 8 7 The Chairman and/or President, each Vice Chairman, Executive Vice President, Senior Vice President and Vice President, the General Counsel, the Secretary and any Assistant Secretary, the Treasurer and any Assistant Treasurer, and the Controller shall be elected by the Board. Each such officer shall hold office until his successor is elected or appointed and qualified or until his earlier death, resignation or removal. Any officer may be removed, with or without cause, at any time by the Board. A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided in these By-Laws for election or appointment to such office. POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER Section 2. The Chief Executive Officer shall have general charge and management of the affairs, property and business of the corporation, subject to the Board, the Executive Committee and the provisions of these By-Laws. The Chief Executive Officer or in his absence such other individual as the Board may select, shall preside at all meetings of the stockholders. He shall also preside at meetings of the Board and the Executive Committee, and in his absence the Board or the Executive Committee, as the case may be, shall appoint one of their number to preside. The Chief Executive Officer shall perform all duties assigned to him in these By-Laws and such other duties as may from time to time be assigned to him by the Board. He shall have the power to appoint and remove, with or without cause, such officers, other than those elected by the Board as provided for in these By-Laws, as in his judgment may be necessary or proper for the transaction of the business of the corporation, and shall determine their duties, all subject to ratification by the Board. POWERS AND DUTIES OF OTHER OFFICERS Section 3. The Chairman shall perform such duties as may from time to time be assigned to him by the Board, the Executive Committee or the Chief Executive Officer. Section 4. Each Vice Chairman shall perform such duties as may from time to time be assigned to him by the Board, the Executive Committee or the Chief Executive Officer. Section 5. The President shall perform such duties as may from time to time be assigned to him by the Board, the Executive Committee or the Chief Executive Officer. Section 6. Each Executive Vice President shall perform such duties as may from time to time be assigned to him by the Board, the Executive Committee or the Chief Executive Officer. Section 7. Each Senior Vice President shall perform such duties as may from time to time be assigned to him by the Board, the Executive Committee or the Chief Executive Officer. Section 8. Each Vice President and Assistant Vice President shall perform such duties as may from time to time be assigned to him by the Board, the Executive Committee, the Chief Executive Officer or an Executive Vice President. Section 9. The General Counsel shall have general supervision and control of all of the corporation's legal business. He shall perform such other duties as may be assigned to him by the Board, the Executive Committee or the Chief Executive Officer. 9 8 Section 10. The Secretary or an Assistant Secretary shall record the proceedings of all meetings of the Board, the Executive Committee of the Board and the stockholders, in books kept for that purpose. The Secretary shall be the custodian of the corporate seal, and he or an Assistant Secretary shall affix the same to and countersign papers requiring such acts; and he and the Assistant Secretaries shall perform such other duties as may be required by the Board, the Executive Committee or the Chief Executive Officer. Section 11. The Treasurer and Assistant Treasurers shall have care and custody of all funds of the corporation and disburse and administer the same under the direction of the Board, the Executive Committee or the Chief Executive Officer and shall perform such other duties as the Board, the Executive Committee or the Chief Executive Officer shall assign to them. Section 12. The Controller shall maintain adequate records of all assets, liabilities and transactions of the corporation and see that audits thereof are currently and regularly made; and he shall perform such other duties as may be required by the Board, the Executive Committee or the Chief Executive Officer. SALARIES AND APPOINTMENTS Section 13. The salaries of corporate officers shall be fixed by the Compensation Committee provided for in Section 5 of Article III hereof, except that the fixing of salaries below certain levels, determinable from time to time by the Compensation Committee, may in the discretion of the Committee be delegated to the Chief Executive Officer, subject to the approval of the Board. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 14. (1) The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an "Indemnitee") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, including appeals (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the corporation or, while a director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in paragraph (3) of this Section 14, the corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the Board. (2) The corporation shall pay the expenses (including attorneys' fees) incurred by an Indemnitee in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should be ultimately determined that the Indemnitee is not entitled to be indemnified under this Section 14 or otherwise. (3) If a claim for indemnification or payment of expenses under this Section 14 is not paid in full within thirty days after a written claim therefor by the Indemnitee has been received by the corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or payment of expenses under applicable law. 10 9 (4) The rights conferred on any Indemnitee by this Section 14 shall not be exclusive of any other rights which such Indemnitee may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested directors or otherwise. (5) The corporation's obligation, if any, to indemnify or to advance expenses to any Indemnitee who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such Indemnitee may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, enterprise or nonprofit enterprise. (6) Any repeal or modification of the foregoing provisions of this Section 14 shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omission occurring prior to the time of such repeal or modification. (7) This Section 14 shall not limit the right of the corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when and as authorized by appropriate corporate action. ARTICLE V CAPITAL STOCK CERTIFICATES OF STOCK Section 1. Certificates of stock certifying the number of shares owned shall be issued to each stockholder in such form not inconsistent with the Restated Certificate of Incorporation as shall be approved by the Board. Such certificates of stock shall be numbered and registered in the order in which they are issued and shall be signed by the Chairman, the President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. Any and all of the signatures on the certificates may be a facsimile. TRANSFER OF SHARES Section 2. Transfers of shares shall be made only upon the books of the corporation by the holder, in person, or by power of attorney duly executed and filed with the Secretary of the corporation, and on the surrender of the certificate or certificates of such shares, properly assigned. The corporation may, if and whenever the Board shall so determine, maintain one or more offices or agencies, each in charge of an agent designated by the Board, where the shares of the capital stock of the corporation shall be transferred and/or registered. The Board may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. LOST, STOLEN OR DESTROYED CERTIFICATES Section 3. The corporation may issue a new certificate of capital stock of the corporation in place of any certificate theretofore issued by the corporation, alleged to have been lost, stolen or destroyed, and the corporation may, but shall not be obligated to, require the owner of the alleged lost, stolen or destroyed certificate, or his legal representatives, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate, as the officers of the corporation may, in their discretion, require. 11 10 FIXING OF RECORD DATE Section 4. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty nor less than ten days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than ten days from the date upon which the resolution fixing the record date is adopted by the Board; and (3) in the case of any other action, shall not be more than sixty days prior to such other action. If no record date is fixed by the Board: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be determined in accordance with Article VI of these By-Laws; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. ARTICLE VI CONSENTS TO CORPORATE ACTION RECORD DATE Section 1. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be as fixed by the Board or as otherwise established under this Section. Any person seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall by written notice addressed to the Secretary and delivered to the corporation, request that a record date be fixed for such purpose. The Board may fix a record date for such purpose which shall be no more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board and shall not precede the date such resolution is adopted. If the Board fails within 10 days after the corporation receives such notice to fix a record date for such purpose, the record date shall be the day on which the first written consent is delivered to the corporation in the manner described in Section 2 below unless prior action by the Board is required under the General Corporation Law of Delaware, in which event the record date shall be at the close of business on the day on which the Board adopts the resolution taking such prior action. PROCEDURES Section 2. Every written consent purporting to take or authorizing the taking of corporate action and/or related revocations (each such written consent and related revocation is referred to in this Article VI as a "Consent") shall bear the date of signature of each stockholder who signs the Consent, and no Consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated Consent delivered in the manner required by this Section 2, Consents signed by a sufficient number of stockholders to take such action are delivered to the corporation. 12 11 A Consent shall be delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery to the corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. In the event of the delivery to the corporation of a Consent, the Secretary of the corporation shall provide for the safe-keeping of such Consent and shall promptly conduct such ministerial review of the sufficiency of the Consents and of the validity of the action to be taken by shareholder consent as he deems necessary or appropriate, including, without limitation, whether the holders of a number of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent; provided, however, that if the corporate action to which the Consent relates is the removal or replacement of one or more members of the Board, the Secretary of the corporation shall promptly designate two persons, who shall not be members of the Board, to serve as Inspectors with respect to such Consent and such Inspectors shall discharge the functions of the Secretary of the corporation under this Section 2. If after such investigation the Secretary or the Inspectors (as the case may be) shall determine that the Consent is valid and that the action therein specified has been validly authorized, that fact shall forthwith be certified on the records of the corporation kept for the purpose of recording the proceedings of meetings of stockholders, and the Consent shall be filed in such records, at which time the Consent shall become effective as stockholder action. In conducting the investigation required by this Section 2, the Secretary or the Inspectors (as the case may be) may, at the expense of the corporation, retain special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate to assist them, and shall be fully protected in relying in good faith upon the opinion of such counsel or advisors. ARTICLE VII MISCELLANEOUS DIVIDENDS AND RESERVES Section 1. Dividends upon the capital stock of the corporation may be declared as permitted by law by the Board or the Executive Committee at any regular or special meeting. Before payment of any dividend or making any distribution of profits, there may be set aside out of the surplus or net profits of the corporation such sum or sums as the Board or the Executive Committee, from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for such other purposes as the Board or Executive Committee shall think conducive to the interests of the corporation, and any reserve so established may be abolished and restored to the surplus account by like action of the Board or the Executive Committee. SEAL Section 2. The seal of the corporation shall bear the corporate name of the corporation, the year of its incorporation and the words "Corporate Seal, Delaware". WAIVER Section 3. Whenever any notice whatever is required to be given by statute or under the provisions of the Restated Certificate of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders or the Board, as the case may be, need be specified in any waiver of notice of such meeting. 13 12 FISCAL YEAR Section 4. The fiscal year of the corporation shall begin with January first and end with December thirty-first. CONTRACTS Section 5. Except as otherwise required by law, the Restated Certificate of Incorporation or these By-Laws, any contracts or other instruments may be executed and delivered in the name and on the behalf of the corporation by such officer or officers of the corporation as the Board may from time to time direct. Such authority may be general or confined to specific instances as the Board may determine. The Chairman of the Board, the President or any Vice President may execute bonds, contracts, deeds, leases and other instruments to be made or executed for or on behalf of the corporation. Subject to any restrictions imposed by the Board, the Chairman of the Board, the President or any Vice President of the corporation may delegate contractual powers to others under his jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power. PROXIES Section 6. Unless otherwise provided by resolution adopted by the Board, the Chairman of the Board, the President or any Vice President may from time to time appoint an attorney or attorneys or agent or agents of the corporation, in the name and on behalf of the corporation, to cast the votes which the corporation may be entitled to cast as the holder of stock or other securities in any other corporation or other entity, any of whose stock or other securities may be held by the corporation, at meetings of the holders of the stock or other securities of such other corporation or other entity, or to consent in writing, in the name of the corporation as such holder, to any action by such other corporation or other entity, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. AMENDMENTS Section 7. The Board from time to time shall have the power to make, alter, amend or repeal any and all of these By-Laws, but any By-Laws so made, altered or repealed by the Board may be amended, altered or repealed by the stockholders. 14 13 CERTIFICATION The undersigned hereby certifies that he is the duly elected and acting Secretary of Tenneco Inc., a Delaware corporation, and the keeper of its corporate records and minutes. The undersigned further hereby certifies that the above and foregoing is a true and correct copy of the By-Laws of said corporation, as in force at the date hereof. WITNESS the hand of the undersigned and the seal of said corporation, this day of , . -------------------------------------- -------------------------------------- Secretary EX-4.3(L) 3 REGISTRATION RIGHTS AGREEMENT 1 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is dated as of August 28, 1998, by and between TENNECO INC., a Delaware corporation (the "Company"), and Dana G. Mead, Theodore R. Tetzlaff, Paul T. Stecko and Robert T. Blakely, not individually but solely as trustees (collectively, the "Trustee") under that certain Tenneco Inc. Rabbi Trust, dated as of August 28, 1998 (the "Trust"). WHEREAS, the Company and the Trustee have established the Trust to hold assets until certain amounts are paid to participants under certain designated nonqualified deferred compensation plan(s) and supplemental pension arrangements; and WHEREAS, in connection with entering into the Trust, the Company has agreed to provide the registration rights set forth in this Agreement for the benefit of the Trust; and WHEREAS, the parties desire to enter into this Agreement to set forth their agreement regarding certain registration rights with respect to the Common Stock (and any other securities issued in respect thereof or in exchange therefor) held by the Trust. NOW, THEREFORE, the parties hereto agree as follows: 1. Demand Registrations. (a) Upon written notice by the Trustee to the Company at any time and from time to time after the date hereof requesting that the Company effect the registration under the Securities Act of 1933 (the "Securities Act") of any or all of the securities of the Company now or hereafter held by the Trust (or such shares or other securities into which or for which such securities are changed, converted or exchanged upon any reclassification, share combination, share subdivision, share dividend, share exchange, merger, consolidation or similar transaction or event, together with such shares or other securities received through dividends, reinvestment of dividends or otherwise) (the "Registrable Securities"), which notice shall specify the intended method(s) of disposition of such Registrable Securities, the Company shall use its best efforts to effect the registration under the Securities Act and applicable state securities laws of such Registrable Securities for disposition in accordance with such intended method(s) of disposition. (b) Notwithstanding any other provision of this Agreement to the contrary, a registration requested by the Trustee shall not be deemed to have been effected: (i) unless it has become effective, (ii) if after it has become effective such registration is interfered with by any stop order, injunction or other order or requirement of the Securities and Exchange Commission ("SEC") or other governmental agency or court for any reason other than a misrepresentation or an omission by the Trustee and, as a result thereof, the Registrable Securities requested to be registered cannot be completely distributed in accordance with the plan of distribution set forth in the registration statement or (iii) if the conditions to closing specified in any purchase agreement or underwriting agreement entered into in connection with any such registration are not satisfied or waived other than by reason of some act or omission by the Trustee. 2 (c) In the event that any registration pursuant to this Section shall involve, in whole or in part, an underwritten offering, the Trustee shall have the right to designate an underwriter or underwriters as the lead or managing underwriters of such underwritten offering and, in connection with each registration, the Trustee may select counsel to represent the Trustee. (d) As to any particular Registrable Securities, such Registrable Securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale by the Trust shall have been declared effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (ii) such securities shall have been distributed to the public in accordance with Rule 144 promulgated under the Securities Act ("Rule 144"), or (iii) such securities shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any state securities or blue sky law then in effect. 2. Expenses. The Company shall pay any and all expenses incident to performance of or compliance with each registration of securities pursuant to this Agreement, including, without limitation, (i) the fees, disbursements and expenses of the Company's counsel and accountants and the fees, disbursements and expenses of counsel selected by the Trust in accordance with this Agreement in connection with the registration of the securities to be disposed of; (ii) all expenses, including filing fees, in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering document and amendments and supplements thereto and the mailing and delivering of copies thereof to any underwriters and dealers; (iii) the cost of printing or producing any underwriting agreements and blue sky or legal investment memoranda and any other documents in connection with the offering, sale or delivery of the securities to be disposed of; (iv) all expenses in connection with the qualification of the securities to be disposed of for offering and sale under state securities laws, including the fees, disbursements and expenses of counsel for the underwriters or the Trustee in connection with such qualification and in connection with any blue sky and legal investment surveys; (v) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the securities to be disposed of; (vi) transfer agents' and registrars' fees and expenses and the fees and expenses of any other agent or trustee appointed in connection with such offering; (vii) all security engraving and security printing expenses; (viii) all fees, disbursements and expenses payable in connection with the listing of the securities on any securities exchange or automated interdealer quotation system or the rating of such securities, (ix) any other fees, disbursements and expenses of underwriters customarily paid by the sellers of securities, and underwriting discounts and commissions and transfer taxes, if any, and (x) other out-of-pocket expenses of the Trust. Notwithstanding the foregoing, each of the Trust and the Company shall be responsible for its own internal administrative and similar costs. -2- 3 3. Registration and Qualification. If and whenever the Company is required to effect the registration of any Registrable Securities under the Securities Act as provided in Section 1, the Company shall as promptly as practicable: (a) prepare, file and use its reasonable best efforts to cause to become effective a registration statement under the Securities Act relating to the Registrable Securities to be offered; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities until the earlier of (A) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition set forth in such registration statement and (B) the expiration of six months after such registration statement becomes effective; provided, that such six-month period shall be extended for such number of days that equals the number of days elapsing from (x) the date the written notice contemplated by paragraph (f) below is given by the Company to (y) the date on which the Company delivers to the Trustee the supplement or amendment contemplated by paragraph (f) below; (c) furnish to the Trustee and to any underwriter of such Registrable Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents, as the Trustee or such underwriter may reasonably request, and upon request a copy of any and all transmittal letters or other correspondence to or received from, the SEC or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering; (d) use its reasonable best efforts to register or qualify all Registrable Securities covered by such registration statement under the securities or blue sky laws of such U.S. jurisdictions as the Trustee or any underwriter to such Registrable Securities shall request, and use its reasonable best efforts to obtain all appropriate registrations, permits and consents in connection therewith, and do any and all other acts and things which may be necessary or advisable to enable the Trustee or any such underwriter to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement; (e) (i) furnish to the Trustee and to any underwriter of such Registrable Securities an opinion of counsel for the Company addressed to the Trustee and dated the date of the closing under the underwriting agreement (if any) (or if such offering is not underwritten, dated the effective date of the registration statement) and (ii) furnish to the Trustee and to any underwriter of such Registrable Securities a "cold comfort" letter addressed to the Trustee and signed by the -3- 4 independent public accountants who have audited the financial statements of the Company included in such registration statement, in each such case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Trustee may reasonably request and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements; (f) as promptly as practicable, notify the Trustee in writing (i) at any time when a prospectus relating to a registration pursuant to Section 1 is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (ii) of any request by the SEC or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and in either such case, at the request of the Trustee, prepare and furnish to the Trustee a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; (g) if requested by the Trustee or the lead or managing underwriters, use its best efforts to list all such Registrable Securities covered by such registration on each securities exchange and automated inter-dealer quotation system on which a class of common equity securities of the Company is then listed; and (h) furnish for delivery in connection with the closing of any offering of Registrable Securities pursuant to a registration effected pursuant to Sections 1 or 2 unlegended certificates representing ownership of the Registrable Securities being sold in such denominations as shall be requested by the Trustee or the underwriters. 4. Underwriting; Due Diligence. (a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration requested under this Agreement, the Company shall enter into an underwriting agreement with such underwriters for such offering, which agreement will contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements of the Company to the extent relevant and as are customarily contained in underwriting agreements generally with respect to secondary distributions to the extent relevant, including, without limitation, indemnification and contribution provisions substantially to the effect and to the extent provided in Section 5(a), and -4- 5 agreements as to the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 3(e). The Trust shall be a party to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters, shall also be made to and for the benefit of the Trust. Such underwriting agreement shall also contain such representations and warranties by the Trust and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, when relevant, including, without limitation, indemnification and contribution provisions substantially to the effect and to the extent provided in Section 5(b). (b) In connection with the preparation and filing of each registration statement registering Registrable Securities under the Securities Act pursuant to this Agreement, the Company shall give the Trustee and the underwriters, if any, and their respective counsel and accountants, such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified the financial statements of the Company as shall be necessary, in the opinion of the Trustee and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 5. Indemnification and Contribution. (a) In the case of each offering of Registrable Securities made pursuant to this Agreement, the Company agrees to indemnify and hold harmless, to the extent permitted by law, the Trustee, the Trust, each underwriter of Registrable Securities so offered and each individual or entity (each a "Person"), if any, who controls any of the foregoing Persons within the meaning of the Securities Act and the officers, directors, affiliates, employees and agents of each of the foregoing, against any and all losses, liabilities, costs (including reasonable attorney's fees and disbursements), claims and damages, joint or several, to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or threatened, insofar as such losses, liabilities, costs, claims and damages (or actions or proceedings in respect thereof, whether or not such indemnified Person is a party thereto) arise out of or are based upon any untrue statement by the Company or alleged untrue statement by the Company of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or in any offering memorandum or other offering document relating to the offering and sale of such Registrable Securities prepared by the Company or at its direction, or any amendment thereof or supplement thereto, or in any document incorporated by reference therein, or any omission by the Company or alleged omission by the Company to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that the Company shall not be liable to any Person in any such case to the extent that any such loss, liability, cost, claim or damage arises out of or relates to any untrue statement or alleged untrue statement, or any omission or alleged omission, if such statement or omission shall have been made in reliance upon and in conformity with information relating to the Trust or an underwriter furnished in -5- 6 writing to the Company by or on behalf of the Trust or such underwriter specifically for use in the registration statement (or in any preliminary or final prospectus included therein), offering memorandum or other offering document, or any amendment thereof or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Trust or any underwriter and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability that the Company may otherwise have to the Trust or any underwriter of the Registrable Securities or any controlling Person of the foregoing and the officers, directors, affiliates, employees and agents of each of the foregoing; provided, further, that, in the case of an offering with respect to which the Trust has designated the lead or managing underwriters (or the Trust is offering Registrable Securities directly, without an underwriter), this indemnity does not apply to any loss, liability, cost, claim or damage arising out of or relating to any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus or offering memorandum if a copy of a final prospectus or offering memorandum was not sent or given by or on behalf of any underwriter (or the Trust) to such Person asserting such loss, liability, cost, claim or damage at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such final prospectus or offering memorandum. (b) In the case of each offering made pursuant to this Agreement, the Trust, by exercising its registration rights hereunder, agrees to indemnify and hold harmless, and to cause each underwriter of Registrable Securities included in such offering (in the same manner and to the same extent as set forth in Section 5(a)) to agree to indemnify and hold harmless, the Company, each other underwriter who participates in such offering, each other holder with securities included in such offering, each Person, if any, who controls any of the foregoing within the meaning of the Securities Act and the officers, directors, affiliates, employees and agents of each of the foregoing, against any and all losses, liabilities, costs (including reasonable attorney's fees and disbursements), claims and damages to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or threatened, insofar as such losses, liabilities, costs, claims and damages (or actions or proceedings in respect thereof, whether or not such indemnified Person is a party thereto) arise out of or are based upon any untrue statement or alleged untrue statement by the Trustee or underwriter, as the case may be, of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or in any offering memorandum or other offering document relating to the offering and sale of such Registrable Securities prepared by the Company or at its direction, or any amendment thereof or supplement thereto, or any omission by the Trust or underwriter, as the case may be, or alleged omission by the Trustee or underwriter, as the case may be, of a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement of a material fact is contained in, or such material fact is omitted from, information relating to the Trust or underwriter, as the case may be, furnished in writing to the Company by or on behalf of the Trust or underwriter, as the case may be, specifically for use in such registration statement (or in any preliminary or final prospectus included therein), offering -6- 7 memorandum or other offering document, or any amendment thereof or supplement thereto. The foregoing indemnity is in addition to any liability which the Trust or underwriter, as the case may be, may otherwise have to the Company, or controlling persons and the officers, directors, affiliates, employees, and agents of each of the foregoing; provided that, in the case of an offering made pursuant to this Agreement with respect to which the Company has designated the lead or managing underwriters (or the Company is offering securities directly, without an underwriter), this indemnity does not apply to any loss, liability, cost, claim, or damage arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus or offering memorandum if a copy of a final prospectus or offering memorandum was not sent or given by or on behalf of any underwriter (or the Company, as the case may be) to such Person asserting such loss, liability, cost, claim or damage at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such final prospectus or offering memorandum. (c) Each party indemnified under paragraph (a) or (b) above shall, promptly after receipt of notice of a claim or action against such indemnified party in respect of which indemnity may be sought hereunder, notify the indemnifying party in writing of the claim or action; provided, that the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party on account of the indemnity agreement contained in paragraph (a) or (b) above otherwise than under such subsection. If any such claim or action shall be brought against an indemnified party, and it shall have notified the indemnifying party thereof, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified party and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel satisfactory to the indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party). After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 5 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation. If the indemnifying party does not assume the defense of such claim or action, it is understood that the indemnifying party shall not, in connection with any one such claim or action or separate but substantially similar or related claims or actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to one separate firm of local attorneys in each such jurisdiction) at any time for all such indemnified parties. Any indemnifying party against whom indemnity may be sought under this Section 5 shall not be liable to indemnify an indemnified party if such indemnified party settles such claim or action without the consent of the indemnifying party, which consent shall not be unreasonably withheld. -7- 8 (d) If the indemnification provided for in this Section 5 shall for any reason be unavailable (other than in accordance with its terms) to an indemnified party in respect of any loss, liability, cost, claim or damage referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, cost, claim or damage in such proportion as shall be appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other with respect to the statements or omissions which resulted in such loss, liability, cost, claim or damage as well as any other relevant equitable considerations. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the indemnifying party on the one hand or the indemnified party on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission, but not by reference to any indemnified party's stock ownership in the Company. The amount paid or payable by an indemnified party as a result of the loss, cost, claim, damage or liability, or action in respect thereof, referred to above in this paragraph (d) shall be deemed to include, for purposes of this paragraph (d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Indemnification and contribution similar to that specified in the preceding paragraphs of this Section 5 (with appropriate modifications) shall be given by the Company, the Trust and underwriters with respect to any required registration or other qualification of securities under any state law or regulation or governmental authority. (f) The obligations of the parties under this Section 5 shall be in addition to any liability which any party may otherwise have to any other party. 6. Black-Out Period. The Company agrees not to effect, for itself or on behalf of any other person or entity, any public sale or distribution of any Common Stock or other equity security of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the period beginning 7 days before, and ending 180 days (or such lesser period as may be permitted by the Trustee) after, the effective date of a registration statement filed in connection with the registration of the Registrable Securities hereunder. Such black-out period shall not apply to public sales or distributions that: (a) have been consented to in writing by the Trustee, or (b) in the opinion of the lead or managing underwriter designated by the Trustee can be effected without an adverse effect on the price, timing or distribution of the Registrable Securities offered pursuant to a registration statement hereunder. In the event the black-out period does not apply pursuant to clauses (a) or (b) hereof, the Company may effect such public sale or distribution only on the terms and conditions (including, without limitation, the amount and timing of the public sale or distribution) established by the Trustee or the underwriter, as the case may be. 7. Rule 144 and Form S-3. (a) The Company shall use its best efforts to ensure that the conditions to the availability of Rule 144 set forth in paragraph (c) thereof shall be satisfied. Upon the request of the Trustee, the Company will deliver to the Trustee a written statement as to whether it has complied with such requirements. (b) The Company shall to use its reasonable efforts to cause all conditions to the availability of Form S-3 (or any successor form) under the Securities Act for the filing of registration statements under this Agreement to be met. -8- 9 8. Miscellaneous. (a) Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Trustee with respect to the transactions contemplated hereby and supersedes all prior agreements or understandings among the parties with respect thereto. (b) Headings. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (c) Notices. All notices or other communications provided for in this Agreement shall be in writing and shall be sent by confirmed telecopy (with an undertaking to provide a hard copy) or delivered by hand or sent by overnight courier service prepaid to the address specified below. If to the Company: If to the Trust or Trustee: TENNECO INC. TENNECO INC. RABBI TRUST 1275 King Street c/o TENNECO INC. Greenwich, CT 06831 1275 King Street Attention: Corporate Secretary Greenwich, CT 06831 Attention: Corporate Secretary or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. (d) Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. (e) Successor Trustee and Successor Trust. The Trust and Trustee may assign this Agreement. As used herein, the "Trustee" shall include any and all successor trustees of the Trust, and the "Trust" shall include any and all successor trusts. Each successor trustee and successor trust shall be entitled to the benefits and may enforce this Agreement as if an original party hereto. -9- 10 (f) Amendments. This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing signed by the Company and the Trustee. (g) Transferability. The registration and other rights granted to the Trust hereunder may be transferred or assigned by the Trust to a third party in connection with a sale or other transfer of all shares of Common Stock then owned by the Trust to such third party. (h) Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. -10- 11 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed and delivered as of the date first above written. TENNECO INC. /s/ KARL A. STEWART ----------------------------------------- By: Karl A. Stewart Its: Vice President TENNECO INC. RABBI TRUST dated August 28, 1998 By: /s/ DANA G. MEAD -------------------------------------- Dana G. Mead, not individually but solely as trustee By: /s/ THEODORE R. TETZLAFF -------------------------------------- Theodore R. Tetzlaff, not individually but solely as trustee By: /s/ PAUL T. STECKO -------------------------------------- Paul T. Stecko, not individually but solely as trustee By: /s/ ROBERT T. BLAKELY -------------------------------------- Robert T. Blakely, not individually but solely as trustee -11- EX-10.14 4 AMENDED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1 EX-10.14 TENNECO INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (As Amended and Restated Generally Effective as of January 1, 1997) PURPOSE ------- The Tenneco Inc. Supplemental Executive Retirement Plan (the "Plan") is maintained by Tenneco Inc. (the "Company") as an unfunded plan for the purpose of providing retirement benefits with respect to certain employees that are equal to retirement benefits lost under the Tenneco Inc. Retirement Plan (the "Retirement Plan" or the "TRP") as a result of the imposition of the limitations contained in the Internal Revenue Code of 1986, as amended (the "Code"). The portion of the Plan that provides for benefits limited by Code Section 415 is maintained as an "excess benefit plan" as described in Section 3(36) of the Employee Retirement Income Security Act of 1974 as amended ("ERISA"). The other benefits provided for under the Plan are only available to a "select group of management or highly compensated employees" as determined by the Tenneco Benefits Committee, and the portion of the Plan providing such benefits is intended to satisfy the ERISA exemption requirements for a plan limited to such a group. THE PLAN -------- 1. Effective Date -------------- The effective date of this amendment and restatement of the Plan is January 1, 1997. The benefit entitlement, if any, under the Plan or under the Tenneco Inc. Benefit Equalization Plan (the "BEP"), which has been merged into this Plan, of any person who separated from service prior to that date shall be governed by the provisions of the Plan or the BEP as either was in effect from time to time prior to that date. 2. Eligibility ----------- An employee shall be eligible for benefits under this Plan if the employee is a participant in the Retirement Plan or is provided a benefit under Section 11 hereof. 3. Amount of Benefit ----------------- The benefit payable under this Plan to a Participant, or to the Participant's Eligible Spouse, Eligible Child(ren), joint annuitant or other beneficiary(ies), all as determined under the provisions of the Retirement Plan, shall equal the excess, if any, of (a) over (b) where: (a) is the benefit that would be paid under the Retirement Plan if the provisions of the Retirement Plan were administered without regard to the limitations imposed by the Code and, only with respect to Participants who, at any time, were participants in the Tenneco Inc. Executive Incentive Compensation Plan ("EICP"), if Final Average Compensation, as computed under the Retirement Plan, were determined on the basis of compensation paid during the three calendar years (of the five calendar year period ending no later than the calendar year immediately preceding his or her termination or retirement) for which such compensation is the highest, and increased by the quotient of (i) the total of the cash bonuses, as defined below, paid to the Participant in the three calendar years (during the -1- 2 same five calendar year period ending no later than the calendar year immediately preceding his or her termination or retirement) for which such total is the highest, divided by (ii) three or such lesser number of calendar years (included in such period) in which such bonuses were paid to the Participant; provided, that the calendar year including his or her termination or retirement shall be included if such event follows the payment of regular bonuses for that year; and provided, that bonuses and salary, respectively, deferred at the election of the Participant shall be counted only in the year that they would have been paid absent such election, and provided further, that, effective with respect to bonuses that relate to the period on and after January 1, 1998, the foregoing language shall be applied to count bonuses which relate to a calendar year as paid in that year, for example, 1998 bonuses will be counted in 1998 notwithstanding the fact that they are actually paid in 1999; and (b) is the benefit that is payable under the Retirement Plan. Notwithstanding the foregoing, if, except as otherwise provided in writing, an employee is granted credit for purposes of benefit accrual under the Retirement Plan for service rendered prior to the time that the employee became a participant in the Retirement Plan, such employee shall be credited with such service under this Plan only if and to the extent determined by the Tenneco Benefits Committee. Unless otherwise provided in writing, no benefit shall be payable under the Plan unless a benefit also is payable under the Retirement Plan. Cash bonus means only cash bonuses paid under the EICP and the cash special bonuses paid in January 1997. 4. Form of Benefit --------------- Any benefit under this Plan shall be paid in the same form and manner as the benefit payments made to, or with respect to, the Participant under the TRP. Notwithstanding the preceding sentence, no benefit is payable hereunder prior to 60 days after the Participant has separated from service, unless the Tenneco Benefits Committee so determines. Prior to the commencement of benefits but, in no event later than 24 months after the Participant has separated from service, and only with respect to a Participant or beneficiary who at any time was a participant in the EICP, such Participant or beneficiary may elect, but only with the approval of the Tenneco Benefits Committee, to receive payment of such benefit in the form of a lump sum or annuity, provided that in cases where a Participant has chosen a lump sum and the exact amount of a Participant's benefit cannot be determined by the date elected for payment, a preliminary lump sum shall be paid with respect to amounts that can be clearly ascertained then, with the remainder to be issued in a subsequent lump sum when that amount is exactly determined by the Tenneco Benefits Committee or its delegee. In addition, with respect to all Plan participants, if the benefit payable from this Plan (expressed as an age 65 life annuity) would be less than $50 per month, the benefit payable from this Plan automatically shall be paid as a lump sum. The actuarial factors set forth in the TRP shall be used to compute benefits hereunder, provided that, for purposes of any lump sum payment that may be payable under the Plan, the interest rate used shall be the annual rate of interest on 30-year Treasury securities as specified by the IRS for the second calendar month preceding the first day of the Plan Year during which the annuity starting date occurs, and the applicable mortality table described in Rev. Rul. 95-6, 1995-1 C.B. (page 80), or in such other formal guidance as may be issued from time to time by the IRS. -2- 3 5. Unfunded Plan ------------- This Plan shall be maintained as an unfunded non-qualified deferred compensation plan. All benefits under this Plan shall be payable from the general assets of Tenneco Inc. No person shall be entitled to receive any benefits under this Plan from the funds of the Retirement Plan. 6. No Assignment ------------- No benefit under this Plan shall be assignable or alienable or subjected, by attachment or otherwise, to the claims of creditors of any person. 7. No Guarantee of Employment -------------------------- This Plan shall not be construed to give any Participant the right to be retained in the employment of Tenneco Inc. or any of its affiliates. 8. Operation and Administration ---------------------------- This Plan shall be operated under the direction of the Compensation and Benefits Committee of the Board of Directors of Tenneco Inc. and administered by the Tenneco Benefits Committee. The Tenneco Benefits Committee's decision in all matters involving the interpretation and application of this Plan shall be final and binding. The Tenneco Benefits Committee shall establish a claims procedure which is consistent with the claims procedure employed under the TRP. 9. Governing Law ------------- To the extent not preempted by federal law, this Plan shall be construed, administered and enforced in accordance with the laws of the State of Delaware. 10. Amendment and Discontinuance ---------------------------- Tenneco Inc. expects to continue this Plan indefinitely but reserves the right, by action of the Compensation and Benefits Committee of its Board of Directors, to amend or discontinue it. However, no such amendment or discontinuance shall impair or adversely affect any benefits accrued under this Plan as of the date of such action. -3- 4 11. Special Appendix ---------------- The Company may from time to time determine to provide certain persons additional supplemental pension benefits, which may be reflected in a Special Appendix hereto or in such other document as the Company shall determine. References in a Special Appendix or such other document to the "Plan" are to this Plan. IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing, Tenneco Inc., a Delaware corporation, has caused these presents to be duly executed in its name and behalf by its proper officers thereunto duly authorized this 9th day of September, 1998. TENNECO INC. By: /s/ Barry R. Schuman ---------------------------------------- Its: Senior Vice President - Human Resources -4- 5 MEAD SPECIAL APPENDIX TO THE TENNECO INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("PLAN") This Special Appendix sets forth certain special provisions of the Plan with respect to the benefits of Dana G. Mead ("Mead"). 1. Mead shall be entitled to monthly pension benefits in the amount determined under Section 2 hereof commencing on the first day of the calendar month immediately following the termination of his employment with the Tenneco Management Company (the "Company"). 2. The monthly pension benefits to which Mead shall be entitled shall be equal to the greater of (a) or (b), where (a) equals the benefits to which Mead would be entitled under the Tenneco Inc. Retirement Plan (the "TRP") and this Plan, computed using Final Average Earnings, as defined in Section 3 hereof, and Years of Credited Service, as defined in Section 4 hereof, and substituting the rules of Sections 1, 5 and 6 hereof for the generally applicable rules of such plans; and (b) equals 2.48% of Mead's Final Average Earnings, as defined in Section 3 hereof, times his Years of Credited Service, as defined in Section 4 hereof, and substituting the rules of Sections 1, 5 and 6 hereof for the generally applicable rules of such plans. 3. "Final Average Earnings" means the quotient of (i) Mead's Earnings, as defined below, for the 3 calendar years in which his Earnings were the highest in the 5 consecutive calendar year period ending prior to his termination of employment, divided by (ii) 36. "Earnings" means regular base salary plus Executive Incentive Compensation Plan bonus earned (regardless of when paid) with respect to that period. 4. "Years of Credited Service" means the total of (i) 14 2/3 plus (ii) Mead's Actual Tenneco Service, as defined below. "Actual Tenneco Service" means the period, in whole years and fractions thereof with each month or portion thereof counting as one-twelfth of one year, from April 1, 1992 through the date of Mead's termination of employment with the Company. 5. The benefits provided hereunder shall be paid in the joint and 50% survivor form of annuity if Mead is married at the time benefits are to commence -- i.e., to Mead for life and, after his death, 50% of the monthly amount payable during Mead's life continuing to the spouse, if any, to whom he was legally married at the date of the commencement of payment of benefits hereunder and to whom he was so married on the date of his death. There shall be no reduction in the amount of the benefits payable during Mead's life on account of payment in the joint and 50% survivor form. The benefits provided hereunder shall be paid in the life only form of annuity if Mead is not married at the time that benefit 6 payments are to commence. Subject to the rules stated in the immediately following paragraph, Mead may elect to receive such benefits in another form which is the actuarial equivalent of the normal form of benefit specified above for his marital status at the time in question. At Mead's election, the Company will purchase and distribute to him an annuity contract issued by an insurance company acceptable to Mead to provide such benefits. If his termination of employment is effective after he attains age 62 or earlier with the consent of the Company, Mead may elect to receive such benefits in the form of a lump sum distribution. If a lump sum distribution is elected, it shall be computed under the assumptions then in use with respect to the TRP, or its successor; provided, that in no event shall the interest assumption be greater than the Pension Benefit Guaranty Corporation immediate annuity interest rate in effect as of January 1 of the year in which the payment is to be made, and provided further that the mortality table shall be no less favorable to Mead or his Beneficiary than the 1983 group annuity table, 50% male, 50% female mix. Mead may elect that the lump sum benefit be paid at some date certain which is later than the date specified for benefit commencement in Section 1 hereof. Any such election shall be irrevocable and must be filed no later than 90 days prior to the date benefits would otherwise commence hereunder. If he makes such an election, the lump sum amount computed above shall be credited with interest at the prime rate prevailing from time to time from the date specified in Section 1 above until the date of actual payment. 6. If Mead dies before commencing to receive the benefits described hereunder, his Beneficiary will receive a death benefit in a lump sum distribution which is the present value of the benefits which he has accrued hereunder as of the date of his death computed in accordance with the rules set forth herein, including the interest assumption specified in Section 5 hereof. Without limiting the generality of the foregoing, it is specifically provided that the special alternative death benefit called for by the TRP as in effect on December 31, 1994, shall apply if that produces a higher benefit. 7. The benefits provided hereunder are in lieu of any benefits to which Mead might otherwise be entitled under the TRP, Tenneco Inc. Benefit Equalization Plan or this Plan, but shall not adversely affect his entitlement to benefits under any other plan, fund or program maintained by the Company, nor shall benefits provided under any other such plan fund or program be offset against or otherwise reduce the benefits provided for hereunder. 8. For the purpose of calculating Mead's Final Average Earnings, the Company shall determine an amount that shall be used as a cash bonus number (the "Hypothetical Bonus") for any year in which Mead has received something in lieu of a cash bonus. Notwithstanding the foregoing, a Hypothetical Bonus shall be counted only in circumstances in which it would yield larger monthly pension benefits. -2- 7 STECKO SPECIAL APPENDIX TO THE TENNECO INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("PLAN") This Special Appendix sets forth certain special provisions of the Plan with respect to the benefits of Paul T. Stecko ("Stecko"). The aggregate monthly pension benefits to which Stecko shall be entitled under the Plan and this Special Appendix shall be computed as if his participation in the TRP had commenced on his employment commencement date and shall be no less than the amount to which Stecko would have been entitled if Stecko's coverage under the International Paper defined benefit plans in effect as of December 3, 1993 had continued until Stecko's separation from service with Tenneco (the "Company"), less any benefits Stecko is entitled to receive from such International Paper defined benefit plans. In the event that Stecko's employment is terminated for any reason other than cause before November 1, 1999, he shall nevertheless be deemed to have attained age 55 for all purposes in this Special Appendix, including without limitation, the computation of benefits under such International Paper plans; provided, that only the amounts actually payable from the International Paper plans shall be used as offsets. The amount of the benefits payable under the International Paper defined benefit plans shall be computed as a single life annuity based on the actuarial factors applicable to each such plan. If Stecko would not otherwise meet the service requirements for early retirement eligibility under the Tenneco Inc. Retirement Plan ("TRP"), this Plan and this Special Appendix (collectively, the "Tenneco Plans"), but he would meet such service requirements counting his years of service with International Paper, he shall be entitled to monthly benefits hereunder which, when taken together with monthly benefits to which he is entitled under the Tenneco Plans and the International Paper defined benefit plans, are no less than the benefits to which he would have been entitled (subject to the rule stated in the first sentence above) had he met such requirements. For purposes of determining the amount to which Stecko would have been entitled if Stecko's coverage under the International Paper defined benefit plans in effect as of December 3, 1993 had continued until Stecko's separation from service with the Company (i.e., the minimum benefit described above), all of Stecko's service with International Paper and the Company, shall be aggregated to determine whether Stecko has met the service requirements for early retirement eligibility under the International Paper defined benefit plans. If Stecko dies before commencing to receive the benefits described hereunder, his beneficiary will receive a death benefit which is the present value of the benefits which he has accrued hereunder as of the date of his death. 8 BLAKELY SPECIAL APPENDIX TO THE TENNECO INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("PLAN") This Special Appendix sets forth certain special provisions of the Plan with respect to the benefits of Robert T. Blakely ("Blakely"). The monthly pension benefits to which Blakely shall be entitled hereunder shall be equal to the benefits to which Blakely would be entitled under the Plan, except that, if Blakely retains his position as Executive Vice President and Chief Financial Officer of Tenneco Inc. until the earlier of (i) December 31, 1999 or (ii) the date that the Chief Executive Officer of Tenneco Inc. determines that his services with respect to the strategic review announced in 1998 and related transactions are completed, for all purposes, including without limitation benefit accrual, death benefits, normal retirement and eligibility for early retirement benefits, Blakely shall be deemed to have 25 years of service and 25 years of participation. If Blakely dies before commencing to receive the benefits described hereunder, his beneficiary will receive a death benefit which is the present value of the benefits which he has accrued hereunder as of the date of his death. This benefit enhancement is consistent with those provided to other senior executives. 9 TETZLAFF SPECIAL APPENDIX TO THE TENNECO INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("PLAN") This Special Appendix sets forth certain special provisions of the Plan with respect to the benefits of Theodore R. Tetzlaff ("Tetzlaff"). The monthly pension benefits to which Tetzlaff shall be entitled shall be equal to the benefits to which Tetzlaff would be entitled under the Plan if he were a participant in the Tenneco Inc. Retirement Plan ("TRP"), computed using the following special provisions: (a) Tetzlaff's service and participation will be regarded as beginning July 1, 1992. (b) Tetzlaff's retainer and bonus for each calendar year will be prorated for each month that Tetzlaff performs services for the Company as an officer during the calendar year to arrive at a covered monthly compensation under the TRP formula. (c) If Tetzlaff reaches age 55 while performing services for the Company as an officer, Tetzlaff will be eligible for an early retirement benefit with subsidized reduction factors parallel to the TRP factors, even though Tetzlaff does not have the service or participation required under the TRP provisions. (d) Tetzlaff's guaranteed minimum annual life only benefit will be as follows: Age at Commencement Of Benefits ------------------- Age 55 $100,000 per year Age 60 $200,000 per year Age 65 $300,000 per year with a prorated guaranteed minimum annual life only benefit between the above ages. (e) In all other respects, the provisions of the Plan shall apply. If Tetzlaff dies before commencing to receive the benefits described hereunder, his beneficiary will receive a death benefit which is the present value of the benefits which he has accrued hereunder as of the date of his death. 10 J. CASTELLANI BENEFITS UNDER THE TENNECO INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("PLAN") The benefits of John J. Castellani ("Castellani") under the Plan will be adjusted as follows: The monthly normal retirement pension benefits to which Castellani shall be entitled hereunder shall be equal to the normal retirement pension benefits to which Castellani would be entitled under the Plan, deeming him to have a total of 20 years of service and 20 years of participation (including both actual and deemed service and participation), for all purposes (including without limitation benefit accrual, death benefits, normal retirement and eligibility for early retirement benefits), and subtracting any normal retirement benefit payable to Castellani from TRW's qualified defined benefit pension plan. If Castellani dies before commencing to receive the benefits described hereunder, his beneficiary will receive a death benefit which is the present value of the benefits which he has accrued hereunder as of the date of his death. Castellani shall be entitled to benefits hereunder prior to his normal retirement under the following rules. If Castellani becomes entitled to benefits under the Tenneco Inc. Retirement Plan ("TRP") under its generally applicable rules prior to Castellani attaining normal retirement, Castellani shall be entitled to a benefit hereunder equal to the benefit that would be payable under the TRP at the time in question if the benefit stated in the foregoing paragraph were Castellani's normal retirement benefit under the TRP. EX-10.28 5 LETTER AGREEMENT: CASTELLANI 1 EXHIBIT 10.28 [LETTERHEAD OF TENNECO] [LOGO OF TENNECO] September 24, 1998 Mr. John J. Castellani Tenneco 1275 King Street Greenwich, CT 06831 Dear John: If your employment with Tenneco Inc., any majority owned subsidiary of Tenneco Inc. and any business entity which results from a restructuring of Tenneco Inc. is terminated either by the Company other than Discharge for Cause or after you have incurred a Constructive Termination as those terms are defined in the Tenneco Inc. Change in Control Severance Benefit Plan for Key Executives (the "Plan") as though a Change in Control had occurred, the Company will provide you with the following, subject to applicable tax withholding and any amounts due the Company, but conditioned upon your (and your spouse's) execution of a separation agreement that the Company will tender including a general release and such other documents as it may require: - - You will be entitled to receive a pro rata adjusted target bonus for the year in which your employment terminates. - - You will be paid severance in an amount equal to three times your then current annual base salary. - - Your restricted shares will be vested and distributed to you in shares; your outstanding performance shares will be deemed to have been earned at target and will be paid out in shares; and your stock options will be deemed exercisable for the lesser of (i) a period of 5 years from your termination or (ii) the remaining period for which the option would have been outstanding under its generally applicable terms as granted, disregarding any rules that would have shortened such period. You will have the same rights with respect to any stock options to which you become entitled upon the conversion of existing Tenneco Inc. stock options to options of the Company or another entity. 2 Mr. John J. Castellani September 24, 1998 Page 2 - - The Company will forgive the principal balance of the note you executed in connection with your move from Washington, D.C. to Greenwich, and accrued interest. - - You will be deemed to have 20 years of service and participation for purposes of computing benefits under the Tenneco Inc. Supplemental Executive Retirement Plan. This benefit enhancement is consistent with those provided to other senior executives. Depending upon the course of events, you may have rights which arise under the Plan and the Tenneco Benefits Protection Trust (the "Trust"). To the extent that this occurs and the rights which arise under the Plan and Trust are greater than those described above, you will receive the benefit of those greater rights, but the items described in this letter would count against your rights under the Plan and Trust. Sincerely, /s/ Barry R. Schuman -------------------------------------- Barry R. Schuman Senior Vice President, Human Resources APPROVED BY: /s/ Dana G. Mead -------------------------------------- Dana G. Mead Chairman and Chief Executive Officer Date: 9/29/98 --------------------------------- EX-10.30 6 CONTRIBUTION AGREEMENT 1 EXHIBIT 10.30 CONTRIBUTION AGREEMENT AMONG TENNECO PACKAGING INC., PCA HOLDINGS LLC AND PACKAGING CORPORATION OF AMERICA 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS AND TERMS......................................................................................3 1.1 Specific Definitions.....................................................................3 1.2 Other Terms.............................................................................16 1.3 Other Definitional Provisions...........................................................16 ARTICLE II ORGANIZATION OF NEWCO; CONTRIBUTION OF THE CONTAINERBOARD BUSINESS...............................................................17 2.1 Organization of Newco...................................................................17 2.2 Contribution and Purchase of Assets; Assumption of Liabilities..........................17 2.3 Retained Assets and Retained Liabilities................................................18 2.4 Closing Mechanics.......................................................................18 2.5 Post-Closing Adjustment.................................................................20 2.6 Purchase Price Adjustment Following Public Sale By TPI..................................22 2.7 Transfer Taxes and Recording Fees.......................................................22 2.8 Certain Transfers.......................................................................22 2.9 Appraisal...............................................................................23 ARTICLE III REPRESENTATIONS AND WARRANTIES OF TPI.....................................................................23 3.1 Organization and Qualification..........................................................23 3.2 Corporate Authorization.................................................................23 3.3 Consents and Approvals..................................................................24 3.4 Non-Contravention.......................................................................24 3.5 Binding Effect..........................................................................24 3.6 Financial Statements: Absence of Certain Changes........................................24 3.7 Litigation and Claims...................................................................26 3.8 Taxes...................................................................................26 3.9 Employee Benefits.......................................................................27 3.10 Compliance with Laws....................................................................27 3.11 Environmental Matters...................................................................27 3.12 Intellectual Property...................................................................28 3.13 Labor Matters...........................................................................29 3.14 Contracts...............................................................................29 3.15 Real Estate Leases......................................................................30 3.16 Entire Business; Title to Property......................................................30 3.17 Finders' Fees...........................................................................31
-i- 3 3.18 Insurance...............................................................................31 3.19 No Undisclosed Liabilities. ............................................................32 3.20 No Other Representations or Warranties..................................................32 3.21 Closing Date............................................................................32 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PCA.....................................................................32 4.1 Organization and Qualification..........................................................32 4.2 Authorization...........................................................................32 4.3 Consents and Approvals..................................................................33 4.4 Non-Contravention.......................................................................33 4.5 Binding Effect..........................................................................33 4.6 Finders' Fees...........................................................................33 4.7 Financial Capability....................................................................33 4.8 Newco Liabilities.......................................................................34 4.9 No Other Representations or Warranties..................................................34 4.10 Closing Date............................................................................34 ARTICLE V COVENANTS.................................................................................................34 5.1 Access..................................................................................34 5.2 Conduct of Business.....................................................................34 5.3 Reasonable Efforts......................................................................36 5.4 Covenants Regarding Employees...........................................................37 5.5 Compliance with WARN and Similar Laws...................................................38 5.6 Further Assurances......................................................................38 5.7 Use of Tenneco Marks....................................................................39 5.8 Certain Matters Related to Retained and Assumed Liabilities.............................39 5.9 Intercompany Agreements.................................................................39 5.10 Records and Retention and Access........................................................40 5.11 Insurance...............................................................................40 5.12 Noncompetition..........................................................................40 5.13 ........................................................................................41 5.14 Delivery of Most Recent Year End Statement and the Stub Period Statements and Regulation S-X Financial Statements.................................................41 5.15 Consent of TPI Auditors. ...............................................................42 5.16 Covenant Regarding Campbell Road Property...............................................42 5.17 ........................................................................................42 ARTICLE VI CONDITIONS TO CLOSING.....................................................................................42 6.1 Conditions to the Obligations of PCA and TPI............................................42
ii 4 6.2 Conditions to the Obligations of PCA....................................................43 6.3 Conditions to the Obligations of TPI....................................................45 ARTICLE VII SURVIVAL; INDEMNIFICATION.................................................................................46 7.1 Survival................................................................................46 7.2 Indemnification by PCA and Newco........................................................46 7.3 Indemnification by TPI..................................................................47 7.4 Indemnification Procedures..............................................................48 7.5 Acknowledgment Regarding Environmental Liabilities......................................50 7.6 Computation of Losses Subject to Indemnification........................................50 7.7 Characterization of Indemnification Payments............................................51 ARTICLE VIII TAX COVENANTS.............................................................................................51 8.1 Liability for Taxes.....................................................................51 8.2 Preparation of Tax Returns..............................................................52 8.3 Amended Tax Returns.....................................................................53 8.4 Carrybacks and Carryforwards............................................................54 8.5 Additional Tax Matters..................................................................54 8.6 Tax Controversies; Cooperation..........................................................55 ARTICLE IX TERMINATION...............................................................................................56 9.1 Termination.............................................................................56 9.2 Effect of Termination...................................................................57 ARTICLE X MISCELLANEOUS.............................................................................................57 10.1 Notices.................................................................................57 10.2 Amendment; Waiver.......................................................................58 10.3 Assignment..............................................................................59 10.4 Entire Agreement........................................................................59 10.5 Fulfillment of Obligations..............................................................59 10.6 Parties in Interest.....................................................................59 10.7 Public Disclosure.......................................................................59 10.8 Expenses................................................................................59 10.9 Schedules...............................................................................59 10.10 Bulk Transfer Laws......................................................................60 10.11 Governing Law; Submission to Jurisdiction; Selection of Forum...........................60 10.12 Counterparts............................................................................60
iii 5 10.13 Headings................................................................................60 10.14 Severability............................................................................60
-iv- 6 CONTRIBUTION AGREEMENT CONTRIBUTION AGREEMENT dated as of January 25, 1999, among TENNECO PACKAGING INC., a Delaware corporation ("TPI"), PCA Holdings LLC, a Delaware limited liability company ("PCA"), and Packaging Corporation of America, a Delaware corporation ("Newco"). PRELIMINARY STATEMENTS A. TPI is engaged, in part, in the business of producing containerboard and corrugated packaging products (excluding folding carton and honeycomb paperboard - type products), (as currently conducted at four paper mills located at Counce, Tennessee, Valdosta, Georgia, Tomahawk, Wisconsin and Filer City, Michigan (the "Mills"), 70 box plants, two recycling facilities, four wood products facilities and certain timberlands and related facilities, the "Containerboard Business"). B. PCA recognizes that TPI has substantial experience and expertise in the ownership, management and operation of the Containerboard Business and desires to invest in the operation of the Containerboard Business. PCA and TPI have determined that it is advisable to form a joint venture corporation to facilitate PCA's investment in the operation of the Containerboard Business and have caused Newco to be incorporated under the laws of the State of Delaware as such joint venture corporation. C. As of the date hereof, the Purchased Property (as defined below) is subject to various lease and financing arrangements, all of which lease and financing arrangements are described on Schedule PS-1 (the "Existing Financing Arrangements"). D. Upon the terms and subject to the conditions set forth more fully herein, each of TPI, PCA and Newco desires to cause PCA's investment in the Containerboard Business and the initial capitalization of Newco to be consummated as described below, which will occur in the following order but, except as otherwise specifically provided herein, will be consummated contemporaneously as part of the Closing: First: PCA will arrange, negotiate and obtain on behalf of TPI and/or Newco, subject to Section 5.3(b) hereof, credit facilities and other financings as set forth in the Commitment Letters (the "New Financing Arrangements") in an aggregate principal amount sufficient to fund the borrowings by TPI contemplated by paragraph D.2 below, and those New Financing Arrangements under which TPI is the initial borrower will be assigned to, and assumed by, Newco in connection with the transactions contemplated hereby (such that following the assignment to and assumption by Newco, the lenders shall not thereafter have recourse against PCA or TPI in respect thereof, but shall then have a security interest in the assets of Newco, including the Contributed Assets). Capitalized terms used in these Preliminary Statements and not otherwise defined shall have the meaning ascribed thereto in the Commitment Letters. 7 Second: TPI will borrow $1.06 billion under the Term Loan Facilities on an unsecured basis. Third: TPI will issue $700 million of Senior Subordinated Notes, or if elected by TPI, draw down under the Bridge Loan. Fourth: TPI will contribute the Contributed Assets (including the Containerboard Business) to Newco free and clear of (i) all indebtedness for borrowed money or any other obligation that is fixed as to amount or certainty, other than the Assumed Indebtedness and (ii) all Encumbrances (other than Permitted Encumbrances but free and clear of all Encumbrances with respect to the Existing Financing Arrangements). Fifth: In consideration of the Contributed Assets, Newco will (i) assume from TPI $1.06 billion under the Term Loan Facilities, (ii) enter into the Credit Facilities and become the Borrower under the Senior Secured Financing, (iii) grant the lenders under the Senior Secured Financing a security interest in the assets of Newco, including the Contributed Assets, and (iv) pay the required fees and expenses with respect thereto. Sixth: In consideration of the Contributed Assets, Newco will assume TPI's obligations under the $700 million Senior Subordinated Notes (or the Bridge Loan if applicable) and issue replacement Senior Subordinated Notes (or notes evidencing the Bridge Loan if applicable). Newco will pay the required fees and expenses with respect to the Senior Subordinated Notes (or the Bridge Loan if applicable, provided that in such case TPI will pay the 1.5% Commitment Fee on behalf of Newco and PCA). Seventh: Subject to adjustment pursuant to paragraph F below, Newco (or if requested by the underwriters, a holding company) will issue $100 million of Deferred-Pay Financing and will pay the required fees and expenses with respect thereto. Eighth: Subject to adjustment pursuant to paragraph E below, PCA will contribute $236.5 million in cash (the "Cash Contribution") to Newco, and Newco will issue to PCA in respect thereof 55% of Newco's outstanding common stock, $.01 par value (the "Common Stock"). Ninth: In consideration of the Contributed Assets, Newco will assume the Assumed Liabilities, and subject to paragraph E below, Newco will issue to TPI 45% of Newco's outstanding Common Stock and distribute to TPI cash in an amount equal to $246.5 million less the dollar amount of the PIK Preferred, if any, issued to TPI and/or its designees, as contemplated by paragraph F below (the "Cash Distribution"). Subject to paragraph E below, immediately following such actions PCA and TPI will own Newco -2- 8 Common Stock representing 55% and 45%, respectively, of the issued and outstanding common equity of Newco. For purposes of the Closing hereunder, each of the above actions will be deemed to occur as part of an integrated Closing and the Closing will not be deemed to have occurred and no such action shall be effective unless and until all such actions have been completed, at which time the Closing will be deemed effective. E. In addition to the issuance of Common Stock to TPI and PCA, at the Closing and during the 120-day period following the Closing, Newco may, at PCA's direction, sell shares of the Common Stock, at the same price per share as such stock is being purchased by PCA, representing up to 5% of the outstanding Common Stock of Newco (on a fully diluted basis) to certain members of Newco's management (the "Management Stock"), on the terms set forth on Schedule PS-2. TPI shall have the option to be exclusively diluted with respect to such purchases of Management Stock by delivering notice of its election to be exclusively diluted to PCA on or before the date on which TPI delivers to PCA the Most Recent Year End Statement in accordance with Section 5.14 hereof (a "Dilution Notice"). If TPI delivers PCA a Dilution Notice by such date, then to the extent such members of management purchase Management Stock at Closing, Newco shall issue fewer shares to TPI (equal to the number of shares of Management Stock purchased by management at Closing), in which event the Cash Distribution will be increased by an amount equal to the aggregate purchase price of the Management Stock purchased at Closing (provided the per share purchase price for the Management Stock is equal to the price per share paid for Common Stock purchased by PCA hereunder). If TPI does not deliver a Dilution Notice in accordance with the terms hereof, TPI and PCA shall be diluted pro rata with respect to issuances of Management Stock, so that the number of shares of Common Stock purchased or received by PCA or TPI shall be reduced by an aggregate number of shares of Management Stock purchased by management at Closing in a ratio of 55 to 45, the Cash Contribution shall be reduced by an amount equal to 55% of the aggregate purchase price of the Management Stock purchased at Closing, and the Cash Distribution shall be increased by an amount equal to 45% of the aggregate purchase price of the Management Stock purchased at Closing. To the extent members of management purchase Management Stock after the Closing, the provisions of Section 5.17 shall apply. F. In the event the Deferred-Pay Financing is not sold as part of the New Financing Arrangements, (i) PCA and/or its designees shall purchase $55 million of PIK Preferred for $55 million, and (ii) Newco shall issue $45 million of PIK Preferred to TPI and/or its designees. -3- 9 NOW, THEREFORE, TPI, PCA, and Newco agree as follows: ARTICLE I DEFINITIONS AND TERMS 1.1 SPECIFIC DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth or as referenced below: (a) "ACC" shall have the meaning set forth in Section 3.16(c). (b) "ACQUISITION PROPOSAL" shall have the meaning set forth in Section 5.13. (c) "ADJUSTED CASH CONTRIBUTION" means, as of any date, the Cash Contribution, minus (i) the product determined by multiplying (A) the purchase price paid per share of Common Stock purchased by PCA hereunder at Closing times (B)the number of shares of Common Stock transferred by PCA to any Person other than a PCA Affiliate, minus (ii) the aggregate amount of any cash payments previously paid to PCA in satisfaction of indemnity obligations to PCA under Section 7.3 hereof, and minus (iii) any distributions (other than pro rata stock dividends, splits or combinations) previously made by Newco to PCA. (d) "AFFILIATES" shall mean, with respect to any Person, any Persons directly or indirectly controlling, controlled by or under common control with, such other Person as of the date on which, or at any time during the period for which, the determination of affiliation is being made. For the purpose of this definition, "control" means (i) the ownership or control of 50% or more of the equity interest in any Person, or (ii) the ability to direct or cause the direction of the management or affairs of a Person, whether through the direct or indirect ownership of voting interests, by contract or otherwise. (e) "AGREEMENT" shall mean this Agreement (including the Preliminary Statements set forth above and all Exhibits), as the same may be amended or supplemented from time to time in accordance with the terms hereof. (f) "ANCILLARY AGREEMENTS" shall mean the Facility Use Agreement, the Human Resources Agreement, the Registration Rights Agreement, the Stockholders Agreement, the Supply Agreements, and the Transition Services Agreement. (g) "APPLICABLE TAX LAW" shall mean any Law of any nation, state, region, province, locality, municipality or other jurisdiction relating to Taxes, including regulations and other official pronouncements of any governmental entity or political subdivision of such jurisdiction charged with interpreting such Laws. -4- 10 (h) "APPRAISAL" shall have the meaning set forth in Section 2.9. (i) "ASSUMED INDEBTEDNESS" shall have the meaning set forth in the Preliminary Statements hereto. (j) "ASSUMED LIABILITIES" shall mean all debts, liabilities, commitments, or obligations whatsoever, other than Retained Liabilities, Related to the Containerboard Business or Related to the Contributed Assets, whether arising before or after the Closing and whether known or unknown, fixed or contingent, including the following: (i) all debts, liabilities, obligations or commitments related to or arising under the Contracts to the extent such Contracts are assigned to Newco, including the Real Estate Leases provided that, the foregoing notwithstanding the Assumed Liabilities shall not include any liabilities and obligations arising under any Contract which is not identified in the Disclosure Memorandum except as follows: (A) if such Contract is for an amount of $1,000,000 or less and (i) is entered into in the ordinary course of business; (ii) the terms of which are customary and normal for the Containerboard Business specifically and the containerboard industry generally and on market rates at the time entered into, and (iii) all of the fees, expenses, penalties, liabilities and other payment obligations (or commitments therefor) arising thereunder which were incurred during the 12-month period ending December 31, 1998 have been paid and have been (or will be) properly reflected on the Most Recent Year End Statement and, if applicable, Final Working Capital Statement), such Contract shall be an Assumed Liability; and (B) if such Contract is for an amount greater than $1,000,000 or otherwise does not meet the conditions set forth in clause (A), such Contract shall be an Assumed Liability only if and to the extent Newco elects to assume such Contract in accordance with Section 5.21 hereof. (ii) all debts, liabilities, obligations or commitments Related to the Real Property; (iii) the Current Liabilities; (iv) the Assumed Indebtedness; (v) except for the Retained Environmental Liabilities, all liabilities under Environmental Laws Related to the ownership, operation or conduct of the Containerboard Business or the Real Property; and (vi) except for the Retained Litigation, all liabilities with respect to all actions, suits, proceedings, disputes, claims or investigations Related to the Containerboard Business or that otherwise are Related to the Contributed Assets, at law, in equity or otherwise. (k) "AUDITED FINANCIAL STATEMENTS" shall have the meaning set forth in Section 3.6(a). -5- 11 (l) "AUDITOR CONSENT LETTER" shall have the meaning set forth in Section 5.15. (m) "BOOKS AND RECORDS" shall mean all lists, files and documents Relating to customers, suppliers and products of the Containerboard Business, the Contributed Assets, or the Assumed Liabilities, and all general ledgers and underlying books of original entry and other financial records of the Containerboard Business, except to the extent included in the Retained Assets and except for employee records and files. (n) "BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a day on which banks in New York City are authorized or obligated by law or executive order to close. (o) "CAMPBELL ROAD PROPERTY" shall mean that Real Property identified as Item 1.I. on Schedule 1.1(vvv). (p) "CAP" shall have the meaning set forth in Section 7.2(c). (q) "CASH CONTRIBUTION" shall have the meaning set forth in the Preliminary Statements hereto. (r) "CASH DISTRIBUTION" shall have the meaning set forth in the Preliminary Statements hereto. (s) "CHOSEN COURTS" shall have the meaning set forth in Section 10.11. (t) "CLOSING" shall mean the closing of the transactions contemplated by this Agreement. (u) "CLOSING DATE" shall have the meaning set forth in Section 2.4. (v) "CLOSING WORKING CAPITAL" shall have the meaning set forth in Section 2.5(a). (w) "CLOSING WORKING CAPITAL STATEMENT" shall have the meaning set forth in Section 2.5(a). (x) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (y) "COMMITMENT LETTERS" shall have the meaning set forth in Section 4.7(b). (z) "COMMON STOCK" shall have the meaning set forth in the Preliminary Statements hereto. -6- 12 (aa) "CONFIDENTIALITY AGREEMENT" shall mean the Confidentiality Agreement dated November 20, 1998, between Madison Dearborn Partners, Inc. and TPI. (bb) "CONSENT" shall mean any consent, approval, authorization, waiver, permit, grant, franchise, concession, agreement, license, exemption or order of, registration, certificate, declaration or filing with, or report or notice to any Person, including any Governmental Authority, including those identified on Schedule 3.3. (cc) "CONTAINERBOARD BUSINESS" shall have the meaning set forth in the Preliminary Statements hereto. (dd) "CONTRACTS" shall mean all agreements, contracts, leases, timber deeds, purchase orders, trade billback, refund and other arrangements, incentive agreements, commitments, collective bargaining agreements, and licenses that are Related to the Containerboard Business or the Contributed Assets or to which the Contributed Assets are subject, except to the extent included in the Retained Assets. (ee) "CONTRIBUTED ASSETS" shall mean all of the assets of TPI which Relate to the Containerboard Business, whether tangible or intangible, real or personal, as they exist on the date hereof, with such changes, deletions or additions thereto as may occur from the date hereof to the Closing Date in the ordinary course of business (except, in each case, for the Retained Assets), including the following: (i) the Real Property; (ii) the Fixtures and Equipment; (iii) the Current Assets; (iv) the Intellectual Property and the PCA Mark; (v) the Books and Records; (vi) the Contracts other than (A) Existing Financing Arrangements, and (B) Contracts not included in the Assumed Liabilities pursuant to the exception set forth in Section 1.1(j)(i) (unless and to the extent assumed by Newco pursuant to Section 5.21 hereof); (vii) the stock or other ownership interests of the Contributed Subsidiaries; (viii) all prepaid Taxes, to the extent such prepaid Taxes are reflected on the Final Working Capital Statement; -7- 13 (ix) all refunds of Taxes, to the extent such refunds of Taxes are reflected on the Final Working Capital Statement; (x) the Purchased Property; and (xi) all Governmental Authorizations which are transferable without obtaining any Consent. (ff) "CONTRIBUTED SUBSIDIARIES" shall mean those Subsidiaries listed on Schedule 1.1(ff). (gg) "CPA FIRM" shall have the meaning set forth in Section 2.5(b). (hh) "CURRENT ASSETS" shall mean Inventory, accounts receivables (including the gross amount of any factored accounts receivable), deposits, and all other current assets of the Containerboard Business other than (i) cash, cash accounts, disbursement accounts, outstanding checks and disbursements in transit, investment securities and other short-term and medium-term investments (other than such items, if any, which are securing the performance of any obligations included in the Assumed Liabilities), and (ii) Non-Trade accounts receivable from TPI or its Affiliates. For purposes of this Agreement, an account receivable shall be deemed "Non-Trade" if it (i) is not supported by an issued invoice, (ii) is not of the type reflected on the Most Recent Statement of Assets and Liabilities, and (iii) is not the result of an arms' length sale of goods or services to a third party or a bona fide sale of goods or services to a third party. (ii) "CURRENT LIABILITIES" shall mean all of TPI's current liabilities to the extent Related to the Containerboard Business other than (i) Non-Trade accounts payable to TPI or its Affiliates, (ii) cash accounts, disbursement accounts, outstanding checks and disbursements in transit, and (iii) federal, state, local and foreign income Taxes with respect to the Tax Periods, or portions thereof, ending on or before the Closing Date. For purposes of this Agreement, an account payable shall be deemed "Non-Trade" if (i) it is not supported by an issued invoice, (ii) is not of the type reflected on the Most Recent Statement of Assets and Liabilities, and (iii) is not the result of a of an arms' length purchase of goods or services from a third party or bona fide purchase of goods or services from a third party. Liabilities for Taxes (other than federal, state, local or foreign income taxes) shall be Current Liabilities only to the extent such Tax is reflected in the Final Working Capital Statement, it being understood that in no event will any Taxes arising with respect to federal, state, local, or foreign income be included as a Current Liability. (jj) "DEDUCTIBLE" shall have the meaning set forth in Section 7.2(c). (kk) "DETERMINATION DATE" shall mean 7:59 a.m. on the Closing Date. -8- 14 (ll) "DISCLOSURE MEMORANDUM" shall mean the Disclosure Memorandum dated the date hereof delivered by TPI to PCA and Newco in connection with this Agreement. References herein to "Schedules" are to the various Schedules of the Disclosure Memorandum. (mm) "DILUTION NOTICE" shall have the meaning set forth in the Preliminary Statements. (nn) "ENCUMBRANCES" shall mean liens, charges, encumbrances, security interests, options or any other restrictions or third-party rights. (oo) "ENVIRONMENTAL LAW" shall mean any applicable federal, state, local, common or foreign law, statute, ordinance, rule, regulation, code, order, judgment, decree or injunction relating to (i) the protection of the environment (including air, water vapor, surface water, groundwater, drinking water supply, surface or subsurface land), or (ii) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, protection, release or disposal of, Hazardous Substances, or workplace safety or health. (pp) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (qq) "EXISTING FINANCING ARRANGEMENTS" shall have the meaning set forth in the Preliminary Statements hereto. (rr) "FACILITY USE AGREEMENT" shall mean an agreement at the price as set forth on Exhibit 1.1(ggggg), and otherwise in form and substance reasonably satisfactory to PCA and TPI, to be entered into by Newco and TPI as of the Closing pursuant to which TPI grants Newco the right to use the first floor and related common areas (including the cafeteria, parking, and other ancillary areas and facilities) of TPI's facility located in Lake Forest, Illinois. (ss) "FINAL WORKING CAPITAL STATEMENT" shall have the meaning set forth in Section 2.5(b). (tt) "FINANCIAL STATEMENTS" shall have the meaning set forth in Section 3.6(a). (uu) "FIXTURES AND EQUIPMENT" shall mean all furniture, fixtures, furnishings, machinery, vehicles, equipment (including computer hardware, computer terminals, network servers, and research and development equipment) and other tangible personal property Related to the Containerboard Business. (vv) "FORMER FACILITY" shall mean a facility or property previously owned or operated by TPI or its predecessors in the conduct of the Containerboard Business that is not located on the Real Property or the Retained Real Property. -9- 15 (ww) "GAAP" shall mean United States generally accepted accounting principles, consistently applied. (xx) "GOVERNMENTAL AUTHORITY" shall mean any nation or government, any state, province or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any government authority, agency, department, board, commission or instrumentality of the United States, any State of the United States or any political subdivision thereof. (yy) "GOVERNMENTAL AUTHORIZATIONS" shall mean all licenses, permits, franchises, certificates of occupancy, other certificates and other authorizations and approvals required to carry on the Containerboard Business as currently conducted under the applicable laws, ordinances or regulations of any Governmental Authority. (zz) "HAZARDOUS SUBSTANCES" shall mean (i) petroleum, petroleum byproducts and any petroleum fractions; (ii) materials which contain any substance defined as a hazardous or toxic substance or words of similar meaning or effect under the following United States federal statutes and their state counterparts, as well as such statutes' implementing regulations: the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the Toxic Substances Control Act, the Federal Insecticide, Fungicide, and Rodenticide Act, and the Clean Air Act; and (iii) any other materials as to which liability or standards of conduct are imposed pursuant to any Environmental Law. (aaa) "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (bbb) "HUMAN RESOURCES AGREEMENT" shall mean an agreement to be entered into on the Closing Date by and among Tenneco, TPI and Newco in the form of Exhibit 1.1(bbb) attached hereto. (ccc) "INDEMNIFICATION CLAIM NOTICE" shall have the meaning set forth in Section 7.4(a). (ddd) "INDEMNIFIED PARTIES" shall have the meaning set forth in Section 7.3(a). (eee) "INDEMNIFYING PARTY" shall have the meaning set forth in Section 7.4(a). (fff) "INITIAL PRICE" per share means (i) in the case of an initial Public Offering, the initial offering price per share, and (ii) in the case of a Spin-Off, the average closing price per share on each of the 10 Business Days commencing on the first Business Day which is 30 days after the effective date of the Spin-Off, provided that if TPI or Goldman, Sachs & -10- 16 Co., or their respective Affiliates, shall have purchased any shares of Newco through the public market during such period, then the Initial Price shall be the lower of (x) the closing price on the effective date of the Spin-Off, and (y) the average closing price per share on each of the 10 Business Days commencing on the first Business Day which is 30 days after the effective date of the Spin-Off. (ggg) "INTELLECTUAL PROPERTY" shall mean (except to the extent included in the Retained Assets) the following intellectual property (and the rights associated therewith) Related to the Containerboard Business or the Contributed Assets: trademarks, service marks, brand names, certification marks, trade dress, assumed names, Internet Domain names, trade names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; patents, applications for patents (including divisionals, continuations, continuations-in-part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; patent disclosures and innovations (whether or not patentable and whether or not reduced to practice); non-public information, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any Person; copyrighted works and registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; software; any similar intellectual property or proprietary rights; and any claims or causes of action arising out of or related to any infringement or misappropriation of any of the foregoing occurring before or after the Closing. (hhh) "INVENTORY" shall mean all inventory held for resale in the Containerboard Business, all raw materials, work in process, finished products, office supplies, storeroom inventory, spare parts and equipment, wrapping, supply and packaging items, of the Containerboard Business. (iii) "KNOWLEDGE" or any similar phrase means the actual knowledge of those management employees of TPI identified on Schedule 1.1(iii), after due inquiry. (jjj) "LAWS" shall mean any federal, state, foreign or local law, statute, ordinance, rule, code, regulation, order, judgment or decree of any Governmental Authority. (kkk) "LEASED REAL PROPERTY" shall mean all land (including, to the extent included in any such lease, any timberlands and tree farms associated with the Mills), buildings, fixtures and other real property leased on the date hereof by TPI or one of the Contributed Subsidiaries as lessee pursuant to the Real Estate Leases used by the Containerboard Business, other than the real property identified as "Transition Real Property" on Schedule 1.1(ggggg). (lll) "LEMELSON PATENTS" shall have the meaning set forth in Section 6.2(k). (mmm) "LOSSES" shall have the meaning set forth in Section 7.2. -11- 17 (nnn) "MATERIAL ADVERSE CHANGE" shall mean a change that is materially adverse to the value of the Contributed Assets or the Containerboard Business taken as a whole or materially adverse to the business, financial condition or results of operations or business prospects of the Containerboard Business taken as a whole; provided that any change identified on Schedule 1.1(nnn) shall not constitute a Material Adverse Change. The scope of this definition of "Material Adverse Change" shall in no way be construed to be applicable to or to limit in any respect the determination of "Material Adverse Effect" or "Material Adverse Change" as used in the Commitment Letters, or the agreements and indentures contemplated thereby, by the lenders thereunder with respect to the conditions precedent to such lenders' obligation to consummate the New Financing Arrangements. (ooo) "MATERIAL ADVERSE EFFECT" shall mean an effect that is materially adverse to the value of the Contributed Assets or the Containerboard Business taken as a whole or materially adverse to the business, financial condition or results of operations or business prospects of the Containerboard Business taken as a whole; provided that any effect arising from or attributable to any condition, event or circumstance identified on Schedule 1.1(nnn) shall not constitute a Material Adverse Effect. The scope of the definition of "Material Adverse Effect"shall in no way be construed to be applicable to or to limit in any respect the determination of "Material Adverse Effect" or "Material Adverse Change" as used in the Commitment Letters, or the agreements and indentures contemplated thereby, by the lenders thereunder with respect to the conditions precedent to such lenders' obligation to consummate the New Financing Arrangements. (ppp) "MDP TRANSACTION FEE" has the meaning set forth in Section 4.6. (qqq) "MOST RECENT STATEMENT OF ASSETS AND LIABILITIES" shall have the meaning set forth in Section 3.6(a). (rrr) "MOST RECENT YEAR END STATEMENT" shall have the meaning set forth in Section 3.6(a). (sss) "NET WORKING CAPITAL" shall mean the excess of Current Assets over Current Liabilities on a consolidated basis determined in accordance with Section 2.5. (ttt) "NEW FINANCING ARRANGEMENTS" shall have the meaning set forth in the Preliminary Statements hereto. (uuu) "NONCOMPETE PERIOD" shall have the meaning set forth in Section 5.12(a). (vvv) "OBJECTION" shall have the meaning set forth in Section 2.5(b). (www) "OWNED REAL PROPERTY" shall mean all land (including any timberlands and tree farms associated with the Mills) and all buildings, fixtures, and other improvements -12- 18 located thereon, and all easements, rights-of-way and appurtenances thereto, owned by TPI or one of the Contributed Subsidiaries which is identified on Schedule 1.1(vvv). (xxx) "PCA INDEMNIFIED PARTIES" shall have the meaning set forth in Section 7.3(a). (yyy) "PCA MARKS" shall mean any mark that includes the phrase "Packaging Corporation of America" or the word "PCA" or any variation thereof and any trademark symbol or logo using such phrase or name and any variation thereof. (zzz) "PERMITTED ENCUMBRANCES" shall have the meaning set forth in Section 3.16(b). (aaaa) "PERSON" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization. (bbbb) "PIK PREFERRED" shall mean the Preferred Stock, as such term is defined in the Commitment Letters. (cccc) "POST-CLOSING PERIOD" shall mean, with respect to any Contributed Subsidiary, any Tax Period commencing after the Closing Date and the portion of any Straddle Period commencing after the Closing Date. (dddd) "PRE-CLOSING PERIOD" shall mean, with respect to any Contributed Subsidiary, any Tax Period ending on or before the Closing Date and the portion of any Straddle Period ending on the Closing Date. (eeee) "PROCEEDING" shall have the meaning set forth in Section 7.4(a). (ffff) "PUBLIC OFFERING" shall mean a public offering pursuant to an effective registration statement under the Securities Act (or any comparable form under any similar statute then in force), covering the offer and sale of Common Stock for the account of Newco and/or selling stockholders to the public. (gggg) "PURCHASED PROPERTY" shall mean all land (including any timberlands and tree farms associated with the Mills) and all buildings, fixtures, other improvements, machinery and equipment located thereon, and all easements, rights-of-way and appurtenances thereto, that are subject to the Existing Financing Arrangements listed on Schedule PS-1. (hhhh) "REAL ESTATE LEASES" shall mean those agreements pursuant to which TPI or one or more of the Contributed Subsidiaries leases, subleases, licenses, or otherwise uses or licenses, real property, including land (and everything growing upon the land, to the extent included in such Real Estate Lease), buildings, structures and improvements thereon or appurtenances thereto, which are identified on Schedule 1.1(gggg). -13- 19 (iiii) "REAL PROPERTY" shall mean the Owned Real Property (and the applicable Purchased Property) and the Leased Real Property. (jjjj) "REGISTRATION RIGHTS AGREEMENT" shall have the meaning set forth in Section 2.1(c). (kkkk) "RELATED TO" OR "RELATING TO" shall mean primarily related to, or used primarily in connection with. (llll) "REQUIRED CONSENT" shall mean any Consents specifically identified on Schedule 3.3 as a "Required Consent" and each other material Consent, which may be a Consent listed on Schedule 3.3. (mmmm) "RETAINED ASSETS" shall mean (i) the assets (including real property, tangible personal property, accounts receivable, intellectual property and contracts) Related to all businesses conducted by TPI and any of its Affiliates, including but not limited to, their plastics and aluminum packaging, aluminum, plastics, folding carton, molded fiber, cushion protective packaging (including all honeycomb paperboard-type products), flexible packaging, and foam building products businesses, and all tangible assets located at TPI's Lake Forest, Illinois facility, but not including any assets Related to the Containerboard Business; (ii) the stock or other ownership interests of all Subsidiaries of TPI other than the Contributed Subsidiaries; (iii) all cash and cash accounts, disbursement accounts, outstanding checks and disbursements, investment securities and other short-term and medium-term investments and Non-Trade accounts receivable from TPI and its Affiliates and the notes receivable listed in Schedule 1.1(llll)(iii); (iv) all deferred Tax assets of TPI; (v) all prepaid Taxes to the extent such prepaid Taxes are not reflected on the Final Working Capital Statement; (vi) all refunds of Taxes to the extent such Taxes are not reflected on the Final Working Capital Statement; (vii) all Tax Returns of TPI; (viii) all Books and Records which TPI is required by law to retain, provided that TPI shall provide Newco with complete copies of such Books and Records; -14- 20 (ix) all Tenneco Plans, and all assets of the Tenneco Plans; (x) all Governmental Authorizations to the extent not transferable without obtaining a Consent; (xi) the Tenneco Marks; (xii) the Retained Real Property and any financial instruments related to the Retained Real Property; (xiii) all of TPI's or Tenneco's insurance policies Related to the Containerboard Business and, subject to the rights of Newco and obligations of TPI and TPI's Affiliates, respectively, set forth in Section 5.11, all rights under such insurance policies; and (xiv) any Contracts not included in the Assumed Liabilities pursuant to the exception set forth in Section 1.1(j)(i) (unless and to the extent assumed by Newco pursuant to Section 5.21 hereof). (nnnn)"RETAINED ENVIRONMENTAL LIABILITIES" has the meaning set forth in the definition of "Retained Liabilities." (oooo) "RETAINED LIABILITIES" shall mean all of the following debts, liabilities, commitments or obligations, whether arising before or after the Closing and whether known or unknown, fixed or contingent: (i) all liabilities Related to the Retained Assets; (ii) all (A) liabilities under Environmental Laws with respect to any property to which the Containerboard Business disposed or arranged for the disposal of Hazardous Substances prior to Closing, other than (x) at the Real Property, or (y) at locations other than the Retained Real Property where Hazardous Substances may have migrated or are alleged to have migrated from the Real Property, (B) liabilities under Environmental Laws with respect to any Former Facility, and (C) liabilities in connection with the Retained Real Property (collectively, the "Retained Environmental Liabilities"); (iii) all liabilities arising out of the actions, suits, proceedings, disputes, claims or investigations identified in Schedule 1.1(nnnn)(iii) (the "Retained Litigation") and all Losses arising out of the three matters listed in Section 5.18 of this Agreement to the extent Newco's Losses in connection therewith exceed the limitations set forth in such section; (iv) all liabilities which are retained by Tenneco or TPI under the Ancillary Agreements; -15- 21 (v) all liabilities under the Tenneco Plans, except to the extent such liabilities are specifically assumed by Newco pursuant to the Human Resources Agreement; (vi) all liabilities for Taxes imposed with respect to the taxable periods, or portions thereof, ending on or before the Closing Date except to the extent that any such Taxes are Current Liabilities and are reflected on the Final Working Capital Statement; (vii) all liabilities for "non-trade" accounts payable to TPI or its Affiliates which arise prior to the Closing Date; (viii) all liabilities for indebtedness for borrowed money and any other obligation which is fixed as to amount and certainty as of the Closing or which is secured by a lien that is not a Permitted Encumbrance on any of the Contributed Assets, including any liabilities under the Existing Financing Arrangements, but not including (A) the Assumed Indebtedness, (B) Assumed Liabilities as shown on the Final Working Capital Statement and (C) liabilities under Contracts included in the Contributed Assets; (ix) all severance, termination, change of control and similar agreements, payments, debts, obligations or liabilities with respect to any director, officer, employee or consultant of TPI or any of its Subsidiaries which exist as of or prior to the Closing (after taking into account the transactions contemplated by this Agreement), other than (i) obligations under any collective bargaining agreement, (ii) obligations of the type described in Section 2.3 (v) of the Human Resources Agreement, and (iii) obligations under any employment, consulting, or other agreement entered into by Newco; (x) all liabilities and obligations under any employment, consulting, or other agreement or arrangement between TPI or its Affiliates and William Sweeney, including any liabilities or obligations to Mr. Sweeney which exist as of or prior to the Closing (including after taking into account the transactions contemplated by this Agreement and including severance and pension benefits, costs, or other expenses), except to the extent assumed by Newco under the Human Resources Agreement; (xi) all other liabilities and obligations for which TPI has expressly assumed responsibility pursuant to this Agreement or the Ancillary Agreements; (xii) all debts, liabilities or obligations whatsoever, that do not Relate to the Containerboard Business or that do not otherwise Relate to the Contributed Assets; and (xiii) all liabilities and obligations arising under any Contract which is not identified in the Disclosure Memorandum except as follows: (A) if such Contract is for an amount of $1,000,000 or less and (i) is entered into in the ordinary course of -16- 22 business; (ii) the terms of which are customary and normal for the Containerboard Business specifically and the containerboard industry generally and on market rates at the time entered into, and (iii) all of the fees, expenses, penalties, liabilities and other payment obligations (or commitments therefor) arising thereunder which were incurred during the 12-month period ending December 31, 1998 have been paid and have been (or will be) properly reflected on the Most Recent Year End Statement, and, if applicable, Final Working Capital Statement), such Contract shall not be a Retained Liability; and (B) if such Contract is for an amount greater than $1,000,000 or otherwise does not meet the conditions set forth in clause (A), such Contract shall be a Retained Liability only if and to the extent Newco does not elect to assume such Contract in accordance with Section 5.21 hereof. (pppp) "RETAINED LITIGATION" has the meaning set forth in the definition of "Retained Liabilities." (qqqq) "RETAINED REAL PROPERTY" shall mean the real property identified on Schedule 1.1(pppp). (rrrr) "SPIN-OFF" shall mean any distribution by TPI or its Affiliates of any class or series of Newco Common Stock to TPI's or such Affiliate's public stockholders. (ssss) "STRADDLE PERIOD" shall mean, with respect to any Contributed Subsidiary, any Tax Period that begins before and ends after the Closing Date. (tttt) "STOCKHOLDERS AGREEMENT" shall have the meaning set forth in Section 2.1(b) hereof. (uuuu) "STUB PERIOD FINANCIAL STATEMENTS" shall have the meaning set forth in Section 3.6(b). (vvvv) "SUBSIDIARY" shall mean, with respect to any Person, any corporation, partnership, joint venture or other legal entity of which such Person, either directly or through or together with any other Subsidiary of such Person, owns any equity interests. (wwww) "SUPPLY AGREEMENTS" shall mean the supply agreements, to be entered into at Closing by and among Newco, TPI and TPI's affiliates in form and substance satisfactory to each of TPI and PCA, setting forth the terms and conditions pursuant to which Newco agrees to supply to TPI and its Affiliates, and TPI and its Affiliates agree to purchase from Newco, certain products, at prices set forth on Schedule 1.1(vvvv), for a period of five years from the Closing Date. (xxxx) "SURVIVAL PERIOD" shall have the meaning set forth in Section 7.1. (yyyy) "TARGET WORKING CAPITAL" has the meaning set forth in Section 2.5(e). -17- 23 (zzzz) "TAX AUTHORITY" shall mean, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Taxes for such entity or subdivision. (aaaaa) "TAX BENEFIT" shall mean the amount by which a Person's Tax liability is actually reduced (including any related interest actually received from a Tax Authority in connection therewith). (bbbbb) "TAX PERIOD" shall mean, with respect to any Tax, the period for which the Tax is reported as provided under Applicable Tax Laws. (ccccc) "TAX RETURN" shall mean, with respect to any Tax, any information return with respect to such Tax, any report, statement, declaration or document required to be filed under the Applicable Tax Law in respect of such Tax, any claim for refund of Taxes paid, and any amendment or supplement to any of the foregoing. (ddddd) "TAXES" shall mean all federal, state, local or foreign taxes, including but not limited to income, gross receipts, windfall profits, goods and services, value added, severance, property, production, sales, use, license, excise, franchise, employment, withholding or similar taxes, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties. (eeeee) "TENNECO" means Tenneco Inc., a Delaware corporation. (fffff) "TENNECO MARK" shall mean any mark that includes the word "Tenneco" or "Tenn" or any variation thereof, the Tenneco "horizon" symbol, and any trademark, symbol or logo using the "Tenneco" or "Tenn" name or such symbol or any variation thereof. (ggggg) "TENNECO PLANS" means all employee benefit plans, and all assets and liabilities related to such employee benefit plans, of TPI, or any Affiliate of TPI, including Tenneco. (hhhhh) "TRANSITION SERVICES AGREEMENT" shall mean a mutually satisfactory agreement to be entered into at Closing between Newco and TPI under which TPI and its Affiliates will provide transition services requested by Newco in order to allow it to operate the Containerboard Business after Closing in a manner consistent with past practices. The charge to Newco for such services will be TPI's or such Affiliate's (as the case may be) actual cost on a fully loaded basis without allocation of corporate overhead (the "TPI Cost"). To the extent of any services reflected in any of the eight service categories on Schedule 1.1 (ggggg) , the charge to Newco for each such service will be the lesser of (i) TPI's Cost for such services, and (ii) 105% of the cost for such service set forth on such Schedule. The Transition Services Agreement shall be for an initial one year term. Newco may extend the term beyond the initial term for up to six months for an upcharge of 15%. Newco may terminate any such services under the Transition Services Agreement on 90 days written notice to TPI. Newco may reduce or phase-down the services to be provided during the initial term or renewal term -18- 24 under the Transition Services Agreement upon reasonable written notice to TPI, in which case the charge to Newco will be reduced to reflect the actual TPI Cost for rendering such reduced service. (iiiii) "TPI INDEMNIFIED PARTIES" shall have the meaning set forth in Section 7.2(a). (jjjjj) "TRANSFER COSTS" shall have the meaning set forth in Section 2.7. (kkkkk) "WARN" shall have the meaning set forth in Section 5.5. (lllll) "WARN OBLIGATIONS" shall have the meaning set forth in Section 5.5. 1.2 OTHER TERMS. Other terms may be defined elsewhere in the text of this Agreement, and unless otherwise indicated shall have such meanings throughout this Agreement. 1.3 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof", "herein", and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The word "including" means "including without limitation." (b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. (c) The terms "dollars" and "$" shall mean United States dollars. ARTICLE II ORGANIZATION OF NEWCO; CONTRIBUTION OF THE CONTAINERBOARD BUSINESS 2.1 ORGANIZATION OF NEWCO. At or prior to Closing, TPI, Newco and PCA shall cause each of the following to occur: (a) CORPORATE DOCUMENTS. Newco's certificate of incorporation shall be amended and restated to be as set forth as Exhibit 2.1A hereto (except that such certificate of incorporation shall be amended to create a series of preferred stock entitled "Series A Preferred Stock as contemplated by the Stockholders Agreement) and Newco shall adopt amended and restated by-laws in form and substance satisfactory to PCA and TPI, which by-laws shall include all provisions required by the Stockholders Agreement to be included in Newco's by-laws. -19- 25 (b) STOCKHOLDERS AGREEMENT. TPI, PCA and Newco shall enter into a Stockholders Agreement in the form of Exhibit 2.1B. (c) REGISTRATION RIGHTS AGREEMENT. TPI, PCA and Newco shall enter into a Registration Rights Agreement in the form of Exhibit 2.1C. 2.2 CONTRIBUTION AND PURCHASE OF ASSETS; ASSUMPTION OF LIABILITIES. (a) BORROWING OF ASSUMED INDEBTEDNESS; REPAYMENT OF EXISTING FINANCING ARRANGEMENTS. Immediately prior to the Closing, subject to Article VI, TPI will borrow the Assumed Indebtedness under the New Financing Arrangements and will use the proceeds to repay in full the Existing Financing Arrangements such that TPI shall own all of the Purchased Property free and clear of all Encumbrances (other than Permitted Encumbrances, but free and clear of all Encumbrances with respect to Existing Financing Arrangements), and the Purchased Property shall constitute a part of the Contributed Assets. On the terms and subject to the conditions set forth herein and in the Ancillary Agreements, at the Closing the parties shall take the following actions, in the order set forth below, provided that such actions shall take place contemporaneously as part of the Closing. (b) PCA CASH CONTRIBUTION; ISSUANCE OF COMMON STOCK. PCA will contribute the Cash Contribution to Newco, and Newco will issue to PCA the number of fully paid, nonassessable shares of Common Stock determined in accordance with the Preliminary Statements. (c) CONTRIBUTION OF CONTRIBUTED ASSETS; ASSUMPTION OF LIABILITIES. (i) TPI shall contribute, convey, transfer, assign and deliver to Newco, and Newco shall accept and acquire from TPI, all right, title and interest of TPI in and to the Contributed Assets, free and clear of all Encumbrances (other than Permitted Encumbrances but free and clear of all Encumbrances with respect to Existing Financing Arrangements); (ii) Newco shall assume and agree to pay, honor, discharge and perform the Assumed Liabilities only and shall assume no other liabilities and obligations of any kind or nature; and (iii) Newco will issue to TPI the number of fully paid, nonassessable shares of Common Stock determined in accordance with the Preliminary Statements and pay TPI cash in an amount equal to the Cash Distribution. (d) ADJUSTMENT FOR MANAGEMENT PURCHASES. To the extent members of Newco management purchase Management Stock at Closing, the number of shares of Common Stock issued to TPI and PCA, and the amounts of the Cash Distribution and the Cash Contribution, shall be adjusted as set forth in the Preliminary Statements. 2.3 RETAINED ASSETS AND RETAINED LIABILITIES. Notwithstanding anything herein to the contrary, (i) from and after the Closing each of TPI and its Affiliates shall retain all of its direct or indirect right, title and interest in and to, and there shall be excluded from the sale, conveyance, assignment or transfer to Newco hereunder, the Retained Assets and the Retained Liabilities, and (ii) the Retained Liabilities shall not be assumed by Newco hereunder. -20- 26 2.4 CLOSING MECHANICS. The Closing shall take place at the offices of PCA's counsel at 8:00 a.m. (Chicago time), on the date which is the later of (i) the 90th day following the execution of this Agreement, (ii) the second Business Day following the satisfaction or waiver (by the party entitled to waive the condition) of each condition to the Closing set forth in Article VI, and (iii) the 45th day following delivery of the Most Recent Year End Statement and the Regulation S-X Financial Statements pursuant to Section 5.14, provided that on or prior to any such date TPI shall have provided to Newco any quarterly financial statements for any calendar quarter ended more than 30 days prior to such date (unless the foregoing condition is waived by PCA in its sole discretion), or at such other time and place as the parties hereto may mutually agree. The date on which the Closing occurs is called the "Closing Date." The Closing shall be deemed effective at 8:00 a.m. (Chicago time) on the Closing Date. To effect the steps set forth in Section 2.2 hereof, the parties shall execute and deliver to each other and to third parties, as appropriate, all documents reasonably necessary to effect the Closing. Without limiting the generality of the foregoing, (a) TPI DELIVERIES. TPI shall execute and deliver to Newco and PCA: (i) to Newco, deeds, in limited warranty or other similar form, in form and substance reasonably acceptable to PCA, transferring all Owned Real Property (and the applicable Purchased Property) to Newco; (ii) to Newco, assignments, or where necessary subleases, in form and substance reasonably acceptable to PCA, assigning or subleasing to Newco all Real Property Leases; (iii) to Newco, assignments, in form and substance reasonably acceptable to PCA, assigning to Newco all Intellectual Property and the PCA Marks; (iv) to Newco, bills of sale, certificates of title, and all other instruments of transfer, in form and substance reasonably acceptable to PCA, transferring to Newco all Contributed Assets other than the Real Property or the Intellectual Property which are being transferred to Newco pursuant to conveyance documents in clauses (i) - (iii) above; (v) to Newco, such instruments of assumption and other instruments or documents, in form and substance reasonably acceptable to PCA, as may be necessary to effect TPI's assignment of the Assumed Liabilities to Newco; (vi) to Newco or PCA, as appropriate, a duly executed copy of each of the Ancillary Agreements to which TPI is a party; (vii) to PCA, a copy of the opinion of Jenner & Block, TPI's counsel, in form and substance reasonably satisfactory to PCA; -21- 27 (viii) to PCA, evidence reasonably satisfactory to PCA that all Encumbrances other than Permitted Encumbrances on any of the Contributed Assets have been released; (ix) to Newco, stock certificates or other evidence of ownership of each of the Contributed Subsidiaries, in each case duly endorsed for transfer to Newco; (x) the certificates and other documents to be delivered pursuant to Section 6.2(a) and (b); and (xi) such other instruments or documents, in form and substance reasonably acceptable to PCA, as may be necessary to effect the Closing and the contribution of the Contributed Assets in accordance with this Agreement. (b) PCA DELIVERIES. PCA shall execute and deliver to Newco and TPI: (i) to Newco or TPI, as appropriate, a duly executed copy of each of the Ancillary Agreements to which PCA is a party; (ii) to TPI, a copy of the opinion of Kirkland & Ellis, PCA's counsel, in form and substance reasonably satisfactory to TPI; (iii) to Newco, the Cash Contribution; (iv) the certificates and other documents to be delivered by PCA pursuant to Section 6.3(a) and (b); and (v) such other instruments or documents, in form and substance reasonably acceptable to TPI, as may be necessary to effect the Closing. (c) NEWCO DELIVERIES. Newco shall execute and deliver to TPI and PCA: (i) to TPI and PCA, such instruments of assumption and other instruments or documents, in form and substance reasonably acceptable to TPI, as may be necessary to effect Newco's assumption of the Assumed Liabilities, including all documentation required by the lenders of the Assumed Indebtedness, and to cause such lenders to release TPI from and PCA any liability from the Assumed Indebtedness; (ii) to TPI or PCA, as appropriate, a duly executed copy of each of the Ancillary Agreements to which Newco is a party; (iii) to PCA, stock certificates representing that number of shares of Common Stock in Newco issuable to PCA as determined in accordance with the Preliminary Statements hereof; -22- 28 (iv) to TPI, stock certificates representing that number of shares of Common Stock in Newco issuable to TPI as determined in accordance with the Preliminary Statements hereof; (v) to TPI, the Cash Distribution; and (vi) such other instruments or documents, in form and substance reasonably acceptable to TPI and PCA, as may be necessary to effect the Closing. 2.5 POST-CLOSING ADJUSTMENT. (a) Within 60 days following the Closing, TPI shall, at its expense and with cooperation from Newco's employees and access to Newco's books and records, prepare or cause to be prepared, and deliver to PCA and Newco a statement (the "Closing Working Capital Statement") which shall set forth the Net Working Capital of the Containerboard Business as of the Determination Date (the "Closing Working Capital") and as of the date of the Most Recent Statement of Assets and Liabilities. The amounts so computed shall be used to determine the amount of the payment between TPI and Newco in accordance with this Section 2.5 (the "Post Closing Adjustment"). The Closing Working Capital Statement shall be prepared using the same principles, practices and procedures that were used in preparing the Most Recent Statement of Assets and Liabilities. Notwithstanding the foregoing, the following paragraphs (i) through (viii) shall take precedence over such principles, practices and procedures in the preparation of the Closing Working Capital Statement: (i) The Current Assets included in the Closing Working Capital Statement will be adjusted to exclude the Retained Assets, the LIFO reserve and any current assets related to Tenneco defined benefit pension plans and shall not be taken into account in computing the Post Closing Adjustment. (ii) The Current Liabilities included in the Closing Working Capital Statement will be adjusted to exclude the Retained Liabilities. Any current liabilities related to Tenneco's defined benefit pension plans shall not be taken into account in computing the Post Closing Adjustment. (iii) The Most Recent Statement of Assets and Liabilities does not, and the Closing Working Capital Statement will not, include any accrual or deferral related to federal, state, local or foreign income Taxes. (iv) The Closing Working Capital Statement shall not include any dollar amounts related to the Existing Financing Arrangements. (v) The Closing Working Capital Statement shall not include any dollar amounts related to the New Financing Arrangements. No Post Closing Adjustment shall result from the purchase during the period from the date of the Most Recent Statement of Assets and Liabilities to the Determination Date of any assets which -23- 29 were leased at the date of the Most Recent Statement of Assets and Liabilities. (vi) The Closing Working Capital Statement shall not include any liabilities related to bonuses or incentive compensation earned in 1998. (vii) Any change in accounting principles after the date of the Most Recent Statement of Assets and Liabilities (including any changes required by GAAP) will not apply in determining the Closing Working Capital Statement. (viii) The Closing Working Capital Statement shall exclude any increase or decrease in Current Assets or Current Liabilities resulting directly from accounting for the Transaction. (b) PCA and PCA's accountants and Newco and Newco's accountants shall have 30 days after the delivery by TPI of the Closing Working Capital Statement to review the Closing Working Capital Statement. In the event that PCA or Newco determines that the Closing Working Capital as derived from the Closing Working Capital Statement has not been determined on the basis set forth herein, PCA or Newco shall inform TPI in writing (the "Objection"), setting forth a specific description of the basis of the Objection and the adjustments to the Closing Working Capital which PCA or Newco believes should be made, which Objection must be delivered to TPI on or before the last day of such 30-day period. TPI shall then have 30 days to review and respond to the Objection. TPI and PCA and Newco shall attempt in good faith to reach an agreement with respect to any matters in dispute. If TPI and PCA and Newco are unable to resolve all of their disagreements with respect to the determination of the foregoing items within 45 days following the delivery of Objection, they shall refer their remaining differences to a "Big Five" firm of independent public accountants as to which TPI and PCA and Newco mutually agree (the "CPA Firm"), who shall, acting as experts and not as arbitrators, determine in accordance with this Agreement, and only with respect to the remaining differences so submitted, whether and to what extent, if any, the Closing Working Capital as derived from the Closing Working Capital Statement requires adjustment. TPI and PCA and Newco shall direct the CPA Firm to use its best efforts to render its determination within 30 days after such submission. The CPA Firm's determination shall be conclusive and binding upon Newco, PCA and TPI. The fees and disbursements of the CPA Firm shall be paid by Newco. PCA, Newco and TPI shall make readily available to the CPA Firm all relevant books and records and any work papers (including those of the parties' respective accountants) relating to the Closing Working Capital Statement and all other items reasonably requested by the CPA Firm. The "Final Working Capital Statement" shall be (i) the Closing Working Capital Statement in the event that no Objection is delivered by PCA or Newco during the 30-day period specified above, or (ii) the Closing Working Capital Statement, as adjusted by either (x) the agreement of TPI, PCA and Newco or (y) the CPA Firm. (c) PCA and Newco shall have the opportunity to participate in the preparation of the Closing Working Capital Statement by (i) observing the physical inventory taken in connection therewith (which may begin prior to the Closing Date), (ii) attending any audit planning meetings in connection therewith, (iii) meeting with and discussing procedures -24- 30 with TPI and its accountants, and (iv) otherwise having full access to all information used by TPI in preparing the Closing Working Capital Statement, including the Books and Records and the work papers of its accountants (subject to PCA or Newco executing any necessary waivers or indemnifications required by TPI's accountants). (d) In reviewing the Objection, TPI and its accountants shall have full access to all information used by PCA or Newco in preparing the Objection, including the work papers of PCA's and Newco's accountants (subject to TPI executing any necessary waivers or indemnifications required by PCA's and Newco's accountants). (e) If the Closing Working Capital as reflected on the Final Working Capital Statement is less than the Working Capital of the Containerboard Business determined on the Most Recent Statement of Assets and Liabilities, subject to adjustments as set forth in this Section 2.5(a)(i-viii) (the "Target Working Capital"), then within 10 Business Days following issuance of the Final Working Capital Statement, TPI shall make a payment to Newco equal to such net change, plus interest at the prime rate (as set forth in the "Money Rates" section of The Wall Street Journal) on such amount from the Closing Date through the date of payment. If the Closing Working Capital as reflected on the Final Working Capital Statement is greater than the Target Working Capital, then within 10 Business Days following issuance of the Final Working Capital Statement, Newco shall make a payment to TPI equal to such net change, plus interest at the prime rate (as set forth in the "Money Rates" section of The Wall Street Journal) on such amount from the Closing Date through the date of payment. (f) Payments made by TPI pursuant to this Section 2.5 shall be deemed to result in adjustments to the Cash Distribution made to TPI in partial payment for the Contributed Assets for all purposes of this Agreement, including for purposes of (i) the tax appraisal pursuant to Section 2.9 hereof and (ii) the purchase price adjustment under Section 2.6 hereof. (g) In preparing the Closing Working Capital Statement, (i) liabilities of Newco related to this transaction shall not be treated as liabilities, and (ii) no liabilities or reserves shall be established for matters for which PCA, TPI or Newco is (or but for the Cap or the Deductible would be) entitled to indemnification hereunder. 2.6 PURCHASE PRICE ADJUSTMENT FOLLOWING CERTAIN SALES OF COMMON STOCK BY TPI. If (a) during the one year period following the Closing Date, (i) Newco or TPI shall sell any of its shares of Common Stock in Newco pursuant to an initial Public Offering undertaken by Newco pursuant an exercise by TPI of its Demand Registration Right (as defined in the Registration Rights Agreement) under the Registration Rights Agreement, or (ii) TPI sells, transfers or distributes any of its shares of common stock in Newco pursuant to a Spin-Off, and -25- 31 (b) the Initial Price per share is less than result of (i) the Adjusted Cash Contribution, divided by (ii) the number of outstanding shares of common stock of Newco issued to PCA as of the Closing hereunder and held by PCA and its Affiliates as of the date the calculation under this Section 2.6 is being made, then TPI shall pay to PCA an amount equal to the product of such difference per share, times (y) the number of shares of common stock of Newco then held by PCA and its Affiliates, provided that the maximum amount to be paid by TPI under this Section 2.6 shall not exceed the lesser of (A) $64,500,000 and (B) 15% of the market value of Newco based on the Initial Price per share of the Public Offering or Spin-Off giving rise to the calculation under this Section 2.6 but excluding any shares issued or issuable in connection with such event). At TPI's option, any payment under this Section 2.6 may be paid in cash, in shares of Common Stock (valued at the Initial Price), or in a combination of cash and shares of Common Stock. In the event of a reorganization, recapitalization, stock dividend or stock split, or combination or other change in the shares of Newco's common stock, the parties shall make appropriate and equitable adjustments to the foregoing computation in order to prevent the dilution or enlargement of rights under this Section 2.6. This Section 2.6 shall not apply to any Spin-Off by TPI after Newco has had an initial Public Offering (unless such Spin-Off is part of the initial Public Offering). 2.7 TRANSFER TAXES AND RECORDING FEES. One half of any and all Taxes (other than Taxes imposed on income or gains) or fees imposed or incurred by reason of the transfer of the Contributed Assets hereunder and/or the filing or recording of any instruments necessary to effect the transfer of the Contributed Assets hereunder, regardless of when such Taxes or fees are levied or imposed, including sales, use, value-added, excise, real estate transfer, lease assignment, stamp, documentary and similar Taxes and fees (the "Transfer Costs") shall be the responsibility of, and shall be paid by each of TPI and Newco. Newco shall prepare all Tax Returns required to be filed in respect of Transfer Costs, and PCA and TPI shall have the right to review and approve all such Tax Returns, upon approval, to be timely filed (if such filing is the responsibility of TPI or any of its Affiliates under applicable Law and to the extent that such Tax Returns are approved and given to TPI by Newco in final form before the applicable due dates thereof). In the event Transfer Costs are imposed on or incurred by TPI or its Affiliates in excess of its share hereunder, Newco shall promptly reimburse TPI and its Affiliates for such excess. In the event Transfer Costs are imposed on or incurred by Newco in excess of its share hereunder, TPI shall promptly reimburse Newco for such excess. 2.8 CERTAIN TRANSFERS. TPI shall use commercially reasonable efforts to obtain, at its sole expense, each Consent listed on Schedule 3.3 (other than those Consents marked with an asterisk on Schedule 3.3), and any other material Consent not listed on Section 3.3, if any, if such Consent is required to operate the Containerboard Business after Closing as such business has been operated over the 12-month period immediately prior to Closing. If prior to Closing TPI shall not have obtained any such Consent (other than a Required Consent), the failure to obtain such Consent shall not prevent the Closing, unless the failure to obtain such Consent, could, individually or together with the failure to obtain other Consents, have a Material Adverse Effect or preclude any closing condition to be satisfied. If TPI has not obtained a Consent (other than a Required Consent), the Closing of the transactions -26- 32 contemplated by this Agreement shall not constitute a transfer, or any attempted transfer of any Contract or asset, the transfer of which requires such Consent. Rather, following the Closing, TPI shall use commercially reasonable efforts at TPI's sole expense, and PCA and Newco shall cooperate in such efforts, to obtain promptly such Consent or to enter into reasonable and lawful arrangements (including subleasing or subcontracting if permitted) reasonably acceptable to Newco to provide to Newco the full economic (taking into account Tax costs and benefits) and operational benefits and liabilities which Newco would have had such Consent been obtained as of Closing. Once such Consent for the transfer of a Contributed Asset not transferred at the Closing is obtained on terms reasonably satisfactory to Newco, TPI shall promptly transfer or cause to be transferred, such Contributed Asset to Newco for no additional consideration. 2.9 APPRAISAL. Newco shall obtain a professional appraisal (the "Appraisal") which sets forth separately the fair market values of the Contributed Assets, and, within 90 days after the Closing Date, Newco shall provide a copy of such Appraisal to TPI and PCA. Within 15 days after the receipt of such appraisal, each of TPI and PCA will submit in writing to the other and to Newco any changes it proposes be made to such Appraisal, and Newco, TPI, and PCA will endeavor in good faith to resolve any differences with respect to the Appraisal. Subject to the requirements of Applicable Tax Law or election, all Tax Returns and reports filed by Newco, PCA and TPI will be prepared consistently with the Appraisal, as modified by any subsequent agreement of Newco, TPI and PCA. ARTICLE III REPRESENTATIONS AND WARRANTIES OF TPI TPI represents and warrants to PCA and Newco as follows: 3.1 ORGANIZATION AND QUALIFICATION. TPI and each of the Contributed Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and has all requisite corporate power and authority to own and operate the Contributed Assets and to carry on the Containerboard Business as currently conducted. TPI and each of the Contributed Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in the jurisdictions listed on Schedule 3.1 with respect to TPI or the applicable Contributed Subsidiary which are the only jurisdictions where the ownership or operation of the Contributed Assets or the conduct of the Containerboard Business requires such qualification. 3.2 CORPORATE AUTHORIZATION. TPI has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements, and to perform its obligations hereunder and thereunder. The execution, delivery and performance by TPI of this Agreement and each of the Ancillary Agreements have been duly and validly authorized and no additional corporate authorization or consent is required in connection with the execution, delivery and performance by TPI of this Agreement and each of the Ancillary Agreements. -27- 33 3.3 CONSENTS AND APPROVALS. Except as specifically set forth in Schedule 3.3 or as required by the HSR Act, no Consent is required to be obtained by TPI from, and no notice or filing is required to be given by TPI to or made by TPI with, any Governmental Authority or other Person or under any Contract listed, or required to be listed, on Schedule 3.14 in connection with the execution, delivery and performance by TPI of this Agreement and each of the Ancillary Agreements and the contribution of the Contributed Assets. 3.4 NON-CONTRAVENTION. Except as set forth on Schedule 3.3, the execution, delivery and performance by TPI of this Agreement and each of the Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby, does not and will not (i) violate any provision of the certificate of incorporation or bylaws of TPI, (ii) subject to obtaining the Consents referred to in Section 3.3, conflict with, or result in the breach of, or constitute a default under, or result in the termination, cancellation or acceleration (whether after the filing of notice or the lapse of time or both) of any right or obligation of TPI under, or to a loss of any benefit to which TPI is entitled under, any Contract or result in the creation of any Encumbrance (other than a Permitted Encumbrance) upon any of the Contributed Assets; or (iii) assuming compliance with the matters set forth in Section 3.3, violate, or result in a breach of or constitute a default under any law, rule, regulation, judgment, injunction, order, decree or other restriction of any court or governmental authority to which TPI is subject, including any Governmental Authorization. 3.5 BINDING EFFECT. This Agreement constitutes, and each of the Ancillary Agreements when executed and delivered by the parties thereto will constitute, a valid and legally binding obligation of TPI, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors, rights and to general equity principles. 3.6 FINANCIAL STATEMENTS: ABSENCE OF CERTAIN CHANGES. Subject to the matters set forth on Section 3.6: (a) The following financial statements of the Containerboard Business are (and, with respect to the Most Recent Year End Statement, will be prior to the Closing Date) attached as Schedule 3.6: (i) the audited combined financial statements of the Containerboard Business (collectively, the "Audited Financial Statements") as of and for the years ended December 31, 1996, 1997 and 1998 (the "Most Recent Year End Statement"); (ii) the unaudited combined statement of assets, liabilities and interdivision accounts of the Containerboard Business as of September 30, 1998 (the "Most Recent Statement of Assets and Liabilities"); and collectively with statements described in the foregoing clause (i) , the "Financial Statements"). The Financial Statements present (or, in the case of the Most Recent Year End Statement, will present), in all material respects, the financial condition of the Containerboard Business as of the dates thereof, or the results of operations for the periods then ended, as the case may be. The Financial Statements were (or, in the case of the Most Recent Year End Statement, will be) consistent with the Books and Records, which are complete and accurate in all material respects. -28- 34 (b) TPI will either (i) engage AA on behalf of Newco to audit the combined statement of assets, liabilities, and interdivision account as of the Closing Date, and the related statements of revenues, expenses, and interdivision account and cash flows for the period from January 1, 1999 to the Closing Date (the "Stub Period Financial Statements"), or (ii) cooperate with Newco in the audit of the Stub Period Financial Statements. (c) The Audited Financial Statements were (or, in the case of the Most Recent Year End Statement and the Stub Period Statements, will be) prepared in accordance with GAAP. All of the liabilities reflected in the Financial Statements are Related to the Containerboard Business and arose out of or were incurred in connection with the conduct of the Containerboard Business. (d) The Inventory shown on the Financial Statements was determined in accordance with GAAP, and is stated at the lower of cost or market on a LIFO basis. This representation shall not be deemed to constitute a warranty or guaranty that all such Inventory shall be sold. (e) All accounts receivable reflected on the Financial Statements are, and all accounts receivable reflected on the Most Recent Year End Statement and the Stub Period Statements will be, bona fide receivables, accounted for in accordance with GAAP, and subject to no setoffs or counterclaims, representing amounts due with respect to actual transactions in the operation of the Containerboard Business; it being understood that this representation shall not be deemed to constitute a warranty or guaranty that all such accounts receivable shall be collected. (f) Except as set forth in Schedule 3.6(e) or otherwise disclosed in this Agreement, since December 31, 1997, TPI has conducted the Containerboard Business in the ordinary and usual course and, other than in the ordinary and usual course, has not, with respect to the Containerboard Business: (i) sold, assigned, pledged, hypothecated or otherwise transferred any of the Contributed Assets, other than for such sales, assignments, pledges, hypothecations or other transfers which could not, individually or in the aggregate, have a Material Adverse Effect; (ii) terminated or materially amended any Contracts that are individually or in the aggregate material to the Containerboard Business; (iii) suffered any extraordinary damage, destruction or other casualty loss; (iv) except for normal salary administration for employees of the Containerboard Business, increases pursuant to collective bargaining agreements, or other compensation increases (including bonuses), in each case in the ordinary course of business, increased the compensation payable or to become payable by TPI to any of the employees of the Containerboard Business or increased any bonus, insurance, pension or other employee benefit plan, payment or arrangement made by TPI, for or with any such employees; or (v) entered into an agreement to do any of the foregoing. 3.7 LITIGATION AND CLAIMS. Except as disclosed on Schedule 3.7: (a) There is no action (whether civil, criminal or administrative), suit, demand, claim, dispute, hearing, proceeding (including condemnation or other proceeding in -29- 35 eminent domain) or investigation pending or, to the Knowledge of TPI, threatened, Related to the Containerboard Business or any of the Contributed Assets or included in the Assumed Liabilities. (b) None of the Contributed Assets is subject to any order, writ, judgment, award, injunction, or decree of or settlement enforceable in any court or governmental or regulatory authority of competent jurisdiction or any arbitrator or arbitrators. 3.8 TAXES. Except as disclosed on Schedule 3.8: (a) TPI has duly and timely filed (or has caused to be duly and timely filed) each Tax Return required to be filed with any Tax Authority which includes or is based upon the Contributed Assets, or the operations, ownership or activities of the Containerboard Business, and all Taxes due and payable (whether or not shown on or required to be shown on a Tax Return) have been paid prior to their due dates; provided, however, that the representations and warranties set forth in this paragraph are made only to the extent that (i) such Taxes are or may become Encumbrances on the Contributed Assets, or (ii) Newco is or may be liable in the capacity of transferee of the Contributed Assets. (b) TPI has duly and timely filed (or has caused to be duly and timely filed) each Tax Return which includes or is based upon the assets, operations, ownership or activities of any of the Contributed Subsidiaries, and all Taxes due and payable (whether or not shown on or required to be shown on a Tax Return) have been paid prior to their due dates. (c) None of TPI (with respect to the Containerboard Business) and the Contributed Subsidiaries has made any payments, is obligated to make any payments or is a party to any agreement that could obligate it to make any future payments that will not be deductible under Sections 162(m) or 280G of the Code. (d) None of the Contributed Assets or the assets of the Contributed Subsidiaries (i) is subject to any lien arising in connection with any failure or alleged failure to pay any Tax, (ii) secures any debt the interest on which is Tax-exempt under Section 103(a) of the Code, (iii) is required to be or is being depreciated under the alternative depreciation system under Section 168(g)(2) of the Code, (iv) is "limited use property" with the meaning of Revenue Procedure 76-30 or (v) will be treated as owned by any other person pursuant to the provisions of former Section 168(f)(8) of the Code. (e) TPI (with respect to the Containerboard Business) and the Contributed Subsidiaries have withheld and paid each material Tax required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other party. (f) There are no pending, threatened, or proposed audits, assessments or claims from any Tax Authority for deficiencies, penalties or interest against TPI (with respect to the Contributed Assets or the Containerboard Business) any of the Contributed Subsidiaries or any of their assets, operations or activities. -30- 36 (g) No Contributed Subsidiary owns, directly or indirectly, and none of the Contributed Assets consists of any interest in any entity classified as a partnership for United States federal income Tax purposes. (h) TPI's aggregate tax basis in the stock of the Containerboard Subsidiaries, determined immediately prior to the Closing, shall not exceed the aggregate tax basis of the net assets of the Containerboard Subsidiaries immediately prior to the Closing, by more than $100,000,000. 3.9 EMPLOYEE BENEFITS. Each Tenneco Plan which is an employee benefit plan, as defined in Section 3(3) of ERISA, has been and is being maintained in substantial compliance with all applicable laws, including ERISA and the Code, and each plan that is intended to be qualified under Section 401(a) of the Code is so qualified and has received a determination of such qualification from the Internal Revenue Service. Except as provided on Schedule 3.9, no employee of the Containerboard Business is covered by a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. None of the Tenneco Plans obligates Newco to pay separation, severance, termination or similar-type benefits solely as a result of any transaction contemplated by this Agreement or solely as a result of a "change in control" (as such term is defined in Section 280G of the Code). No liability to the PBGC (except for routine payment of premiums), Internal Revenue Service, Department of Labor, or otherwise has been or is expected to be incurred with respect to any Tenneco Plan that is subject to Title IV of ERISA which could result in a material liability to Newco. 3.10 COMPLIANCE WITH LAWS. Except as set forth in Schedule 3.10, the Containerboard Business is being conducted in compliance in all material respects with all Laws material to the Containerboard Business and as of the Closing, Newco will have (subject to obtaining the Consents) all Governmental Authorizations necessary for the conduct of the Containerboard Business as currently conducted in all material respects and as shall be conducted immediately following Closing (assuming no material change in operations of the Containerboard Business from the manner of operation prior to Closing); it being understood that nothing in this representation is intended to address any compliance issue that is the subject of the representations and warranties set forth in Sections 3.7, 3.8, 3.9, 3.11, 3.12, or 3.13 hereof, and that TPI makes no representations as to the transferability or assignability of any such Governmental Authorizations. TPI has not received written notice that any Governmental Authorization may be suspended, revoked, materially modified or canceled. 3.11 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 3.11 and, in each case, other than as Relates to a Retained Liability: (a) TPI has complied during the past five years and is currently in compliance with all applicable Environmental Laws with respect to the Containerboard Business, and there are no liabilities under any Environmental Law with respect to the Containerboard Business; -31- 37 (b) TPI has not received any written notice of any material violation or alleged material violation of, or any material liability under, any Environmental Law in connection with the Containerboard Business during the past five years; and (c) there are no material writs, injunctions, decrees, orders or judgments outstanding, or any actions, suits, proceedings or investigations pending or, to the Knowledge of TPI, threatened, relating to compliance with or liability under any Environmental Law affecting the Containerboard Business or the Contributed Assets. 3.12 INTELLECTUAL PROPERTY. (a) Schedule 3.12 sets forth a list and description (including the country of registration) of all registered Intellectual Property currently (or, to the Knowledge of TPI, within the last 12 months) used in the Containerboard Business. No third party has rights in, or otherwise has the right to restrict TPI's use of, such Intellectual Property, and, to TPI's Knowledge (without any inquiry), no third party has rights in, or otherwise has the right to restrict Newco's use of the PCA Marks as of and following the Closing. (b) To the Knowledge of TPI, no product (or component thereof or process) currently used, sold or manufactured by the Containerboard Business infringes on, misappropriates, or otherwise violates a valid and enforceable intellectual property right of any other Person. (c) There are no actions or proceedings pending or, to the Knowledge of TPI, threatened challenging, and, to the Knowledge of TPI, no Person is infringing or otherwise violating, the Intellectual Property, except for challenges, infringements or violations which, individually or in the aggregate, would not have a Material Adverse Effect. As of November 1, 1995, to TPI's Knowledge (without any inquiry), no Person was infringing on or otherwise violating the PCA Marks. (d) All of the Intellectual Property used in the Containerboard Business and all of TPI's interest in the PCA Marks will be transferred to Newco at Closing, except for the Intellectual Property that is used by TPI to provide services under the Transition Services Agreement, and such transferred Intellectual Property and the PCA Marks will be available to Newco after Closing on the same terms and conditions under which it was available to TPI prior to the Closing. (e) Attached hereto as Schedule 3.12(e) is a copy of the provisions in Tenneco's most recent Form 10-Q describing Tenneco's efforts at addressing the Year 2000 issue in Tenneco's business. The information set forth therein is accurate as of the date hereof, in all material respects. TPI has developed and begun implementing a Project Plan to remediate and/or replace software, firmware, hardware (whether general or special purpose) or other -32- 38 similar or related items of automated, computerized or software systems that are used or relied upon in the Containerboard Business (each a "Computer System"), but are not Year 2000 ready. Such remediation and/or replacement is scheduled to be completed in 1999. Year 2000 ready means that the Computer System when used in accordance with its associated documentation is Year 2000 compliant, or is not Year 2000 compliant but will process date data accurately with the implementation of a tested procedure, or is not 2000 compliant but will not cause any processing problem. Year 2000 compliant means that the applicable Computer System when used in accordance with its associated documentation will accurately process date data such that: no value for a date prior to year 2028 will cause any interruption in processing; date-based functionality operates consistently for dates prior to, during and after Year 2000 (through year 2027); in all interfaces and data storage, the century any date is specified either explicitly or by algorithms or inferencing rules; and leap years will be accurately recognized and processed. If implemented properly, the Project Plan should be successful in making all material Computer Systems Year 2000 ready, except to the extent that a Computer Systems interfaces or exchanges data with other software, firmware, hardware or other similar or related items of automated, computerized or software systems that are not Year 2000 compliant. 3.13 LABOR MATTERS. Except as disclosed on Schedule 3.13: (a) TPI is not a party to any labor or collective bargaining agreement with respect to employees of the Containerboard Business, no such employees are represented by any labor organization and, to the Knowledge of TPI, there are no organizing or decertification activities (including any demand for recognition or certification proceedings pending or threatened to be brought or filed with the National Labor Relations Board or other labor relations tribunal) involving TPI; (b) There are no strikes, work stoppages, slowdowns, lockouts, unfair labor practice charges pending or, to the Knowledge of TPI, threatened against or involving the employees of the Containerboard Business; (c) There are no complaints, charges, claims or grievances against TPI pending or, to the Knowledge of TPI, threatened to be brought or filed with any governmental authority, arbitrator or court based on or arising out of the employment by TPI of any employee of the Containerboard Business, except for those which, individually or in the aggregate, would not have a Material Adverse Effect; and (d) TPI is in compliance with all Laws relating to the employment of labor, including all such Laws relating to wages, hours, collective bargaining, discrimination, civil rights, safety and health, immigration, workers' compensation, layoffs, and the collection and payment of withholding and/or Social Security Taxes and similar Taxes. 3.14 CONTRACTS. Schedule 3.14 sets forth a list, as of the date hereof, of each Contract that is Related to the Containerboard Business other than (a) Real Estate Leases, which are listed on Schedule 1.1(gggg), and collective bargaining agreements which are listed on Schedule 3.13, (b) purchase orders or similar agreements for the purchase or sale of goods or -33- 39 services in the ordinary and usual course of business, (c) confidentiality agreements entered into in the usual course of business in connection with the purchase and sale of Inventory, and (d) any Contract which requires a payment or imposes an obligation on either party thereto less than $1,000,000 in the aggregate. Schedule 3.14 also identifies any Contract that contains a non-compete covenant or similar provision that could restrict Newco in its conduct of the Containerboard Business following Closing, any employment agreement with any employee of the Containerboard Business, any employment agreement included in the Contributed Assets or Assumed Liabilities, and any Contract between any Affiliates of TPI, on one hand, and TPI or any of the Contributed Subsidiaries, on the other hand, which is related to the Containerboard Business. Each Contract set forth on Schedule 3.14 is a valid and binding agreement of TPI and, to the Knowledge of TPI, is in full force and effect. Except as otherwise provided in Schedule 3.14, TPI is not in, and, to TPI's knowledge, no other party thereto is, in default in any material respect under any Contract listed on Schedule 3.14 or any collective bargaining agreement listed on Schedule 3.13. Schedule 3.14 lists all of the Contracts that are material to the Containerboard Business other than those referred to in clauses (a) through (d) above. 3.15 REAL ESTATE LEASES. Schedule 1.1(gggg) sets forth a list, as of the date hereof, of each material written Real Estate Lease with a term of more than one month that is related to the Containerboard Business. Each Real Estate Lease set forth on Schedule 1.1(gggg) is a valid and binding agreement of TPI and is in full force and effect. There are no defaults under any Real Estate Lease listed on Schedule 1.1(gggg) which defaults have not been cured or waived and which would, individually or in the aggregate, have a Material Adverse Effect. If the Real Estate Leases that are part of the Existing Financing Arrangements are terminated prior to closing, as contemplated herein, TPI shall own title to the assets subject to such Real Estate Leases, upon such termination, the assets subject to such Real Estate Leases shall be deemed Purchased Property. 3.16 ENTIRE BUSINESS; TITLE TO PROPERTY. (a) Except as set forth in Schedule 3.16(a) and Schedule 3.6(e), the Contributed Assets, the assets held by the Contributed Subsidiaries, the intangible Retained Assets (including cash and cash accounts, disbursement accounts, invested securities and other short and medium term investments, the Tenneco Marks, the Tenneco Plans, and TPI's and Tenneco's insurance policies), and the rights specifically provided or made available to Newco under the Ancillary Agreements include all of the buildings, machinery, equipment and other assets (whether tangible or intangible) necessary and adequate for Newco immediately after Closing to conduct in all material respects the Containerboard Business as conducted as of the date hereof and as of September 30, 1998, and as conducted during the 12-month period prior to the date hereof (subject to changes expressly permitted by the terms hereof to be made after the date hereof). (b) TPI has (or in the case of the Purchased Property, will have on the Closing Date) good (and, in the case of Owned Real Property and Purchased Property (as applicable), marketable) title to, or a valid and binding leasehold interest in, the Contributed Assets, free and clear of all Encumbrances, except (i) as set forth in Schedule 3.16(b); (ii) any -34- 40 Encumbrances expressly disclosed in the Financial Statements; (iii) liens for Taxes (which are not related to income, sales or withholding Taxes), assessments and other governmental charges not yet due and payable or due but not delinquent as of the Closing Date or being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP on the Final Working Capital Statement; (iv) mechanic's, workmen's, repairmen's, warehousemen's, carriers, or other like liens arising or incurred in the ordinary course of business for amounts which are not delinquent and which will not individually or in the aggregate have a Material Adverse Effect, original purchase price conditional sales contracts and equipment leases with third parties entered into in the ordinary course of business; (v) with respect to the Real Property, (A) easements, quasi-easements, licenses, covenants, rights-of-way and other similar restrictions, including any other agreements, conditions, restrictions, or other matters which would be shown by a current title report or other similar report or listing, (B) any conditions that may be shown by a current survey, title report or physical inspection, and (C) zoning, building and other similar restrictions, none of which Encumbrances in (A) through (C) materially impairs the uses of the Real Property as currently used in the Containerboard Business or materially detracts from the value thereof as currently used in the Containerboard Business; and (vi) Encumbrances not described in items (i) - (v) immediately preceding and which, individually or in the aggregate, would not have a Material Adverse Effect (all items included in (i) through (vi), including any matter set forth in Schedule 3.16(b), are referred to collectively herein as the "Permitted Encumbrances"); provided, however that as of the Closing Date and for any periods of time thereafter (including for purposes of Section 2.4 and Article VI), "Permitted Encumbrances" shall not include any Encumbrances granted or arising in connection with the Existing Financing Arrangements. (c) The capital structure of each of the Contributed Subsidiaries is as set forth in Schedule 3.16(c). The shares of stock of the Contributed Subsidiaries included in the Contributed Assets constitute 100% of the issued and outstanding shares of stock of each Contributed Subsidiary, except for American Cellulose Corporation ("ACC"). The shares of stock of ACC included in the Contributed Assets constitute 50% of the issued and outstanding shares of stock of ACC, the remainder of which is owned as set forth on Schedule 3.16(c) hereof. All shares of stock of the Contributed Subsidiaries included in the Contributed Assets are validly issued, fully paid and non-assessable. Except as set forth in the ACC Agreement (as hereinafter defined) (i) there are no options, warrants, or similar rights to purchase any of the shares of any of the Contributed Subsidiaries, and no obligations binding upon any Contributed Subsidiary to issue, sell, redeem, purchase or exchange any of its capital stock or any right relating thereto, and (ii) there are shareholders' agreements, voting agreements, voting trusts or other agreements or rights of third parties with respect to or affecting any of the Contributed Subsidiaries or any of their shares of stock. (d) The Contributed Assets and the assets of the Contributed Subsidiaries are in operating condition and repair (subject to normal wear and tear) and are in a condition to allow the continued conduct after the Closing by Newco of the Containerboard Business as it is currently conducted in all material respects. -35- 41 3.17 FINDERS' FEES. Except for Goldman, Sachs & Co., whose fees will be paid by TPI, there is no investment banker, broker or finder which has been retained by or is authorized to act on behalf of TPI who might be entitled to any fee or commission from PCA or Newco in connection with the transactions contemplated by this Agreement. 3.18 INSURANCE. Schedule 3.18 attached hereto sets forth the following information with respect to each insurance policy to which TPI, with respect to the Containerboard Business, has been a party, a named insured, or otherwise the beneficiary of coverage at any time within the past five years: (a) the name of the insurer, the name of the policyholder, and the name of each covered insured; (b) the scope, period and amount of coverage; and (c) a description of any retroactive premium adjustments or other loss-sharing arrangements. Schedule 3.18 also describes any self insurance arrangements affecting the Containerboard Business. 3.19 NO UNDISCLOSED LIABILITIES. TPI does not have any material obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise, whether or not known to TPI, whether due or to become due and regardless of when asserted) arising out of transactions entered into at or prior to the Closing, or any action or inaction at or prior to the Closing, or any state of facts existing at or prior to the Closing other than: (i) liabilities set forth on the Most Recent Statement of Assets and Liabilities (including any notes thereto, if any), (ii) liabilities and obligations arising from or in connection with matters disclosed pursuant to TPI's representations and warranties in this Agreement or in the Disclosure Memorandum (none of which, except as set forth on Schedule 3.7, is a liability resulting from a breach of contract, breach of warranty, tort, infringement claim or lawsuit), (iii) liabilities and obligations which have arisen after September 30, 1998, in the ordinary course of business (none of which, except as set forth on Schedule 3.7, is a liability resulting from a breach of contract, breach of warranty, tort, infringement claim or lawsuit). 3.20 NO OTHER REPRESENTATIONS OR WARRANTIES. Except for the representations and warranties contained in this Article III, neither TPI nor any other Person makes any other express or implied representation or warranty on behalf of TPI. 3.21 CLOSING DATE. The representations and warranties of TPI contained in this Article III and elsewhere in this Agreement and all information contained in any exhibit, schedule or attachment hereto or in any certificate or other writing delivered by, or on behalf of, TPI pursuant to this Agreement to PCA or Newco shall be true and correct in all respects on the Closing Date as though then made, except as affected by the transactions expressly contemplated by this Agreement. TPI shall have the right to update the Schedules up to five -36- 42 Business days prior to Closing to reflect changes in the Containerboard Business between the date hereof and the Closing Date, provided that such changes are actions taken by TPI permitted under Section 5.2 without PCA's prior consent and that no such changes shall be deemed to cure any breach that existed as of the date hereof (none of which relates to any liability resulting from a breach of contract, breach of warranty, tort, infringement claim or lawsuit). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PCA PCA represents and warrants to TPI and Newco as follows: 4.1 ORGANIZATION AND QUALIFICATION. PCA is a limited liability company duly formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite limited liability company power and authority to own and operate and to carry on its business as currently conducted. PCA is duly qualified to do business and is in good standing as a foreign limited liability company in each jurisdiction where the ownership of its properties or the operation of its business requires such qualification. 4.2 AUTHORIZATION. PCA has full power and authority to execute and deliver this Agreement and each of the Ancillary Agreements, and to perform its obligations hereunder and thereunder. The execution, delivery and performance by PCA of this Agreement and each of the Ancillary Agreements have been duly and validly authorized and no additional authorization or consent is required in connection with the execution, delivery and performance by PCA of this Agreement and each of the Ancillary Agreements. 4.3 CONSENTS AND APPROVALS. Except as required by the HSR Act, no consent is required to be obtained by PCA from, and no notice or filing is required to be given by PCA to, or made by PCA with, any Governmental Authority or other Person in connection with the execution, delivery and performance by PCA of this Agreement and each of the Ancillary Agreements. 4.4 NON-CONTRAVENTION. The execution, delivery and performance by PCA of this Agreement and each of the Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby, does not and will not (i) violate any provision of the charter, bylaws or other organizational documents of PCA or (ii) assuming compliance with the matters set forth in Section 4.3, violate or result in a breach of or constitute a default under any law, rule, regulation, judgment, injunction, order, decree or other restriction of any court or governmental authority to which PCA is subject, including any Governmental Authorization. 4.5 BINDING EFFECT. This Agreement constitutes, and each of the Ancillary Agreements when executed and delivered by the parties thereto will constitute, a valid and legally binding obligation of PCA enforceable in accordance with its terms, subject to -37- 43 bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 4.6 FINDERS' FEES. Except for fees payable pursuant to the Commitment Letters and a fee in the amount of $15,000,000 to be paid to Madison Dearborn Capital Partners, Inc. or its designated affiliates at Closing (the "MDP Transaction Fee"), which fees will be paid by Newco, there is no fee or commission payable from TPI or Newco to any investment banker, broker or finder which has been retained by or is authorized to act on behalf of PCA or any Subsidiary of PCA in connection with the transactions contemplated by this Agreement. 4.7 FINANCIAL CAPABILITY. (a) On the Closing Date PCA will have, sufficient funds to fund the Cash Contribution. (b) PCA has received the commitment letters with respect to the New Financing Arrangements attached hereto as Schedule 4.7(b) (the "Commitment Letters"). As of the date of this Agreement, the Commitment Letters are in full force and effect and have not been amended or rescinded. The Commitment Letters set forth, to the best of PCA's knowledge, to the extent customarily set forth in commitment letters of such nature from such Persons, all the conditions to and material terms of the New Financing Arrangements. PCA has paid all fees and other amounts required by such Commitment Letters to be paid by it prior to the Closing, which amounts may be reimbursed by Newco to PCA, or paid directly by Newco, following Closing (provided that such reimbursement or any obligation with respect thereto shall not be included or incorporated in, or reflected as a Current Liability on, the Closing Working Capital Statement or the Final Working Capital Statement). 4.8 NO OTHER REPRESENTATIONS OR WARRANTIES. Except for the representations and warranties contained in this Article IV, neither PCA nor any other Person makes any other express or implied representation or warranty on behalf of PCA. 4.9 CLOSING DATE. The representations and warranties by PCA contained in this Article IV and elsewhere in this Agreement, and all information contained in any exhibit, schedule or attachment hereto or in any certificate or other writing delivered by, or on behalf of, PCA pursuant to this Agreement to TPI or its representatives shall be true and correct in all respects on the Closing Date as though then made, except as affected by the transactions expressly contemplated by this Agreement. -38- 44 ARTICLE V COVENANTS 5.1 ACCESS. Prior to the Closing, TPI shall permit PCA and its representatives to have full access, during regular business hours and upon reasonable advance notice, to the Contributed Assets and the Containerboard Business, subject to reasonable rules and regulations of TPI, and shall furnish, or cause to be furnished, to PCA, any financial and operating data and other information that is available with respect to the Containerboard Business, the Contributed Assets, or the Assumed Liabilities as PCA shall from time to time reasonably request. PCA shall abide by the terms of the Confidentiality Agreement with respect to such access and any information furnished to it or its representatives pursuant to this Section 5.1. Notwithstanding anything herein to the contrary, PCA shall not be permitted to perform any invasive testing of any of the Real Property without specific additional authorization from TPI (which consent shall not be unreasonably withheld), or to perform any testing which would cause a breach of any Real Estate Lease to which TPI is a party, provided that, upon request from PCA, TPI shall use reasonable efforts to obtain any necessary consent to permit such testing. 5.2 CONDUCT OF BUSINESS. During the period from the date hereof to the Closing, except as otherwise contemplated by this Agreement or as PCA shall otherwise agree in writing in advance, TPI shall conduct the Containerboard Business in the ordinary and usual course. During the period from the date hereof to the Closing, except as otherwise expressly provided for in this Agreement or as PCA shall otherwise consent (which consent shall not be unreasonably withheld), with respect to the Containerboard Business, the Contributed Assets or the Assumed Liabilities other than in the ordinary and usual course or as set forth in Schedule 5.2, TPI shall not: (a) enter into commitments for new capital expenditures in excess of $10,000,000 in the aggregate to the extent not otherwise contemplated in the 1999 business plan for the Containerboard Business; (b) dispose of or otherwise transfer, or incur, create or assume any Encumbrance (other than Permitted Encumbrances) on (i) any individual fixed asset of the Containerboard Business if the greater of the book value or the fair market value of such fixed asset exceeds $1,000,000, or (ii) any group of fixed assets of the Containerboard Business if the greater of the book value or the fair market value of such fixed assets, taken as a whole and which in the aggregate during such period, exceeds $2,500,000, and such dispositions or transfers, in either case, are in the ordinary course of business; (c) institute any material change in the methods of purchase, sale, lease or accounting or engage in any activity which would accelerate the collection of TPI's accounts or notes receivable, delay the payment of the TPI's accounts payable, or reduce or otherwise restrict the amount of Inventory (including raw material, packaging, work-in-process, or finished goods) on hand; -39- 45 (d) acquire (by merger, exchange, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership, joint venture or other business organization or division or material assets thereof; (e) grant licenses of Intellectual Property to any Person or allow registered Intellectual Property to lapse, expire or become abandoned; (f) amend any Contributed Subsidiary's certificate of incorporation, bylaws or other charter documents; (g) grant (or agree to grant) any salary or wage increases or (as it relates to employees of the Containerboard Business) materially change or amend any employee benefit or welfare plan, other than pursuant to renegotiation of any collective bargaining agreements in the normal course; or (h) make any loans or advances to, guarantees for the benefit of or investments in any Person, other than intercompany loans to Affiliates of TPI; (i) agree, in writing or otherwise, to do any of the foregoing or to take any other action which would be required to be disclosed in Schedule 3.6(e); (j) enter into any transactions with Affiliates not in the ordinary course of business consistent with past practice; and (k) enter into any Contracts required to be disclosed hereunder, other than timber leases, cutting rights agreements, and similar agreements entered into in the ordinary course of business at fair value consistent with past practices. TPI will: (a) use its commercially reasonable efforts to (A) preserve intact the organization and goodwill of the Containerboard Business, (B) keep available the services of its officers and employees as a group (provided that such efforts shall not require TPI to pay any bonuses or other amounts beyond normal compensation to such persons), (C) maintain satisfactory relationships with its material suppliers and customers and other Persons having business relationships with it, and (D) maintain all Governmental Authorizations; (b) maintain its facilities and assets in good condition and repair and replace its facilities and assets in a manner consistent with past practices and make capital expenditures in the ordinary course of business in an aggregate amount consistent with the 1999 Annual Operating Plan; and (c) notify PCA of any emergency or other change in the normal course of the Containerboard Business or in the condition of the Contributed -40- 46 Assets or the Assumed Liabilities or the operation of the Containerboard Business and of any governmental or third party complaint, investigation or hearing (or communication indicating that such a complaint, investigation or hearing is or may be contemplated), if such emergency, change, complaint, investigation or hearing could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. 5.3 REASONABLE EFFORTS. Each of TPI and PCA will use commercially reasonable efforts to fulfill the conditions precedent to its respective obligations hereunder and to secure as promptly as practicable all Consents required to be obtained by it in connection with the transactions contemplated hereby, and TPI and PCA will cooperate in all reasonable requests to fulfill the conditions precedent to their and the other party's obligations described in this Section 5.3. Without limiting the generality of the foregoing, (a) TPI and PCA will file within 5 Business Days of the date hereof the required notice (including all documentary materials) under the HSR Act and promptly file any additional information requested as soon as practicable after receipt of request therefor. (b) PCA, TPI and Newco each shall use all reasonable efforts to satisfy all conditions precedent in the Commitment Letters and to otherwise obtain, on behalf of TPI and Newco, the New Financing Arrangements. TPI shall use its reasonable efforts to cooperate with PCA in connection with the New Financing Arrangements, including providing information to and permitting the lenders and their representatives access to the Contributed Assets and the Containerboard Business, as set forth in Section 5.1 hereof. Such information shall include all existing title insurance policies and surveys for the Real Property, to the extent such items are in TPI's reasonable control. In addition, TPI shall provide affidavits and customary title insurance undertakings (including gap and non-imputation undertakings) with respect to the Real Property to the extent reasonably required by the title insurer. TPI shall have the opportunity to review and participate in the preparation of the New Financing Arrangements. The New Financing Arrangements shall be on the terms no less favorable to Newco as set forth in the Commitment Letters. The New Financing Arrangements shall provide (unless waived by TPI in its sole discretion and notwithstanding any provision in the Commitment Letters) that: (i) the PIK Preferred generally shall have the terms set forth on Schedule 5.3, and that in the event the Deferred-Pay Financing (as defined in the Commitment Letters) is not sold to the underwriter, then (A) PCA and/or its designees will purchase $55 million of PIK Preferred, and (B) TPI and/or its designees will receive $45 million of PIK Preferred without additional payment; (ii) the New Financing Arrangements shall not create a security interest on any of TPI's assets, including the Contributed Assets prior to their contribution to Newco hereunder; and (iii) there are no materially adverse consequences to Newco which arise under the terms of the New Financing Arrangements as a result of a sale of all or -41- 47 a portion of TPI's equity interest in Newco (e.g., such sale will not trigger a change of control default), and there are no restrictions or limitations in the New Financing Arrangements on TPI's ability to sell or transfer all or any portion of TPI's equity interest in Newco; and (iv) all of the proceeds of the New Financing Arrangements (other than from the Deferred-Pay Financing) shall be initially loaned to TPI, and thereafter assumed by Newco as the Assumed Indebtedness, as set forth in the Preliminary Statements hereof. In addition, the material terms of the New Financing Arrangements (taken as a whole) shall be as favorable to Newco and TPI as financing arrangements then reasonably available in the financial markets to Newco in connection with the transactions contemplated hereby. In the event TPI is not reasonably satisfied with the New Financing Arrangements because the condition in the immediately preceding sentence has not been met, then TPI's sole remedy will be to arrange for substitute New Financing Arrangements on terms which are in all material respects no less favorable to Newco or PCA than under the proposed New Financing Arrangements. TPI shall have the right, at TPI's sole discretion, to direct PCA to make the necessary elections under the New Financing Arrangements (i) to cause Newco to obtain a commitment for the Bridge Loan (defined in the Commitment Letters), provided that if TPI makes such election, TPI shall pay the 1.5% Commitment Fee attributable to such Bridge Loan as set forth in the Commitment Letters, with Newco paying any other fees or costs associated with such Bridge Loan, and (ii) direct that all of the New Financing Arrangements initially be at the TPI level or to direct that a portion of such New Financing Arrangements initially be at the Newco level, to the extent PCA has the right to make such elections in the Commitment Letters. PCA shall make such elections as directed in writing by TPI, and shall not make such elections absent such directions from TPI. (c) TPI shall use its commercially reasonable efforts to obtain prior to the Closing fee simple title to all of the Purchased Property. 5.4 COVENANTS REGARDING EMPLOYEES. (a) At Closing, TPI and Newco shall enter into the Human Resources Agreement, and shall take all actions required by them pursuant to such Human Resources Agreement. (b) Tenneco shall retain sponsorship of the Tenneco Plans, and neither Newco nor PCA shall be entitled to any assets of the Tenneco Plans. (c) For a period of three years from the Closing Date, other than pursuant to the Human Resources Agreement: (i) neither Newco, PCA nor any Affiliate of Newco will contact, solicit, induce or encourage any employee of TPI or any Affiliate of TPI, to leave such -42- 48 employment, or contact, solicit or approach any employee of TPI or any Affiliate of TPI for the purpose of offering employment to or hiring (whether as an employee, consultant, independent contractor or otherwise) without the prior written consent of TPI, and (ii) TPI will not contact, solicit, induce or encourage any employee of Newco or any Affiliate of Newco to leave such employment, or contact, solicit or approach any employee of Newco for the purpose of offering employment to or hiring (whether as an employee, consultant, independent contractor or otherwise) without the prior written consent of Newco. The foregoing clauses (i) and (ii) shall not apply to any employee who shall contact or approach such Person in response to a general solicitation for employment. 5.5 COMPLIANCE WITH WARN AND SIMILAR LAWS. TPI and Newco do not anticipate that there will be any major employment losses as a consequence of the transactions contemplated by this Agreement and the Human Resources Agreement that might trigger obligations under the Worker Adjustment and Retraining Notification ("WARN") Act, 29 U.S.C. Section 2101 et seq., or under any similar provision of any federal, state, regional, foreign, or local law, rule, or regulation (referred to collectively as "WARN Obligations"). Nevertheless, to the extent that any WARN Obligations might arise as a consequence of the transactions contemplated by this Agreement, it is agreed that Newco will timely give all notices required to be given under WARN or other similar statutes or regulations of any jurisdiction relating to any plant closing or mass layoff or as otherwise required by any such statute. For this purpose, Newco shall be deemed to have caused a mass layoff if the mass layoff would not have occurred but for Newco's failure to employ the employees of the Containerboard Business in accordance with the terms of this Agreement and the Human Resources Agreement. 5.6 FURTHER ASSURANCES. At any time after the Closing Date, TPI, PCA and Newco shall promptly execute, acknowledge and deliver any other assurances or documents reasonably requested by Newco, PCA or TPI, as the case may be, and necessary for them or it to satisfy their or its respective obligations hereunder or obtain the benefits contemplated hereby. Without limiting the generality of the foregoing, Newco agrees that if any of the Contributed Subsidiaries are found to own assets that are not part of the Contributed Assets (that is, such assets are not Related to the Containerboard Business), or if any Retained Assets are inadvertently transferred to Newco, Newco shall transfer such assets to TPI, or as TPI shall direct, at TPI's expense but without consideration. Similarly, if after the Closing TPI identifies any assets that should have been transferred to Newco as part of the Contributed Assets, but were not, TPI shall transfer such assets to Newco at TPI's expense without further consideration. 5.7 USE OF TENNECO MARKS. Except as set forth in this Section 5.7, after the Closing Newco shall not use the Tenneco Marks, except that for a period of one year following the Closing Date Newco may (a) continue to produce materials with such Tenneco Marks until changes can be made to plates, molds, and similar items so as to allow Newco to -43- 49 produce materials without such Tenneco Marks, (b) use the Tenneco Marks on products, labels, packaging and promotional materials that are in existence as of the Closing Date or produced pursuant to clause (a) above, and (c) use signage, invoices and stationery in existence as of the Closing Date bearing a Tenneco Mark. Subject to the preceding sentence, Newco shall cease using the Tenneco Marks as soon as possible after closing during such one year period and, following the periods described above, Newco shall cease all use of any Tenneco Marks. 5.8 CERTAIN MATTERS RELATED TO RETAINED AND ASSUMED LIABILITIES. (a) With respect to all Retained Liabilities, Newco Indemnified Parties shall, at TPI's expense, reasonably cooperate with TPI, provide TPI as promptly as possible with notices and other information received by such parties as well as all relevant materials, information and data requested by TPI and shall grant TPI, without charge, reasonable access to employees of the Containerboard Business and to the Real Property. (b) With respect to all Assumed Liabilities, TPI Indemnified Parties shall, at Newco's expense, reasonably cooperate with Newco, provide Newco as promptly as possible with notices and other information received by such parties as well as all relevant materials, information and data requested by Newco and shall grant Newco, without charge, reasonable access to employees of TPI. 5.9 INTERCOMPANY AGREEMENTS. In the period between execution of this Agreement and the Closing, TPI shall terminate and shall cause its Affiliates to terminate, any and all agreements (i) between TPI, on one hand, and any of the Contributed Subsidiaries, on the other hand, or (ii) between TPI, on one hand, and any of TPI's Affiliates, on the other hand, to the extent such agreements Relate to the Containerboard Business. Without limiting the generality of the foregoing, all intercompany loans and Non-Trade accounts receivable and Non-Trade accounts payable between TPI, and any of its Affiliates, on one hand, and any of the Contributed Subsidiaries, on the other hand, shall be eliminated via dividend or capital contribution. 5.10 RECORDS AND RETENTION AND ACCESS. Newco shall keep and preserve in an organized and retrievable manner the Books and Records for at least seven years from the Closing Date. Newco shall neither dispose of nor destroy such Books and Records without first offering to turn over possession thereof to TPI by written notice to TPI at least thirty (30) days prior to the proposed date of such disposition or destruction. While such Books and Records remain in existence, each party shall allow the other party, its representatives, attorneys and accountants, if accompanied by the party's tax representatives, accountants or attorneys, at the requesting party's expense, access to the Books and Records upon reasonable request and advance notice and during normal business hours for the purpose of interviewing, examining and copying in connection with such parties' preparation of financial. -44- 50 5.11 INSURANCE. (a) TPI shall use commercially reasonable efforts to assign to Newco, to the fullest extent, all of the benefits and rights under any insurance policies held by TPI and/or any of its Affiliates with respect to any Losses arising out of, related to or in connection with the Contributed Assets, the Assumed Liabilities and the Containerboard Business with respect to events occurring prior to the Closing Date. Newco shall have the right to such benefits and rights only to the extent actually paid or payable, and exclusive of any deductibles (including pass through deductibles for which TPI or any Affiliate is required to reimburse the insurer). To the extent such assignment is not permitted, TPI shall use commercially reasonable efforts on Newco's behalf to obtain such proceeds or benefits for Newco, or otherwise to provide Newco with the benefit equivalent to that which would have been available had such assignment been permitted. (b) TPI shall cooperate with Newco in obtaining insurance policies for the Containerboard Business to be in effect from and after Closing. Notwithstanding such assistance, all decisions with respect to such policies shall be made solely by Newco, and TPI shall not have any liability, whether to Newco or to any other Person, whether as an advisor, broker or otherwise, under any other theory, in connection with providing such assistance and cooperation. TPI makes no assurances whatsoever with respect to such insurance coverage, including the availability or price thereof. 5.12 NONCOMPETITION. From and after the Closing: (a) Noncompetition. In consideration of the mutual covenants provided for herein, during the period beginning on the Closing Date and ending on the fifth anniversary of the Closing Date (the "Noncompete Period"), neither TPI nor any of its Affiliates shall (i) sell containerboard or corrugated products (other than the sale of folding carton and honeycomb paperboard-type products), or otherwise engage in the business of the Containerboard Business (as conducted as of Closing), anywhere within the United States, or (ii) induce or attempt to induce any customer or other business relation of Newco or any of its Affiliates to terminate such relationship with Newco; provided that TPI shall not deemed to be competing in violation of this Section 5.12 by virtue of its or their (x) ownership of less than 5% of the outstanding stock of any publicly-traded corporation, (y) acquisition of any Person (whether by asset purchase, stock purchase, merger or otherwise) engaged in the sale of containerboard or corrugated products if such sales are not such Person's primary business and such sales are less than $100 million per year; and (z) sales of goods or services other than sales of goods or services made in the Containerboard Business as of the Closing Date (e.g., sales of plastic, foam, molded fiber, folding carton, honeycomb paperboard-type products and other products not sold by the Containerboard Business as of the Closing Date). This Section 5.12 shall not apply to any entity which might acquire TPI, or any Affiliate of TPI, or any assets or division of TPI, subject to the terms of the Stockholders Agreement. (b) Severability. The parties hereto agree that the covenant set forth in Section 5.12(a) is reasonable with respect to its duration, geographical area and scope. If the final judgment of a court of competent jurisdiction declares that any term or provision of Section 5.12(a) is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration -45- 51 or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. (c) Remedy for Breach. TPI, PCA and Newco acknowledge and agree that in the event of a breach of any of the provisions of this Section 5.12, monetary damages shall not constitute a sufficient remedy. Consequently, in the event of any such breach, PCA, Newco and/or their respective successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violation of the provision hereof. 5.13 EXCLUSIVITY. TPI and Tenneco will not, and will not permit or cause their respective officers, directors, agents and Affiliates to, discuss a possible sale or other disposition of all or any part of the assets of the Containerboard Business other than the sale of Inventory in the ordinary course of business or other sales or dispositions permitted by this Agreement (whether by merger, reorganization, recapitalization or otherwise) with any party other than PCA and its Affiliates (an "Acquisition Proposal"), or provide any information to any other party regarding the Containerboard Business other than information which is traditionally provided in the regular course of its business operations to third parties where TPI or Tenneco and its officers, directors, agents and Affiliates have no reason to believe that such information may be utilized to evaluate a possible sale or other disposition of the Containerboard Business. TPI and its officers, directors and Affiliates (i) do not have any agreement, arrangement or understanding with any third party with respect to any Acquisition Proposal (other than confidentiality agreements), (ii) will cease and cause to be terminated any and all discussions with third parties regarding any Acquisition Proposal and (iii) will promptly notify PCA if any Acquisition Proposal, or any inquiry or contact with any Person or entity with respect thereto, is made. 5.14 DELIVERY OF MOST RECENT YEAR END STATEMENT AND THE STUB PERIOD STATEMENTS AND REGULATION S-X FINANCIAL STATEMENTS. As soon as practicable, but in any event no later than March 31, 1999 TPI will deliver to PCA a copy of the Most Recent Year End Statement, which statements shall be attached as part of Schedule 3.6. Prior to the Closing, TPI shall furnish or shall cause TPI's independent accountants to furnish audited financial statements for the Containerboard Business for the years ended December 31, 1996, 1997 and 1998 in a form meeting the requirements of Regulation S-X of the Securities Act of 1933, as amended ("Regulation S-X"). In addition, prior to the Closing, or as soon as practicable thereafter in the case of (iii) below, TPI shall provide to Newco: (i) unaudited selected financial data as of and for the years ended December 31, 1994 and 1995 (as described in Regulation S-K of the Securities Act of 1933, as amended); (ii) unaudited condensed combined statements of assets, liabilities and interdivision account as of March 31, 1998, June 30, 1998, and September 30, 1998, and the related unaudited condensed combined statements of revenues, expenses and interdivision account and cash flows for the three months ended March 31, 1998, -46- 52 the three and six months ended June 30, 1998, and the three and nine months ended September 30, 1998; and (iii) in the event the Closing Date is later than March 31, 1999, unaudited condensed combined statements of assets, liabilities and interdivision account and the related unaudited condensed combined statements of revenues, expenses and interdivision account and cash flows for any interim periods as are required by Regulation S-X. The financial statements and financial data in (i) through (iii) are collectively known as the "Regulation S-X Financial Statements." The Regulation S-X Financial Statements will be prepared in accordance with GAAP and in a form meeting the requirements of Regulation S-X for Newco's or its Subsidiaries' registration statement and any amendments thereto in connection with the New Financing Arrangements. 5.15 CONSENT OF TPI AUDITORS. TPI shall use its commercially reasonable efforts to obtain prior to the Closing the written agreement (the "Auditor Consent Letter") of Arthur Anderson LLP ("AA") to permit the use of the Audited Financial Statements and any applicable Stub Period Financial Statements (a) in connection with Newco's offerings of securities as contemplated by the Commitment Letters, and (b) subject to AA's normal procedures, in other private or public offerings of securities as may be reasonably requested by Newco. In addition, TPI will use commercially reasonable efforts to cause AA to provide a comfort letter in accordance with SAS 72 for any such offering. 5.16 COVENANT REGARDING CAMPBELL ROAD PROPERTY. Prior to the Closing, TPI shall permit PCA and its representatives to have full access, in accordance with Section 5.1 hereof, to the Campbell Road Property for the purposes of conducting such due diligence review of such property as PCA reasonably deems appropriate. If, based upon such review, PCA identifies any existing environmental conditions the reasonable costs of addressing which could reasonably be expected to exceed $1,000,000 within five years from the Closing Date, PCA may, in its sole discretion, elect to instruct TPI to retain the Campbell Road Property, in which case, the Campbell Road Property shall constitute Retained Real Property rather than Owned Real Property for purposes hereof and TPI shall be deemed to have consented to the appropriate revisions to the Schedules and any other necessary amendments to this Agreement to reflect such election. 5.17 POST CLOSING SALES OF MANAGEMENT STOCK. If (i) TPI has delivered PCA a Dilution Notice in accordance with the terms hereof and (ii) any members of management purchase Management Stock in the 120-day period following the Closing Date, then either (x) TPI shall sell shares of its Common Stock to such members of management, on the same terms as Newco would sell such shares, provided that such sales by TPI would not violate any state and federal securities laws and are in compliance with and pursuant to an exemption from registration under all state and federal securities laws, or (y) in the event that such sales by TPI cannot be implemented due to such restrictions in the foregoing clause (x), Newco shall sell such shares of Common Stock to such members of Management, and shall simultaneously redeem from TPI one share of Common Stock for each share sold to such Persons, at a redemption price per share equal to the per share price paid by the Persons purchasing such Management Stock (provided such amount is equal to the price per share paid for Common Stock purchased by PCA at Closing hereunder), provided such sales and redemptions are permitted under the -47- 53 New Financing Arrangements. Any shares sold by TPI under this Section 5.17 shall not be subject to, or entitle the holder to any of the benefits of, the Stockholders Agreement or the Registration Rights Agreement. 5.18 CERTAIN LITIGATION AND CLAIMS. TPI shall indemnify Newco if and to the extent any Losses for the following matters exceeds the following amounts:
Matter No. 3.A on Schedule 3.7: $350,000 Matter No. 1.K on Schedule 3.7: $150,000 Matter No. 2.F on Schedule 3.7: $250,000
Newco shall use its commercially reasonable efforts to settle or otherwise resolve such matters, in accordance with Newco's reasonable business judgment, for the least amount practical. Upon request, Newco will inform TPI as to the status of such matters. In the event Newco proposes a definitive settlement, for which a settlement agreement has been agreed to by all of the other parties thereto, that TPI does not approve, Newco may pay TPI the amount of such settlement (up to the aforesaid limits), and TPI shall be responsible for, and indemnify Newco from and against, all Losses in connection with such matters 5.19 ACC. (a) The parties acknowledge that the shares of ACC held by TPI are subject to the terms and conditions set forth in that certain Subscription and Shareholders Agreement dated as of August 21, 1989, between Larry E. Homan ("Homan") and TPI (the "ACC Agreement"), a true and complete copy of which has been previously delivered to PCA. (b) Within 30 days from the date hereof, Newco shall instruct TPI to (i) seek Homan's consent to the transfer of the ACC shares to Newco without triggering the provisions of Section 5.1 or 5.2 of the ACC Agreement, (ii) deliver an Offering Notice (as defined in the ACC Agreement) to Homan under Section 5.1 of the ACC Agreement with respect to the proposed transfer of the ACC shares to Newco, at a price to be reasonably determined (based upon estimated fair market value) by TPI and Newco, granting Homan a right of first refusal to purchase the shares of ACC owned by TPI at such price on the terms set forth in Section 5.1 of the ACC Agreement, or (iii) deliver a Notice of Purchase (as defined in the ACC Agreement) to Homan under Section 5.2 of the ACC Agreement, at a price determined by Newco, granting Homan the right to purchase TPI's shares of ACC at such price, and requiring TPI to purchase Homan's shares at such price if Homan does not elect to purchase TPI's shares. (c) If Homan consents to the transfer of the ACC shares to Newco, or if an Offering Notice is given pursuant to Section 5.19(b)(ii) and Homan does not elect to purchase TPI's shares of ACC, such shares shall be contributed to Newco as part of the Contributed Assets. If an Offering Notice is given pursuant to Section 5.19(b)(ii) or a Notice of Purchase is given pursuant to Section 5.19(b)(iii) and Homan -48- 54 elects to purchase TPI's shares of ACC, TPI shall sell such shares to Homan and Newco shall receive the proceeds thereof. If a Notice of Purchase is given pursuant to Section 5.19(b)(iii) and Homan does not elect to purchase TPI's shares of ACC, Newco shall purchase Homan's shares of ACC, and TPI's shares of ACC shall be contributed to Newco as part of the Contributed Assets. (d) In no event shall the Cash Contribution, the Cash Distribution, or the stock issuances contemplated by this Agreement be effected by the disposition or transfer of the ACC shares. 5.20 WRITE DOWN. Prior to Closing, TPI will write down the Contributed Assets to fair market value based on the value of the consideration received by TPI pursuant to this Contribution Agreement unless prohibited by GAAP. The parties agree that 100% of the Common Stock of Newco will have a fair market value of $430 million immediately after the transactions contemplated by this Agreement. 5.21 NEWCO RIGHT TO ASSUME CERTAIN CONTRACTS. Newco shall have the right to assume any Contract not included in the Assumed Liabilities by reason of the exclusion in Section 1.1(j)(i) thereof. Newco must assume or reject such Contract within 30 days after discovery or notice of such Contract. If Newco assumes such Contract, such Contract shall be included in the Contributed Assets. Any such assumption must be for all benefits and obligations under the Contract arising from and after the date of assumption, provided that, notwithstanding such assumption, TPI shall be liable for performance of all obligations incurred prior to the date of assumption, and shall indemnify Newco against any and all Losses attributable to such Contract arising or based on event occurring prior to the date on which Newco elects to assume such Contract. ARTICLE VI CONDITIONS TO CLOSING 6.1 CONDITIONS TO THE OBLIGATIONS OF PCA AND TPI. The obligations of the parties hereto to effect the Closing and otherwise under Article II hereof are subject to the satisfaction (or waiver by both PCA and TPI) prior to the Closing of the following conditions: (a) HSR ACT. All filings under the HSR Act shall have been made and any required waiting period under such laws (including any extensions thereof obtained by request or other action of any governmental authority) applicable to the transactions contemplated hereby shall have expired or been earlier terminated. (b) NO INJUNCTIONS. No court or governmental authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, non-appealable judgment, decree, injunction or other order which is in effect on the Closing Date and prohibits the consummation of the Closing. -49- 55 6.2 CONDITIONS TO THE OBLIGATIONS OF PCA. The obligations of PCA to effect the Closing and otherwise under Article II hereof are subject to the satisfaction (or waiver by PCA) prior to the Closing, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of TPI contained herein shall have been true and correct in all material respects when made and shall be true and correct in all respects as of the Closing, as if made as of the Closing (except that representations and warranties that are made as of a specific date need be true in all material respects only as of such date), except to the extent the failure of any such representations or warranties to be true and correct in all respects could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and PCA shall have received a certificate to such effect dated the Closing Date and executed by a duly authorized officer of TPI. (b) COVENANTS. The covenants and agreements of TPI to be performed on or prior to the Closing shall have been duly performed in all material respects, and PCA shall have received a certificate to such effect dated the Closing Date and executed by a duly authorized officer of TPI. (c) MOST RECENT YEAR END STATEMENT. TPI shall have delivered the Most Recent Year End Statement to PCA prepared and presented in accordance with Sections 3.6 and 5.14 and on a consistent basis with the audited financial statements for the year ended December 31, 1997. The Most Recent Year End Statement shall demonstrate Adjusted EBITDA, as described in this Section 6.2(c), of at least $309.8 million. Adjusted EBITDA is defined as operating profit adjusted for the following items (if reflected in Most Recent Year End Statement): plus (i) interest expense, plus (ii) depreciation, depletion and amortization expenses, plus (iii) lease expense related to leases terminated as a result of the transaction, minus (iv) amortization of deferred gain on refinanced leases included in operating profit, plus (v) the amount of corporate allocations minus management's estimate of total divisional and corporate overhead costs ($69.2 million) plus divisional overhead costs, plus (vi) charge related to the 1998 restructuring included in operating profit, and plus (vii) rebates TPI or its Affiliates included in operating profit. An example of the foregoing calculation is set forth on Schedule 6.2(c). (d) NEW FINANCING ARRANGEMENTS; NO LIENS OR INDEBTEDNESS. PCA shall have obtained, on behalf of TPI for assignment to and assumption by Newco at Closing, the New Financing Arrangements under which TPI is to be the initial borrower, and shall have obtained on behalf of Newco all other New Financing Arrangements, in each case as described in the Commitment Letters or otherwise on a basis reasonably satisfactory to PCA and TPI (as provided in Section 5.3(b)), and all conditions to funding under the New Financing Arrangements shall have been satisfied or waived by requisite lenders thereunder. Each of the Contributed Assets shall be free and clear of all Encumbrances other than Permitted Encumbrances, and the Containerboard Business shall not have or be liable for any indebtedness (meaning, for purposes hereof, any indebtedness for borrowed money or any other obligation that is fixed as to amount or certainty), or obligation giving rise to any lien on any of the -50- 56 Contributed Assets (other that the Permitted Encumbrances) other than the Assumed Indebtedness. The Purchased Property and all other Contributed Assets shall be free and clear of all Encumbrances with respect to Existing Financing Arrangements. (e) NO MATERIAL ADVERSE CHANGE. Since the date of the Most Recent Statement of Assets and Liabilities, the Containerboard Business shall not have suffered a Material Adverse Change. (f) TPI REQUIRED CONSENTS. TPI shall have obtained and delivered copies to PCA of all Required Consents identified on Schedule 3.3 and any other Consents reasonably indicated by PCA or Newco's lenders in connection with the New Financing Arrangements as required for the continued operation of the Containerboard Business by Newco following Closing in accordance with past practices. (g) SENIOR MANAGEMENT ARRANGEMENTS. Newco shall have entered into an employment arrangement with Mr. Paul T. Stecko on the terms set forth in that certain letter dated January 25, 1999, between PCA and Mr. Stecko, and as of Closing Mr. Stecko shall confirm that he is willing to serve in the capacity and on the terms set forth in such letter. (h) RESIGNATION OF OFFICERS AND DIRECTORS. All officers and directors of the Contributed Subsidiaries shall resign, effective as of the Closing, except as PCA shall otherwise request. (i) CLOSING DOCUMENTS. TPI and Newco shall have executed and delivered to Newco and PCA all of these documents, instruments, agreements and other deliveries described in Sections 2.4(a) and 2.4(c). (j) ESTOPPEL CERTIFICATES. TPI shall have obtained and delivered estoppel certificates with respect to those sites for which estoppel certificates shall have been requested by the lenders in connection with the New Financing Arrangements. (k) LEMELSON SETTLEMENT. Either (i) Newco shall have received from the Lemelson Foundation Partnership, either directly or through TPI, a royalty-free license or sublicense under all patents relating to machine vision, bar coding or flexible manufacturing that either have issued, or that in the future may issue, with Jerome H. Lemelson as a named inventor and which patents are now, or in the future may be owned by, or able to be licensed by, the Lemelson Foundation Partnership (collectively the "Lemelson Patents") and such license or sublicense shall include the right for Newco to make, use, sell and/or lease any and all products, apparatus, methods and services of the Containerboard Business, subject to any additional terms and conditions included in the royalty-free license (or sublicense), or (ii) in the event such a license or sublicense is not obtained by Closing, TPI shall defend indemnify and hold harmless the PCA Indemnified Parties from, against and in respect of any claim of infringement of the Lemelson Patents asserted against any of the PCA Indemnified Parties, directly or indirectly, relating to or arising out of Newco making, using, selling and/or leasing products, apparatus, methods and services of the Containerboard Business; provided TPI's obligations hereunder shall apply only to the extent of the levels of production of the Containerboard Business affected by the Lemelson Patents as of the Closing Date. -51- 57 (l) AUDITOR CONSENT LETTER. TPI shall have obtained and delivered a copy to PCA of the Auditor Consent Letter and related "cold comfort" letter for the financing arrangements contemplated as part of the New Financing Arrangements, each of which shall be in form and substance reasonably satisfactory to PCA. (m) EXISTING FINANCING ARRANGEMENTS; LEASED REAL PROPERTY. TPI shall have delivered to PCA, in form and substance reasonably satisfactory to PCA, evidence that all of the obligations arising under or related to the Existing Financing Arrangements have been paid and satisfied in full and that TPI has obtained a fee simple interest in all of the Purchased Property, free and clear of all Encumbrances other than Permitted Encumbrances, but free and clear of all Encumbrances in connection with the Existing Financing Arrangements. (n) NO SHARED FACILITIES. Except as provided in the Facility Use Agreement and for the Transition Real Property, none of the Owned Real Property or the Leased Real Property or other assets of the Containerboard Business shall be owned, used or occupied in whole or in part by TPI or any of its Affiliates other than in connection with the operation of the Containerboard Business. 6.3 CONDITIONS TO THE OBLIGATIONS OF TPI. The obligations of TPI to effect the Closing and otherwise under Article II hereof are subject to the satisfaction (or waiver by TPI) prior to the Closing of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of PCA contained herein shall have been true and correct in all material respects when made and shall be true and correct in all respects as of the Closing, as if made as of the Closing (except that representations and warranties that are made as of a specific date need be true in all material respects only as of such date), except to the extent the failure of any such representations or warranties to be true and correct in all respects, could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect and TPI shall have received a certificate to such effect dated the Closing Date and executed by a duly authorized officer of PCA. (b) COVENANTS. The covenants and agreements of PCA to be performed on or prior to the Closing shall have been duly performed in all material respects, and TPI shall have received a certificate to such effect dated the Closing Date and executed by a duly authorized officer of PCA. (c) NEW FINANCING ARRANGEMENTS. PCA shall have obtained on behalf of TPI, for assignment to and assumption by Newco at Closing, the New Financing Arrangements under which TPI is to be the initial borrower and all conditions to funding such New Financing Arrangements shall have been satisfied or waived. PCA shall have obtained on -52- 58 behalf of Newco all other New Financing Arrangements and all conditions to funding under such New Financing Arrangements shall have been satisfied or waived. (d) MANAGEMENT INCENTIVE PLAN. Any stock option, management incentive, stock appreciation, phantom stock, or other similar plan established for Newco's management as of the Closing whereby such persons receive, or receive options or rights to acquire, any equity in Newco or equity-based compensation shall provide that the maximum amount of equity or equity equivalents (such as stock appreciation rights or phantom stock) that may be earned, acquired, paid or distributed under such plan, together with Management Stock issued at the Closing or within 120 days following Closing, shall not exceed 9.8% of the outstanding equity (in a fully diluted basis) of Newco. (e) CLOSING DOCUMENTS. PCA and Newco shall have executed and delivered to TPI and Newco, all of those documents, instruments, agreements and other deliveries described in Section 2.4(b) and Section 2.4(i). ARTICLE VII SURVIVAL; INDEMNIFICATION 7.1 SURVIVAL. The representations and warranties contained in this Agreement shall survive the Closing (regardless of any investigation, inquiry or examination made by or on behalf of, or any knowledge of any party hereto or the acceptance of any party or on its behalf of a certificate and opinion) for the respective periods (each, a "Survival Period") set forth in this Section 7.1. All of the representations and warranties of TPI contained in this Agreement and all claims and causes of action with respect thereto shall terminate upon expiration of the 18 month period commencing on the Closing Date, except that (a) the representations and warranties set forth in Section 3.8 shall survive until the expiration of the applicable statute of limitation (including any extension thereof), (b) the representations and warranties set forth in Sections 3.1-3.5, 3.16(a)-(c), 3.17, and 4.1-4.6 shall have no expiration date and (c) the representations and warranty set forth in Section 3.19 shall survive only until Closing. Any claim for indemnification for breach of a representation and warranty must be made during the applicable Survival Period. In the event notice of any claim for indemnification for a breach of a representation or warranty is given (within the meaning of Section 10.1) within the applicable Survival Period, an Indemnifying Party's obligations with respect to such indemnification claim shall survive until such time as such claim is finally resolved. 7.2 INDEMNIFICATION BY PCA AND NEWCO. (a) PCA shall indemnify, defend and hold harmless TPI, its Affiliates and, if applicable, their respective directors, officers, shareholders, partners, members, attorneys, accountants, agents and employees and their heirs, successors and assigns (the "TPI Indemnified Parties") from, against and in respect of any damages, claims, losses, charges, actions, suits, proceedings, deficiencies, Taxes, interest, penalties, and reasonable costs and expenses (including reasonable attorneys' fees, removal costs, remediation costs, closure costs, fines, -53- 59 penalties and expenses of investigation and ongoing monitoring) (collectively, the "Losses") imposed on, sustained, incurred or suffered by or asserted against any of the TPI Indemnified Parties, directly or indirectly, relating to or arising out of (i) subject to Section 7.2(c), any breach of any representation or warranty made by PCA contained in this Agreement, and (ii) the breach of any covenant or agreement of PCA contained in this Agreement. (b) Newco shall indemnify, defend and hold harmless the TPI Indemnified Parties and the PCA Indemnified Parties from, against and in respect of any Losses imposed on, sustained, incurred or suffered by or asserted against any of the TPI Indemnified Parties or the PCA Indemnified Parties, directly or indirectly, relating to or arising out of (i) the breach of any covenant or agreement of Newco contained in this Agreement, and (ii) the Assumed Liabilities; provided that Newco shall have no indemnification obligations hereunder in respect of Losses incurred or suffered by a Person solely in such Person's capacity as an equity holder or a debt holder (such as a diminution of value of such equity or debt) of Newco. (c) PCA shall not be liable to the TPI Indemnified Parties for any Losses with respect to the matters contained in Section 7.2(a)(i) except to the extent (and then only to the extent) the Losses therefrom exceed an aggregate amount equal to $12,500,000 (the "Deductible"), and then only for all such Losses in excess thereof up to an aggregate amount equal to $150,000,000 (the "Cap"); provided that Losses from breaches of the representations and warranties in Sections 4.1-4.6 shall not be subject to the Cap and the Deductible. (d) TPI acknowledges that this Article VII constitutes TPI's sole remedy against PCA or Newco with respect to any of the matters referred to herein other than with respect to claims based on fraud, including any Losses or liability under any Environmental Law or with respect to any Hazardous Substances, and expressly waives any other rights or causes of action, including under any Environmental Law or with respect to any claim involving the presence of or exposure to any Hazardous Substances. 7.3 INDEMNIFICATION BY TPI. (a) TPI shall indemnify, defend and hold harmless Newco, PCA, their Affiliates and, if applicable, their respective directors, officers, shareholders, partners, members, lenders, attorneys, accountants, agents and employees and their heirs, successors and assigns (the "PCA Indemnified Parties" and, collectively with the TPI Indemnified Parties, the "Indemnified Parties") from, against and in respect and to the extent of any Losses imposed on, sustained, incurred or suffered by or asserted against each of the PCA Indemnified Parties, directly or indirectly, relating to or arising out of (i) subject to Section 7.3(b), any breach of any representation or warranty made by TPI contained in this Agreement; (ii) the Retained Liabilities; -54- 60 (iii) the breach of any covenant or agreement of TPI contained in this Agreement; (iv) provided such claim is made during the 18-month period commencing on the Closing Date, any liabilities from any Losses arising from, related to or incurred in connection with any state of facts or conditions or transactions (or series of facts, conditions or transactions) existing at or prior to the Closing Related to the Containerboard Business, other than (A) the Assumed Indebtedness, (B) the liabilities reflected on the Final Working Capital Statement, (C) liabilities and obligations disclosed pursuant to TPI's representations or warranties in this Agreement or in the Disclosure Memorandum (none of which relates to any liability resulting from a breach of contract, breach of warranty, tort, infringement claim or lawsuit), (D) matters arising from or in connection with the matters disclosed on Schedule 3.7 or Schedule 3.11, and (E) other liabilities incurred in the ordinary course of business (none of which is or relates to any liability resulting from a breach of contract, breach of warranty, tort, infringement claim or lawsuit); provided, however, that if a liability for a matter which for indemnification is sought under this clause (iv) would also constitute a breach of a representation or warranty of TPI in Article III hereof (other than Section 3.19), TPI's sole obligation with respect to such liability, if any, shall be determined pursuant to Section 7.3(a)(i) hereof and not this Section 7.3(a)(iv), and provided further that TPI shall not have any liability with respect to a matter that is the subject of a representation and warranty hereunder but which was not required to be disclosed hereunder or in the Disclosure Memorandum due to the specific thresholds or exclusions included in such representation and warranty; and (v) any liabilities arising with respect to the matters described in Section 6.2(k)(ii). Newco and PCA acknowledge that Section 5.12(c), Section 5.18, and this Article VII constitute Newco's and PCA's sole remedy with respect to any of the covered by this Article VII, other than with respect to claims based on fraud, including any Losses or liability under any Environmental Law or with respect to any Hazardous Substances and expressly waives any other rights or causes of action, including under any Environmental Law or with respect to any claim involving the presence of or exposure to any Hazardous Substances. (b) TPI shall not be liable to the PCA Indemnified Parties for any Losses with respect to the matters contained in Section 7.3(a)(i) except to the extent (and then only to the extent) the Losses therefrom exceed an aggregate amount equal to the Deductible, and then only for all such Losses in excess thereof up to an aggregate amount equal to the Cap; provided that Losses from breaches of the representations and warranties in Sections 3.1-3.5, 3.8, 3.16(a)-(c) and 3.17 shall not be subject to the Cap or the Deductible. TPI shall not be liable to the PCA Indemnified Parties for any Losses for which and to the extent (and only to the extent) a reserve is specifically provided on the Final Working Capital Statement that was -55- 61 not specifically provided in the Most Recent Statement of Assets or Liabilities, or to the extent of any increase in any such reserve on the Final Working Capital Statement from the amount of such reserve on the Most Recent Statement of Assets and Liabilities. In order to avoid double counting, the portion of any Loss incurred or sustained by Newco and PCA, respectively, will be determined after giving effect to indemnification payments (if any) made in respect of such Loss to the other Person. In the event of a breach of the representation contained in Section 3.8(h), the amount of any Loss shall be determined in the same manner in which Tax Benefits are determined under Section 7.6. 7.4 INDEMNIFICATION PROCEDURES. (a) Any Indemnified Person making a claim for indemnification pursuant to Section 7.2 or 7.3 above must give the party from whom indemnification is sought (an "Indemnifying Party") written notice of such claim describing such claim with reasonable particularity and the nature and amount of such Loss to the extent that the nature and amount of such Loss is known at such time) (an "Indemnification Claim Notice") promptly after the Indemnified Party receives any written notice of any action, lawsuit, proceeding, investigation or other claim (a "Proceeding") against or involving the Indemnified Party by a Governmental Authority or other third party or otherwise discovers the liability, obligations or facts giving rise to such claim for indemnification; provided that the failure to notify or delay in notifying an Indemnifying Party will not relieve the Indemnifying Party of its obligations pursuant to Section 7.2 or 7.3, as applicable, except to the extent that (and only to the extent that) such failure shall have caused the damages for which the Indemnifying Party is obligated to be greater than such damages would have been had the Indemnified Party given the Indemnifying Party prompt notice hereunder. (b) The Indemnifying Party shall have 30 days from the personal delivery or mailing of the Indemnification Claim Notice (the "Notice Period") to notify the Indemnified Party (i) whether or not the Indemnifying Party disputes the liability of the Indemnifying Party to the Indemnified Party hereunder with respect to such claim or demand and (ii) whether or not it desires to defend the Indemnified Party against such claim or demand. (c) If (i) the Indemnifying Party agrees in writing to be, responsible for the full amount of such Loss, and (ii) the claim for indemnification does not relate to a matter (A) that, if determined adversely, could reasonably be expected to expose the Indemnified Party to criminal prosecution or penalties, (B) that, if determined adversely, could reasonably be expected to result in the imposition of a consent order, injunction or decree which would restrict the activity or conduct of the Indemnified Party or any Affiliate thereof, or (C) for which the Indemnified Party shall have reasonably concluded, in good faith, after consultation with the Indemnifying Party, that such representation is likely to result in a conflict of interest or materially jeopardize the viability of such defense, then the Indemnifying Party shall have the right to defend the Indemnified Party by appropriate proceedings and shall have the sole power to direct and control such defense. If any Indemnified Party desires to participate in any such defense, it may do so at its sole cost and expense. The Indemnifying Party in no event shall have -56- 62 any right to control (as opposed to participate in pursuant to Section 7.4(d) hereof) the defense of any claim and shall pay the expenses of the Indemnified Party's defense of such claim if: (x) the Indemnifying Party does not agree in writing to be responsible for the full amount of any claim; (y) the claim for indemnification Relates to a matter (A) that, if determined adversely, could reasonably be expected to expose the Indemnified Party to criminal prosecution or penalties, (B) that, if determined adversely, could reasonably be expected to result in the imposition of a consent order, injunction or decree which would restrict the activity or conduct of the Indemnified Party or any Affiliate thereof, (C) for which the Indemnified party shall have reasonably concluded, in good faith, after consultation with the Indemnifying Party, that such representations is likely to result in a conflict of interest or materially jeopardize the viability of such defense; or (z) a court determines that the Indemnified Party is not vigorously defending the claim. (d) If the claim relates to a matter for which both the Indemnifying Party and any Indemnified Party could be liable or responsible hereunder, such as a Loss for which both parties could be partially liable due to the Cap and Deductible, the Indemnifying Party and the Indemnified Parties shall cooperate in good faith in the defense of such action. No party shall settle any claim without the prior consent of the other party (which consent shall not be unreasonably withheld); provided, however, that an Indemnified Party shall not be required to consent to any settlement if the proposed settlement (i) does not provide for a full release of all claims against such Indemnified Party, (ii) is on a basis which would result in the imposition of a consent order, injunction or decree or any other restriction on the activity or conduct of such Indemnified Party, or (iii) is on a basis which could, in such Indemnified Party's judgment, expose such Indemnified Party to criminal liability or required an admission of wrongdoing by such Indemnified Party; provided further that, the foregoing notwithstanding, an Indemnified Party may settle or compromise any claim without the prior consent of the Indemnifying Party if under Section 7.3(c) the Indemnifying Party had no right to control the defense of such claim. If an Indemnified Party does not consent to a definitive settlement proposed by the Indemnifying Party (with respect to which a settlement agreement has been agreed to by all parties other than the Indemnified Party) which settlement satisfies the foregoing clauses (i) through (iii) or if the Indemnifying Party does not consent to a settlement proposed by an Indemnified Party, then the party declining such settlement shall thereafter have full control of the defense of such claim, and the maximum liability of the party that proposed such settlement shall be determined as though such matter had settled on the terms so proposed, and, if applicable, the amount of the proposed settlement, together with all legal costs and expenses incurred in connection with such matter through and including the proposed settlement date, shall be deemed the amount of the Loss of the Indemnified Party for purposes of determining whether the Cap and Deductible have been met. If both parties agree to the settlement, the relative liabilities of the parties for such Losses shall be determined as provided in the other provisions of this Article VII. -57- 63 (e) All costs and expenses incurred by the Indemnifying Party in defending claim or demand under Section 7.4(c), and all costs and expenses incurred by the Indemnified Party in defending claim or demand which the Indemnifying Party has elected not to defend (including by virtue of its failure to give timely notice to the Indemnified Party) or is not permitted to defend under Section 7.4(c) shall be a liability of, and shall be paid by, the Indemnifying Party. (f) To the extent the Indemnifying Party shall direct, control or participate in the defense or settlement of any third-party claim or demand, the Indemnified Party will give the Indemnifying Party and its counsel access to, during normal business hours, the relevant business records and other documents, and shall permit them to consult with the employees and counsel of the Indemnified Party. The Indemnifying Party and Indemnified Parties shall use their best efforts in the defense of all such claims. 7.5 ACKNOWLEDGMENT REGARDING ENVIRONMENTAL LIABILITIES. PCA and TPI acknowledge the allocation of relative responsibility for liabilities under Environmental Laws under this Agreement is a material term of this Agreement, and that (i) they have taken such matters into consideration in determining the financial and other terms of this transaction, and (ii) they understand that Newco is accepting all risks resulting or arising in any way from any known or unknown liabilities in connection with such matters (other than the Retained Environmental Liabilities or liabilities as to which indemnification is provided under Section 7.3(a)) and TPI is retaining all risks relating the Retained Environmental Liabilities and indemnifying Newco for certain Losses relating to environmental matters under Section 7.3(a), and (iii) they acknowledge that neither shall have any claim of any nature against the other or the other's Affiliates in connection with any matters relating to known or unknown soil or groundwater contamination or any other claims under any Environmental Laws, other than as set forth herein. 7.6 COMPUTATION OF LOSSES SUBJECT TO INDEMNIFICATION. The amount of any Loss for which indemnification is provided under this Article VII shall be computed net of any insurance proceeds actually received by the Indemnified Party in connection with such Loss. Indemnification for any Loss shall be determined and paid without reduction for any Tax Benefits not yet realized by the Indemnified Party. The Indemnified Party will pay to the Indemnifying Party the amount of any Tax Benefits attributable to the Loss actually realized by the Indemnified Party promptly after such Tax Benefits are realized; provided, however, that in the event such Tax Benefits are realized prior to the indemnification payment hereunder, such indemnification payment shall be reduced by Tax Benefits previously realized in lieu of a separate payment to the Indemnifying Party. The amount of any Tax Benefit shall be determined (i) by comparing the liability of the Indemnified Party for Taxes, determined without the Loss, to the liability of the Indemnified Party for Taxes, taking into account the Loss and (ii) by treating any items attributable to the Loss as the last items claimed by the Indemnified Party in any given Tax Period. The amount of any Loss for which indemnification is provided under this Article VII shall exclude consequential and punitive damages and lost profits by an Indemnified Party, provided that any consequential or punitive damages or lost profits of a third party for which an Indemnified Party is liable shall be included in computing such Indemnified Party's Loss. -58- 64 7.7 CHARACTERIZATION OF INDEMNIFICATION PAYMENTS. All amounts paid by PCA, Newco, or TPI, as the case may be, under Article II, Article V, this Article VII, or Article VIII shall be treated as adjustments to the amount contributed to Newco by PCA or TPI, pursuant to Section 2.4(a) or (b) hereof, as appropriate for all Tax purposes. ARTICLE VIII TAX COVENANTS 8.1 LIABILITY FOR TAXES. (a) TPI shall be liable for, and shall indemnify, defend and hold Newco harmless from and against, any and all Taxes imposed on or with respect to the Contributed Subsidiaries, or their respective assets, operations or activities for any Pre-Closing Period, except to the extent that any such Taxes are a Current Liability and are reflected on the Final Working Capital Statement. (b) Newco shall be liable for, and shall indemnify, defend and hold TPI harmless from and against, any and all Taxes imposed on or with respect to the Contributed Subsidiaries or their respective operations, ownership, assets or activities for any Post-Closing Period. (c) Tax items shall be apportioned between Pre-Closing Periods and Post-Closing Periods based on a closing of the books and records of the relevant entity or entities as of the Closing Date (provided that (i) depreciation, amortization and depletion for any Straddle Period shall be apportioned on a daily pro rata basis and (ii) any Taxes imposed on a periodic basis (including real property Taxes, but not including Taxes based on income and receipts) for any Straddle Period shall be apportioned on a daily pro rata basis). Notwithstanding anything to the contrary in the preceding sentence, the parties agree that for U.S. federal income Tax purposes, Tax items for any Straddle Period shall be apportioned between Pre-Closing Periods and Post-Closing Periods in accordance with U.S. Treasury Regulation Section 1.1502-76(b), which regulation shall be reasonably interpreted by the parties in a manner intended to achieve the method of apportionment described in the preceding sentence. Neither TPI nor PCA will exercise any option or election (including any election to ratably allocate a Tax year's items under Treasury Regulation Section 1.1502-76(b)(2)(ii)) to allocate Tax items in a manner inconsistent with this section. -59- 65 8.2 PREPARATION OF TAX RETURNS. (a) TPI shall have the right and obligation to timely prepare and file, and cause to be timely prepared and filed, when due, any Tax Return that is required to include the operations, ownership, assets or activities of TPI, with respect to the Contributed Assets, or of any Contributed Subsidiary for Tax Periods ending on or before the Closing Date. TPI shall provide Newco with copies of any such Tax Returns (to the extent that they relate to the Contributed Assets or the Containerboard Business and reasonably may have a material effect on Newco's and its Affiliates' liability for Taxes) at least 30 days prior to the due date (as extended) for filing such Tax Returns. In the event that Newco reasonably determines that any such Tax Return should be modified, Newco shall notify TPI of Newco's proposed modifications no later than 15 days from the date of receipt of such Tax Return. To the extent that TPI disagrees with such modifications, Newco and TPI shall endeavor to agree on the positions to be taken on such return. To the extent that they are unable to do so, a "Big-Five" accounting firm (other than the regular auditor of TPI or Newco) shall be retained to determine the position to be taken, with the fees and expenses of such accounting firm to be borne equally by TPI and Newco. Any such Tax Return which TPI is required to prepare under the terms hereof shall (to the extent such Tax Return relates to the Contributed Assets or the Containerboard Business and reasonably may have a material effect on Newco's or its Affiliates' Tax liability) be prepared in accordance with past Tax accounting practices used with respect to the Tax Returns in question (unless such past practices are no longer permissible under the Applicable Tax Law), and to the extent any item is not covered by such past practices (or such past practices are no longer permissible under the Applicable Tax Law), in accordance with reasonable Tax accounting practices selected by TPI. Newco shall have the right and obligation to timely prepare and file, or cause to be timely prepared and filed, when due, all Tax Returns that are required to include the operations, ownership, assets or activities Related to the Containerboard Business or of any Contributed Subsidiary for any Tax Period ending after the Closing Date (including, solely with respect to the Contributed Subsidiaries, Straddle Period Returns). Newco shall provide TPI with copies of any Straddle Period Tax Returns required to be filed by Newco hereunder at least 30 days prior to the due date (as extended) for filing such Tax Returns. In the event TPI reasonably determines that any Straddle Period Tax Return should be modified, TPI shall notify Newco of TPI's proposed modifications no later than fifteen days from the date of receipt of such Tax Return. To the extent that Newco disagrees with such modifications, Newco and TPI shall endeavor to agree on the positions to be taken on such return. To the extent that they are unable to do so, a "Big Five" accounting firm (other than the regular auditor of TPI or Newco) shall be retained to determine the position to be taken, with the fees and expenses of such accounting firm to be borne equally by TPI and Newco. Any Straddle Period Tax Return which Newco is required to prepare under the terms hereof shall be prepared in accordance with past Tax accounting practices used with respect to the Tax Returns in question (unless such past practices are no longer permissible under the Applicable Tax Law), and to the extent any item is not covered by such past practices (or such past practices are no longer permissible under the Applicable Tax Law), in accordance with reasonable Tax accounting practices selected by Newco. (b) TPI shall prepare and provide to Newco such Tax information as is reasonably requested by Newco with respect to the operations, ownership, assets or activities of TPI, with respect to the Contributed Assets, or of any Contributed Subsidiary for Straddle -60- 66 Periods to the extent such information is relevant to any Tax Return which Newco has the right and obligation hereunder to file. (c) The party not preparing a Tax Return shall pay the party preparing such Tax Return an amount equal to the non-preparing party's share of the Taxes shown on such Tax Return, if any, determined in accordance with the principles of Articles VII and VIII, not later than 2 business days before the filing of such Tax Return. 8.3 AMENDED TAX RETURNS. (a) Any amended Tax Return or claim for Tax refund for any Contributed Subsidiary for any Pre-Closing Period other than a Straddle Period shall be filed, or caused to be filed, only by TPI who shall not be obligated to make (or cause to be made) such filing. TPI shall not, without the prior written consent of Newco (which consent shall not be unreasonably withheld or delayed), make or cause to be made, any such filing, to the extent such filing, if accepted, reasonably might change the Tax liability of Newco or any Affiliate of Newco for any Post-Closing Period. At Newco's request, TPI shall file an amended Tax Return with respect to Taxes accrued on the Final Working Capital Statement, except to the extent TPI reasonably objects. (b) Any amended Tax Return or claim for Tax refund for any Straddle Period shall be filed by the party responsible for filing the original Tax Return hereunder if either Newco or TPI so requests, except that such filing shall not be done without the consent (which shall not be unreasonably withheld or delayed) of Newco (if the request is made by TPI) or of TPI (if the request is made by Newco). (c) Any amended Tax Return or claim for Tax refund for any Post-Closing Period other than a Straddle Period shall be filed, or caused to be filed, only by Newco, who shall not be obligated to make (or cause to be made) such filing. Newco shall not, without the prior written consent of TPI (which consent shall not be unreasonably withheld or delayed) file, or cause to be filed, any such filing to the extent that such filing, if accepted, reasonably might change the Tax liability of TPI or any Affiliates of TPI for any Pre-Closing Period. 8.4 CARRYBACKS AND CARRYFORWARDS. (a) To the extent permitted by Applicable Tax Law, unless TPI, in its sole and absolute discretion, consents, Newco shall not and shall not permit any Contributed Subsidiary to carry back any losses or credits accruing after the Closing Date to any Tax Return of TPI, a Contributed Subsidiary, or any Affiliate of either TPI or a Contributed Subsidiary for any Pre-Closing Period. To the extent permitted by Applicable Tax Law, Newco shall and shall cause each Contributed Subsidiary to make any elections and take all such actions necessary to avoid any such carry back. To the extent that, under Applicable Tax Law, a Contributed Subsidiary is required to carry back any losses or credits accruing after the Closing Date to any Tax Return of TPI or its Affiliates, TPI shall pay to Newco the amount of any Tax Benefit actually realized by TPI and its Affiliates as a result of such carryback promptly after such Tax -61- 67 Benefits are realized. The amount of any Tax Benefit shall be determined (i) by comparing the liability of TPI and its Affiliates for Taxes, determined without the carryback, to the liability of TPI and its Affiliates for Taxes, taking into account the carryback and (ii) by treating the carryback as the last item claimed by TPI and its Affiliates in any given Tax Period. (b) TPI shall not be liable hereunder for any decrease to any net operating loss carry forward or any other Tax attributes available to a Contributed Subsidiary resulting from adjustments to any item of income, deduction, credit, or exclusion on Tax Returns for which TPI is responsible. 8.5 ADDITIONAL TAX MATTERS. (a) As of the Closing Date, TPI shall cause all Tax allocation, Tax sharing, Tax reimbursement and similar arrangements or agreements between TPI and its Affiliates, on the one hand, and any of the Contributed Subsidiaries, on the other, to be extinguished and terminated with respect to such Contributed Subsidiaries and any rights or obligations existing under any such agreement or arrangement to be no longer enforceable. (b) After the Closing Date, Newco will cause appropriate employees of the Contributed Subsidiaries to prepare usual and customary Tax Return packages with respect to the Tax Period beginning January 1, 1999 and ending as of the Closing Date. Newco will use its commercially reasonable efforts to cause such Tax Return packages to be delivered to TPI on or before March 1, 2000, but in any event not later that May 1, 2000. (c) TPI and Newco agree that Newco has acquired substantially all of the property used in the Containerboard Business and that in connection therewith Newco will employ individuals who immediately before the Closing Date were employed in such trade or business by TPI. Accordingly, pursuant to Rev. Proc. 96-60, 1996-2 C.B. 399, provided that TPI makes available to Newco all necessary payroll records for the calendar year that includes the Closing Date, Newco will furnish a Form W-2 to each employee employed by Newco who had been employed by TPI, disclosing all wages and other compensation paid for such calendar year, and Taxes withheld therefrom, and TPI will be relieved of the responsibility to do so. (d) If Newco or any Contributed Subsidiary receives a Tax refund with respect to Taxes of any Contributed Subsidiary attributable to a Pre-Closing Period (other than a Tax refund accrued on the Final Working Capital Statement or a refund of Taxes accrued on the Final Working Capital Statement ) Newco shall pay, within the thirty (30) days following the receipt of such Tax refund, the amount of such Tax refund, net of any Taxes imposed thereon, to TPI. If TPI receives a Tax refund with respect to Taxes of any Contributed Subsidiary attributable to any Post-Closing Period or any Taxes accrued on the Final Working Capital Statement, TPI will pay, within thirty (30) days following the receipt of such Tax refund, the amount of such Tax refund, net of any Taxes imposed thereon, to Newco. In the case of any Tax refund with respect to Taxes of a Contributed Subsidiary attributable to a Straddle Period, the Tax refund shall be apportioned between Pre-Closing Periods and Post-Closing Periods in accordance with the principles of Section 8.1(c) hereof; provided that to the extent -62- 68 any Tax refund for a Straddle Period was accrued on the Final Working Capital Statement, such refund shall be for the account of Newco. The reduction of any Tax refund amount under this Section 8.5(d) by the amount of Taxes imposed on the payor's receipt of such refund, shall be determined in the same manner in which Tax Benefits are determined and paid under Section 7.6. (e) To the extent requested by TPI, Newco agrees that it will timely file all required applications and notices with the appropriate authorities to the extent necessary, under the applicable forest Tax laws, to maintain the current property tax classification of TPI's timberland properties being contributed to Newco under the terms hereof, except to the extent that any such filing would adversely affect Newco. 8.6 TAX CONTROVERSIES; COOPERATION. (a) TPI shall control any audit, dispute, administrative, judicial or other proceeding related to Tax Returns filed for Pre-Closing Periods, and Newco shall control any audit, dispute, administrative, judicial or other proceeding related to Tax Returns filed for Post-Closing Periods and Straddle Periods of any Contributed Subsidiary. Subject to the preceding sentence, in the event an adverse determination may result in each party having responsibility for any amount of Taxes, each party shall be entitled to fully participate in that portion of the proceedings relating to the Taxes with respect to which it may incur liability hereunder. For purposes of this Section 8.6(a), the term "participation" shall include (i) participation in conferences, meetings or proceedings with any Tax Authority, the subject matter of which includes an item for which such party may have liability hereunder, (ii) participation in appearances before any court or tribunal, the subject matter of which includes an item for which a party may have liability hereunder, and (iii) with respect to the matters described in the preceding clauses (i) and (ii), participation in the submission and determination of the content of the documentation, protests, memorandum of fact and law, briefs, and the conduct of oral arguments and presentations. (b) Newco and TPI shall not agree to settle any Tax liability or compromise any claim with respect to Taxes, which settlement or compromise may affect the liability for Taxes (or right to a Tax Benefit) hereunder of the other party, without such other party's consent (which consent shall not be unreasonably withheld or delayed). (c) Newco and TPI shall bear their own expenses incurred in connection with audits and other administrative judicial proceedings relating to Taxes for which such party and its Affiliates are liable. (d) TPI on the one hand, and Newco and the Contributed Subsidiaries, on the other, shall cooperate (and cause their Affiliates to cooperate) with each other and with each other's agents, including accounting firms and legal counsel, in connection with Tax matters relating to the Contributed Assets and the Contributed Subsidiaries, including (i) preparation and filing of Tax Returns, (ii) determining the liability and amount of any Taxes due or the right to and amount of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any -63- 69 administrative or judicial proceeding in respect of Taxes assessed or proposed to be assessed. Such cooperation shall include each party making all information and documents in its possession relating to the Contributed Subsidiaries available to the other party. The parties shall retain all Tax Returns, schedules and work papers, and all material records and other documents relating thereto, until one year after the expiration of the applicable statute of limitations (including, to the extent notified by any party, any extension thereof) of the Tax Period to which such Tax Returns and other documents and information relate. Each of the parties shall also make available to the other party, as reasonably requested and available, personnel (including officers, directors, employees and agents) responsible for preparing, maintaining, and interpreting information and documents relevant to Taxes, and personnel reasonably required as witnesses or for purposes of providing information or documents in connection with any administrative or judicial proceedings relating to Taxes. ARTICLE IX TERMINATION 9.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing: (a) by agreement of PCA and TPI; (b) by either PCA or TPI by giving written notice of such termination to the other party if the Closing shall not have occurred on or prior to June 30, 1999, provided that the terminating party is not in material breach of its obligations under this Agreement; (c) by either PCA or TPI if there shall be in effect any law or regulation that prohibits the consummation of the Closing or if consummation of the Closing would violate any non-appealable final order, decree or judgment of any court or governmental body having competent jurisdiction; (d) by TPI if, as a result of action or inaction by PCA, the Closing shall not have occurred on or prior to the date that is 10 Business Days following the date on which the Closing is required to occur pursuant to Section 2.4; (e) by PCA if, as a result of action or inaction by TPI, the Closing shall not have occurred on or prior to the date that is 10 Business Days following the date on which the Closing is required to occur pursuant to Section 2.4; or (f) by either party, prior to Closing, following a material breach of this Agreement by the other party hereto, upon 10 Business Days' written notice to the breaching party, unless such breach is cured within such 10 Business Day period; provided that the terminating party is not in material breach of its obligations under this Agreement. -64- 70 9.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement in accordance with Section 9.1, this Agreement shall thereafter become void and have no effect, and no party hereto shall have any liability to the other party hereto or their respective Affiliates, directors, officers or employees, except for the obligations of the parties hereto contained in this Section 9.2 and in Sections 10.1, 10.7, 10.8 and 10.11, and except that nothing herein will relieve any party from liability for any breach of this Agreement prior to such termination. Upon such termination, PCA shall (i) return immediately all of the originals or copies of the Books and Records to TPI, (ii) return (or, at TPI's option, destroy) all other copies of any Evaluation Material (as defined in the Confidentiality Agreement) in its possession or in the possession of its Affiliates, directors, officers, employees, agents and attorneys, and (iii) hold, and cause each of said parties to hold, all of such materials and the information contained in the Books and Records or Evaluation Material in confidence subject to the terms of the Confidentiality Agreement. ARTICLE X MISCELLANEOUS 10.1 NOTICES. All notices or other communications hereunder shall be deemed to have been duly given and made if in writing and if served by personal delivery upon the party for whom it is intended, if delivered by registered or certified mail, return receipt requested, or by a national courier service, or if sent by facsimile transmission; provided that the facsimile transmission is promptly confirmed by telephone confirmation thereof, to the Person at the address or facsimile number set forth below, or such other address or facsimile number as may be designated in writing hereafter, in the same manner, by such Person: To PCA: PCA HOLDINGS LLC c/o Madison Dearborn Partners, Inc. Three First National Plaza Suite 3800 Chicago, IL 60602 Telephone: (312) 895-1000 Fax: (312) 895-1056 Attn: Samuel M. Mencoff Justin S. Huscher With a copy to: KIRKLAND & ELLIS 200 East Randolph Drive Chicago, IL 60601 Telephone: (312) 861-2000 Fax: (312) 861-2200 Attn: William S. Kirsch, P.C. -65- 71 To TPI: TENNECO PACKAGING INC. 1900 West Field Court Lake Forest, Illinois 60045 Telephone: (847) 482-2447 Fax: (847) 482-4589 Attn: President With a copy to: TENNECO PACKAGING INC. 1900 West Field Court Lake Forest, Illinois 60045 Telephone: (847) 482-2430 Fax: (847) 482-4589 Attn: General Counsel 10.2 AMENDMENT; WAIVER. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by PCA and TPI, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 10.3 ASSIGNMENT. No party to this Agreement may assign any of its rights or obligations under this Agreement without the prior written consent of the other party hereto (not to be unreasonably withheld), except that (i) a party may collaterally assign its rights and obligations under this Agreement to a lender as security for a loan to Newco or its Subsidiaries, (ii) following Closing, PCA and TPI may assign their rights, but not their obligations, to any Person to whom PCA or TPI may transfer their shares in Newco, and (iii) Newco may assign its rights under this Agreement in connection with any sale of all or any portion of timberland (and tree farms associated with the Mills) including any assets or operations related to or located thereon, to the extent such assigned rights relate to the assets so sold. 10.4 ENTIRE AGREEMENT. This Agreement (including the Preliminary Statements, all Schedules and Exhibits hereto and the Ancillary Agreements) contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters, except for the obligations of the parties under the Confidentiality Agreement and the obligations of Madison Dearborn Partners, Inc., set forth in that certain letter dated January 25, 1999, to Goldman, Sachs & Co., which obligations will remain in full force and effect. 10.5 FULFILLMENT OF OBLIGATIONS. Any obligation of any party to any other party under this Agreement or any of the Ancillary Agreements, which obligation is performed, satisfied or fulfilled by an Affiliate of such party, shall be deemed to have been performed, satisfied or fulfilled by such party. -66- 72 10.6 PARTIES IN INTEREST. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any Person other than PCA, TPI, Newco or their respective successors or permitted assigns, any rights or remedies under or by reason of this Agreement. 10.7 PUBLIC DISCLOSURE. Notwithstanding anything herein to the contrary, except as may be required to comply with the requirements of any applicable Laws and the rules and regulations of each stock exchange upon which the securities of one of the parties (or its Affiliate) is listed, no press release or similar public announcement or communication shall, prior to the Closing, be made or caused to be made concerning the execution or performance of this Agreement unless specifically approved in advance by all parties hereto. 10.8 EXPENSES. Except as otherwise expressly provided in this Agreement, whether or not the transactions contemplated by this Agreement are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the party incurring such expenses. Notwithstanding the foregoing, (a) all expenses of PCA shall be paid by Newco, (b) all legal and accounting fees and expenses of TPI incurred in connection with negotiating the terms of this Agreement and the Ancillary Agreements and otherwise in connection with the transactions contemplated under this Agreement and the Ancillary Agreements (not to exceed $2,000,000) shall be paid by Newco, (c) the 1.5% Commitment Fee with respect to the Bridge Loan pursuant to the Commitment Letters, if such commitment is obtained by Newco pursuant to the direction of TPI, shall be paid by TPI as set forth in Section 5.3(b) hereof, and (d) the MDP Transaction Fee shall be paid by Newco, provided that the aggregate amount of bank fees and expenses (excluding any Commitment Fee with respect to the Bridge Loan) paid by Newco plus the MDP Transaction Fee shall not exceed $90 million. 10.9 SCHEDULES. The disclosure of any matter in any Schedule shall not be deemed to constitute an admission by PCA or TPI or to otherwise imply that any such matter is material for the purposes of this Agreement. 10.10 BULK TRANSFER LAWS. PCA and Newco acknowledge that TPI has not taken, and does not intend to take, any action required to comply with any applicable bulk sale or bulk transfer laws or similar laws; provided that TPI shall indemnify PCA for any Losses arising from such non-compliance. 10.11 GOVERNING LAW; SUBMISSION TO JURISDICTION; SELECTION OF FORUM. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Illinois. Each party hereto agrees that it shall bring any action or proceeding in respect of any claim arising out of or related to this Agreement or the transactions contained in or contemplated by this Agreement, whether in tort or contract or at law or in equity, exclusively in the United States District Court for the Northern District of Illinois or any state court located in Cook County, Illinois (the "Chosen Courts") and (i) irrevocably submits to the exclusive jurisdiction of the Chosen Courts, (ii) waives any objection to laying venue in any such action -67- 73 or proceeding in the Chosen Courts, (iii) waives any objection that the Chosen Courts are an inconvenient forum or do not have jurisdiction over any party hereto, and (iv) agrees that service of process upon such party in any such action or proceeding shall be effective if notice is given in accordance with Section 10.1 of this Agreement. 10.12 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. 10.13 HEADINGS. The heading references herein and the table of contents hereto are for convenience purposes only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 10.14 SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. * * * * * -68- 74 IN WITNESS WHEREOF, the parties have executed this Contribution Agreement as of the date first written above. TENNECO PACKAGING INC. By: /s/ T.R. Tetzlaff ------------------------ Name: Theodore R. Tetzlaff Title: General Counsel PCA HOLDINGS LLC By: /s/ Samuel M. Mencoff ------------------------ Name: Samuel M. Mencoff Title: Managing Director PACKAGING CORPORATION OF AMERICA By: /s/ Samuel M. Mencoff ------------------------ Name: Samuel M. Mencoff Title: Vice President -69- 75 SCHEDULES AND EXHIBITS
SCHEDULES - --------- Schedule PS-1 - Existing Financing Arrangements Schedule PS-2 - Term Sheet for Management Stock Purchases Schedule 1.1(ff) - Contributed Subsidiaries Schedule 1.1(hhh) - TPI Employees with "Knowledge" Schedule 1.1(mmm) - Exceptions to Material Adverse Change or Effect Schedule 1.1(vvv) - Owned Real Property Schedule 1.1(gggg) - Real Estate Leases Schedule 1.1(pppp) - Retained Real Property Schedule 1.1(llll)(iii) - Retained Notes Receivable Schedule 1.1(nnnn)(iii) - Retained Litigation Schedule 1.1(vvvv) - Supply Agreement Pricing Terms Schedule 1.1(ggggg) - Services and Pricing under Transition Services Agreement and Facility Use Agreement Schedule 2.5 - Target Capital Expenditure Schedule 3.1 - TPI Qualifications Schedule 3.3 - TPI Consent and Approvals Schedule 3.6 - Certain Matters Related to Financial Statements Schedule 3.6 - Financing Statements Schedule 3.6(e) - Changes Since 12/31/97 Schedule 3.7 - Litigation and Claims Schedule 3.8 - Taxes Schedule 3.9 - Employee Benefits Schedule 3.10 - Compliance with Laws Schedule 3.11 - Environmental Matters Schedule 3.12 - Intellectual Property Schedule 3.12(e) - Year 2000 language from most recent 10-Q Schedule 3.13 - Labor Matters Schedule 3.14 - Contracts Schedule 3.16(a) - Exceptions to Entire Business Schedule 3.16(b) - Encumbrances Schedule 3.16(c) - Capital Structure of Contributed Subsidiaries Schedule 3.18 - Insurance Schedule 4.7(b) - PCA New Financing Arrangement Commitment Letters Schedule 5.2 - Conduct of Business Schedule 5.3 - Terms of PIK Preferred Schedule 6.2(c) - Adjusted EBITDA
-70- 76 EXHIBITS - -------- Exhibit 1.1(aaa) - Human Resources Agreement Exhibit 2.1A. - Newco Certificate of Incorporation Exhibit 2.1B - Stockholders Agreement Exhibit 2.1C - Registration Rights Agreement 77 ================================================================================ STOCKHOLDERS AGREEMENT BY AND AMONG TENNECO PACKAGING INC., PCA HOLDINGS LLC AND PACKAGING CORPORATION OF AMERICA [CLOSING DATE TO BE INSERTED] ================================================================================ 78 STOCKHOLDERS AGREEMENT THIS STOCKHOLDERS AGREEMENT (this "AGREEMENT") is made and entered into as of the ____ day of __________, 1999, by and among TENNECO PACKAGING INC., a Delaware corporation ("TPI"), PCA HOLDINGS LLC, a Delaware limited liability company ("PCA"), and PACKAGING CORPORATION OF AMERICA, a Delaware corporation ("NEWCO"). RECITALS WHEREAS, TPI, PCA and Newco are parties to that certain Contribution Agreement, dated as of January __, 1999 (the "CONTRIBUTION AGREEMENT"); WHEREAS, pursuant to and subject to the terms and conditions of the Contribution Agreement, each of TPI and PCA will contribute certain assets to Newco or a Subsidiary of Newco in exchange for shares of the common stock, $.01 par value per share (the "COMMON STOCK"), of Newco; WHEREAS, PCA recognizes that TPI has substantial experience and expertise in the ownership, management and operation of the Containerboard Business (as such term and each other capitalized term used but not otherwise defined herein is defined in the Contribution Agreement); WHEREAS, TPI, PCA and Newco desire to enter into this Agreement to set forth certain arrangements with respect to the ownership, operation and management of Newco and its Subsidiaries; and WHEREAS, the execution and delivery of this Agreement is a condition to each of TPI's and PCA's respective obligation to effect the Closing. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and undertakings contained herein, and subject to and on the terms and conditions herein set forth, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND TERMS 1.1 CERTAIN DEFINITIONS. As used herein, the following terms shall have the meanings set forth or as referenced below: "AFFILIATE" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such first Person as of the date on which, or at any time during the period for which, the determination of affiliation is being made. For the purpose of this definition, "control" means (i) the ownership or control of 50% or more of the equity interest in any Person, or (ii) the ability to direct or cause the direction of the management or affairs of a Person, whether through the direct or indirect ownership of voting interests, by contract or otherwise. 79 "AGREEMENT" shall mean this Agreement, including the exhibits hereto, as the same may be amended or supplemented from time to time in accordance with the terms hereof. "BOARD" shall mean the Board of Directors of Newco. "BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a day on which banks in Chicago, Illinois are authorized or obligated by Law or executive order to close. "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "COMMON STOCK" shall have the meaning set forth in the Recitals hereto. "CONTRIBUTION AGREEMENT" shall have the meaning set forth in the Recitals hereto. "CPA FIRM" shall mean the independent public auditor selected pursuant to SECTION 4.3, or any subsequent independent public auditor of the books and records of Newco appointed by the Board in accordance with the terms of this Agreement. "DEMAND REGISTRATION" shall have the meaning set forth in the Registration Rights Agreement. "DGCL" shall mean the General Corporation Law of the State of Delaware. "ENCUMBRANCES" shall mean liens, charges, encumbrances, mortgages, pledges, security interests, options or any other restrictions or third-party rights. "EXEMPT SALE" shall mean: (i) any Transfer of Shares to an Affiliate of the selling party; (ii) any distribution of securities by a Person to its direct or indirect equity owners; (iii) an assignment or pledge of Shares in connection with the incurrence, maintenance or renewal of indebtedness of Newco or its Subsidiaries; (iv) any Transfer of Shares pursuant to a Public Sale; and (v) any Transfer of Shares to directors, officers, or employees of Newco or its Subsidiaries. "GAAP" shall mean United States generally accepted accounting principles, consistently applied. "INDEPENDENT THIRD PARTY" means any Person who, immediately prior to the contemplated transaction, is not the owner of in excess of 5% of any class or series of Newco's common equity on a fully-diluted basis (a "5% OWNER") and who is not an Affiliate of any such 5% Owner. "LAW" shall mean any federal, state, foreign or local law, constitutional provision, code, statute, ordinance, rule, regulation, order, judgment or decree of any governmental authority. "MANAGEMENT BUY-IN" shall mean the purchase of Management Stock as contemplated by the Contribution Agreement. -2- 80 "NEWCO" shall mean Packaging Corporation of America, a Delaware Corporation. "NEW SECURITIES" shall mean any shares of capital stock or other equity securities (or debt securities convertible into such equity securities) of Newco, whether now authorized or not, and rights, options or warrants to purchase said shares of capital stock and securities of any type whatsoever that are, or may become, convertible into shares of Newco capital stock or other Newco equity securities; provided, however, that the term "New Securities" shall not include: (i) securities issued in connection with any stock split, stock dividend, reclassification or recapitalization of Newco; (ii) shares of Common Stock issued to employees, consultants, officers or directors of Newco or its Subsidiaries pursuant to: (A) the exercise of any stock option, stock purchase or stock bonus plan, agreement or arrangement for the primary purpose of soliciting or retaining the services of such Persons and which is hereafter approved by the Board; or (B) the exercise of any stock option issued pursuant to the Share Performance Plan; (iii) securities issued in a Public Offering; (iv) securities issued in connection with the acquisition of any business, assets or securities of another Person in compliance with SECTION 3.6 hereof; and (v) securities issued to any lender of Newco or one of its Subsidiaries in compliance with SECTION 3.6 hereof. "PCA" shall mean PCA Holdings LLC, a Delaware limited liability company. "PCA HOLDERS" shall collectively refer to PCA together with any other Stockholders who directly or indirectly acquire any Shares from: (i) PCA; or (ii) TPI pursuant to an Initial Period Pro-Rata Tag-Along as provided in SUBSECTION 6.3(b)(ii) below. "PERMITTED ENCUMBRANCES" shall mean liens for taxes, assessments and other governmental charges not yet due and payable or due but not delinquent or being contested in good faith by appropriate proceedings. "PERSON" shall mean an individual, a corporation, a partnership, an association, a trust, a limited liability company or any other entity or organization. "PRO RATA PORTION" shall mean, with respect to each Stockholder, that number of shares of New Securities as is equal to the product of (i) the total number of New Securities proposed to be issued or otherwise transferred multiplied by (ii) a fraction, the numerator of which is the number of shares of Common Stock (including any common equity issued or issuable in respect of such Common Stock) held by such Stockholder immediately prior to such issuance or transfer, and the denominator of which is the total number of shares of Common Stock (including any such common equity issued or issuable in respect of such Common Stock) which are held by all Stockholders. "PUBLIC OFFERING" shall mean an underwritten public offering pursuant to an effective registration statement under the Securities Act (or any comparable form under any similar statute then in force), covering the offer and sale of Common Stock. "PUBLIC SALE" means: (i) any sale of Common Stock pursuant to a Public Offering; or (ii) any Spin-Off. -3- 81 "REGISTRATION RIGHTS AGREEMENT" shall have the meaning set forth in the Contribution Agreement. "SECURITIES ACT" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, as shall be in effect at the time. "SERIES A PREFERRED STOCK" shall mean the one hundred (100) authorized, issued and outstanding shares of Series A Preferred Stock entitled to elect the CEO Director, with TPI holding 45 shares and PCA holding 55 shares, respectively, of such Series A Preferred Stock. "SHARE PERFORMANCE PLAN" shall mean the equity incentive plan for directors, officers and employees of Newco and its Subsidiaries. "SHARE PERFORMANCE PLAN AMOUNT" means the number of shares of Common Stock equal to (i) 9.8% of the fully diluted Common Stock of Newco at Closing, less (ii) the aggregate percentage of Common Stock sold pursuant to the Management Buy-In. "SHARES" shall mean any Common Stock held by any Stockholder (including any equity securities issued or issuable in respect of such Common Stock pursuant to a stock split, stock dividend, reclassification, combination, merger, consolidation, recapitalization or other reorganization) and any other capital stock of any class or series of Newco held by any Stockholder. As to any particular Shares, such shares shall cease to be Shares for all purposes of this Agreement when they have been sold or transferred pursuant to a Public Sale, and the transferee of any Shares pursuant to a Public Sale shall not be considered a Stockholder for purposes of this Agreement by virtue of the ownership of Shares transferred pursuant to such Public Sale. "SPIN-OFF" shall mean any distribution by TPI or one of its Affiliates of all of its Shares of any class or series to its public stockholders, if any. "STOCKHOLDERS" means TPI, PCA and each Person other than Newco who is or becomes bound by this Agreement; provided, however, that anything contained in this Agreement to the contrary notwithstanding, directors, officers and employees who directly or indirectly acquire Shares from TPI and PCA pursuant to the Management Buy-In shall not be Stockholders for purposes of this Agreement or bound by the terms hereof. Stockholders are sometimes individually referred to herein as a "STOCKHOLDER". "SUBSIDIARY" shall mean, with respect to any Person, any corporation, limited liability company, partnership, joint venture or other legal entity of which such Person, either directly or through or together with any other Subsidiary of such Person, owns 50% or more of the equity interests. "SUBSIDIARY BOARD" has the meaning set forth in SECTION 3.3. "TPI" shall mean Tenneco Packaging Inc., a Delaware corporation. -4- 82 "TPI HOLDERS" shall collectively refer to: (i) TPI; and (ii) any other Stockholders who directly or indirectly acquire any Shares from TPI except for Stockholders who directly or indirectly acquire Shares from TPI pursuant to an Initial Period Pro-Rata Tag-Along as provided in SUBSECTION 6.3(b)(ii) below. "TPI REGISTRABLE SECURITIES" shall have the meaning set forth in the Registration Rights Agreement. "VOTING STOCK" shall mean securities of Newco of any class or series the holders of which are entitled to vote generally in the election of directors of Newco. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof", "herein", and "hereunder", and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. (c) The terms "dollars" and "$" shall mean United States dollars. (d) The term "including" shall be deemed to mean "including without limitation." (e) Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Contribution Agreement. ARTICLE II BUSINESS AND OPERATIONS OF NEWCO 2.1 PURPOSES AND BUSINESS. Except as otherwise approved pursuant to SECTION 3.6(i)(c), the sole and exclusive purpose of Newco and its Subsidiaries shall be to engage in the business of producing and selling containerboard and corrugated packaging products (other than folding carton, molded fiber and honeycomb paperboard-type products), including without limitation, the Containerboard Business (the "BUSINESS SCOPE"). Newco shall not and shall not permit any of its Subsidiaries to (and PCA shall not cause or, to the extent reasonably within PCA's control, permit Newco or any of its Subsidiaries to) engage in any other activity or business except to the extent approved by the Board in accordance with the terms and conditions hereof. 2.2 PRINCIPAL EXECUTIVE OFFICES. The principal executive offices of Newco shall be located at 1900 West Field Court, Lake Forest, Illinois or such other location as determined by the Board. -5- 83 2.3 ANNUAL BUSINESS PLAN. (a) PREPARATION. No later than 90 days prior to the expiration of any fiscal year of Newco, the Board shall discuss and approve (in the manner set forth in SECTION 3.6 hereof) an annual business plan and budget for Newco and its Subsidiaries (the "ANNUAL BUSINESS PLAN") for the next succeeding fiscal year, which plan shall address, among other things: (i) The general business direction, policies and programs for Newco and its Subsidiaries during such period; (ii) A budget for Newco and its Subsidiaries for such period, setting forth projected revenues, costs and expenses (including capital expenditures); (iii) The extent to which Newco and/or its Subsidiaries will make any expenditures in connection with business acquisitions; and (iv) Information, plans, budgets, forecasts and projections of the nature included in the annual business plan for 1999 set forth as EXHIBIT 2.3(a), which shall be the initial Annual Business Plan. The Board is expressly empowered to delegate to the management of Newco the responsibility for the initial preparation of each Annual Business Plan, subject to the final approval of each such plan by the Board as provided herein. (b) EFFECT OF ANNUAL BUSINESS PLAN. The parties agree that the business and operations of Newco and its Subsidiaries will be conducted in accordance with the applicable Annual Business Plan in all material respects and in compliance with SECTION 3.6 hereof. ARTICLE III BOARD OF DIRECTORS 3.1 GENERAL. From and after the Closing, each Stockholder will vote all of its respective Shares and any other Voting Stock over which it possesses direct or indirect voting power and will take all other necessary or desirable actions within its direct or indirect control (whether in its capacity as a stockholder of Newco or otherwise), and Newco will take all necessary and desirable actions within its control, in order to give effect to the provisions of this ARTICLE III. By way of example and without limiting the generality of the foregoing, TPI and PCA shall amend the Certificate of Incorporation or By-laws or both, as applicable, of Newco and each Subsidiary to incorporate and effectuate the provisions in this ARTICLE III and to authorize and designate the Series A Preferred Stock for the purpose of implementing the provisions relating to the CEO Director as provided herein. With respect to the enumeration of the matters in SECTION 3.6 below, such matters shall be set forth in the By-laws (and not the Certificate of Incorporation) except with respect to the establishment of committees of the Board and each Subsidiary Board and the dissolution of Newco, which matters shall be set forth in the Certificate of Incorporation. -6- 84 3.2 POWERS. Subject to the provisions of the DGCL, the Certificate of Incorporation of Newco, the By-laws of Newco and this Agreement, the business and affairs of Newco shall be managed by or under the direction of the Board. 3.3 SIZE AND COMPOSITION. The Board shall consist of six individuals as follows: (i) two directors shall be designated in writing by TPI; (ii) three directors shall be designated in writing by PCA; and (iii) the remaining director shall be the Chief Executive Officer of Newco (the "CEO Director"). The directors in the preceding clause (i) (the "TPI DIRECTORS") and in the preceding clause (ii) (the "THE PCA DIRECTORS") are sometimes collectively referred to as the "TPI/PCA DIRECTORS." TPI and PCA, as the holders of the Series A Preferred Stock and thus entitled to elect the CEO Director, shall: (x) at each election of directors (or filling of a vacancy with respect to the CEO Director), elect the individual then serving as the Chief Executive Officer of Newco as the CEO Director; and (y) remove the CEO Director if the CEO Director ceases to serve as the Chief Executive Officer of the Company. The size and composition of the board of directors or similar governing body of each Subsidiary of Newco (each, a "SUBSIDIARY BOARD") and the manner in which the initial members and any subsequent members (including any subsequent member selected or appointed to fill a vacancy) of any such Subsidiary Board will be the same as that of the Board. Anything to the contrary contained herein notwithstanding, the rights of each of TPI and PCA to designate directors as provided herein shall not be assignable (by operation of law, the transfer of Shares or otherwise) without the prior written consent of the other; provided, however, that each of TPI and PCA shall be entitled to assign its rights to designate directors as provided herein to one of its Affiliates that is (or becomes) a Stockholder without the prior written consent of the other. If directed by PCA, a representative of J.P. Morgan & Co. shall be entitled to attend meetings of (and receive information provided to the directors of) the Board and each Subsidiary Board; provided, however, that such representative shall not be or have any rights of a director of the Board or any Subsidiary Board. 3.4 TERM; REMOVAL; VACANCIES. The members of the Board or any Subsidiary Board other than the CEO Director shall hold office at the pleasure of the Stockholder which designated them. Any such Stockholder may at any time, by written notice to the other Stockholder and Newco, remove (with or without cause) any member of the Board or any Subsidiary Board designated by such Stockholder other than the CEO Director. Subject to applicable Law, no member of the Board or any Subsidiary Board may be removed except by written request by the Stockholder that designated the same. In the event a vacancy occurs on the Board (or a Subsidiary Board) for any reason, the vacancy will be filled by the written designation of the Stockholder entitled to designate the director creating the vacancy. 3.5 NOTICE; QUORUM. Meetings of the Board and any Subsidiary Board may be called upon three days' prior written notice to all directors stating the purpose or purposes thereof. Such notice shall be effective upon receipt, in the case of personal delivery or facsimile transmission, and five Business Days after deposit with the U.S. Postal Service, postage prepaid, if mailed. The presence in person of three of the five TPI/PCA Directors shall constitute a quorum for the transaction of business at any special, annual or regular meeting of the Board or any Subsidiary Board. Each Stockholder shall use its reasonable efforts to ensure that a quorum is present at any duly convened meeting of the Board or any Subsidiary Board and each of TPI and PCA may designate by written notice to the other an alternate representative to act in the absence of any of its -7- 85 designates at any such meeting. If at any meeting of the Board or any Subsidiary Board a quorum is not present, a majority of the directors present may, without further notice, adjourn the meeting from time to time until a quorum is obtained. 3.6 VOTING. Each member of the Board and each Subsidiary Board shall be entitled to cast one vote on each matter considered by such Board and Subsidiary Board, respectively; provided, however, that in the event that a vote would result in a 3-3 tie with respect to a matter, the CEO Director shall not be entitled to vote with respect to such matter (the Board and each Subsidiary Board shall poll its members prior to any vote to effectuate the purposes of this sentence). Except as otherwise expressly provided by this Agreement, the act of a majority of the members of the Board and each Subsidiary Board present at any meeting at which a quorum is present shall constitute an act of the Board or Subsidiary Board, as applicable. Notwithstanding anything to the contrary contained herein: (i) the following matters shall require, in addition to any other vote required by applicable law, the affirmative vote of at least four of the five TPI/PCA Directors; (ii) Newco shall not directly or indirectly take, and shall not permit any of its Subsidiaries to directly or indirectly take, any of the following actions without first obtaining such approval; and (iii) PCA shall not cause or, to the extent reasonably within PCA's control, permit Newco or any of its Subsidiaries to take any of the following actions without first obtaining such approval: (i) (a) the approval of any Annual Business Plan, (b) any material change to an approved Annual Business Plan, and (c) engaging in or the ownership or operation of any activities or business by Newco and/or any of its Subsidiaries which are not within the Business Scope; (ii) subject to applicable Law, any dissolution or liquidation of Newco; (iii) (a) during the 12-month period beginning on the Closing Date, any amendment of the certificate of incorporation, articles of incorporation, by-laws or other governing documents of Newco or any of its Subsidiaries (other than such amendment which may be necessary in connection with other actions (or inactions) which would be permissible under this Agreement but for this clause (a)); and (b) from and after such 12-month period, any amendment of the certificate of incorporation, articles of incorporation, by-laws or other governing documents of Newco or any of its Subsidiaries which would: (1) treat any TPI Holder disproportionately vis-a-vis any PCA Holder; (2) place any restriction or limitation on the ability of any TPI Holder to Transfer all or any portion of its Shares or reduce the consideration received or to be received by such TPI Holder in connection with such Transfer; or (3) cause such governing documents, taken as a whole, to be less favorable to a stockholder than the typical governing documents of a publicly traded company engaged in a business within the Business Scope; (iv) any merger, consolidation, reorganization (except as provided in Section 253 of the DGCL and except for a merger, consolidation or reorganization in which the consideration to be received by TPI is cash, publicly traded securities or a combination thereof, and TPI Holders are not treated disproportionately or differently than PCA Holders) or the issuance of capital stock or other securities of Newco or any of its Subsidiaries (other than the formation of or issuance of securities of a wholly-owned Subsidiary, the issuance of up to the -8- 86 number of shares of Common Stock equal to the Share Performance Plan Amount pursuant to the Share Performance Plan and other than issuances of a number of shares of Common Stock which, on a cumulative basis from and after the Closing, does not exceed 5% of the number of shares of Common Stock outstanding as of the Closing and other than issuances pursuant to the Management Buy-In); (v) the sale, transfer, exchange, license, assignment or other disposition by Newco and/or any of its Subsidiaries of assets having a fair market value exceeding $32.5 million in any transaction or series of related transactions (excluding sales of inventory and other assets in the ordinary course of business and timberlands sales pursuant to SECTION 5.2 hereof), except in each case for Permitted Encumbrances; (vi) the acquisition of assets (tangible or intangible) by Newco and/or any of its Subsidiaries (including any capital expenditure not included in the approved Annual Business Plan) for an acquisition price exceeding $32.5 million in value in any transaction or series of related transactions (excluding acquisitions of inventory and other assets in the ordinary course of business); (vii) the acquisition of another Person or an existing business from another Person in any transaction or series of related transactions or the entry into any partnership or formal joint venture or similar arrangement involving an acquisition price or investment exceeding $32.5 million in value; (viii) the refinancing of existing indebtedness, amendment of any existing loan or financing arrangement or incurrence of any new indebtedness by Newco and/or any of its Subsidiaries on terms which either: (a) are, taken as a whole, less favorable to Newco and its Subsidiaries than the terms then reasonably available in the financial markets to similarly situated borrowers; (b) place any restriction or limitation on the ability of any TPI Holder to Transfer all or any portion of its Shares; or (c) include any event of default or other materially adverse consequence to Newco and/or any of its Subsidiaries (including, for example, an increase in the interest rate) as a result of a sale of all or a portion of any Stockholder's Shares; (ix) the making or guarantee by Newco or any of its Subsidiaries of any loan or advance to any Person except: (a) in the ordinary course of business; (b) to a wholly owned Subsidiary; (c) for advances to employees in amounts not to exceed $500,000 to any one individual and $5 million in the aggregate; (d) for loans or advances made in connection with any acquisition of the business, capital stock or assets or any other Person that is otherwise permitted or approved as provided by this SECTION 3.6; and (e) guarantees, loans and advances in connection with the Management Buy-In and Share Performance Plan, not to exceed $15 million in the aggregate; (x) the entry into, or amendment of, contracts or other transactions between Newco and/or any of its Subsidiaries, on the one hand, and a Stockholder or any Affiliate thereof, on the other hand except for: (a) the execution and delivery of the Contribution Agreement, Ancillary Agreements and other documents and agreements to be delivered by -9- 87 Newco at Closing pursuant to the Contribution Agreement; and (b) contracts, amendments and transactions which are no less favorable to Newco and its Subsidiaries than could be obtained from TPI or its Affiliates or Independent Third Parties negotiated on an arms-length basis; (xi) the direct or indirect redemption, retirement, purchase or other acquisition of any equity securities of Newco or any of its Subsidiaries (other than securities of its wholly owned Subsidiary) except for pro rata redemptions with respect to the proceeds received from the disposition of the timberlands or any of the assets or operations related thereto or located thereon; (xii) the appointment of the members of any committee of the Board or any Subsidiary Board, unless at least one member of such committee is a director who was designated by TPI; (xiii) (a) the creation of any Subsidiary, unless: (1) all of the equity interests of such Subsidiary are owned by Newco, or by another Subsidiary in which all the equity interests of such other Subsidiary are owned directly or indirectly by Newco; and (2) the by-laws or similar governing documents of each such Subsidiary contain provisions regarding the size, composition, quorum requirements and voting of the board of directors equivalent to those provided for herein with respect to Newco; and (b) the Transfer of any equity interest in a Subsidiary other than to Newco or another Subsidiary in which all the equity interests of such other Subsidiary are owned by Newco. (xiv) removal of the independent public auditors of Newco or a Subsidiary of Newco or appointment of any public auditors which are not one of the Big Five accounting firms; and (xv) delegation of any of the matters covered by any of clauses (i) through (xiv) above to any committee of the Board or committee of any Subsidiary Board. Notwithstanding the foregoing: (i) the approvals required by this SECTION 3.6 with respect to any of the matters in SUBSECTIONS (ii) THROUGH (xv) above shall not apply to any matter included in an Annual Business Plan which has been approved pursuant to this SECTION 3.6; and (ii) nothing in this SECTION 3.6 shall restrict the sale of the timberlands or any of the assets or operations related thereto or located thereon. TPI hereby covenants and agrees, as more fully described in this paragraph, that it shall use its reasonable good faith efforts to not cause or, to the extent reasonably within its control, permit any member of the Board or Subsidiary Board designated by TPI to withhold approval of a matter recommended for approval by management of Newco and presented to the Board or Subsidiary Board for consideration which requires the affirmative vote of four of the five TPI/PCA Directors pursuant to this SECTION 3.6. TPI's covenant and agreement in the preceding sentence: (i) shall relate only to matters, the approval of which TPI determines in good faith are in the best interests of TPI and its stockholders and Affiliates; and (ii) is exclusive to TPI and shall not be binding upon any direct or indirect transferee of TPI's Shares. -10- 88 3.7 TELEPHONIC MEETINGS; WRITTEN CONSENTS. Except as may otherwise be provided by applicable Law, any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting pursuant to a written consent, in compliance with the DGCL and SECTION 3.6 hereof and such written consent is filed with the minutes of the proceedings of the Board or such committee. Any meeting of the Board or any committee thereof may be held by conference telephone or similar communication equipment, so long as all Board or committee members participating in the meeting can hear one another clearly, and participation in a meeting by use of conference telephone or similar communication equipment shall constitute presence in person at such meeting. 3.8 INITIAL DIRECTORS. TPI and PCA shall make their designations pursuant to SECTION 3.3 on or prior to the Closing Date. 3.9 RECAPITALIZATION OF NEWCO UNDER CERTAIN CIRCUMSTANCES. For any Public Offering or Spin-Off prior to the time Newco becomes subject to the Exchange Act with respect to Shares: (i) Newco shall use commercially reasonable efforts to effect a stock split, stock dividend or stock combination which, in the opinion of the managing underwriter for the Public Offering or TPI's financial advisor in connection with a Spin-Off, is desirable for the sale, marketing or distribution of the Shares to the public; and (ii) each Stockholder agrees to vote all of its respective Shares and any other Voting Stock over which it posses direct or indirect voting power in order to cause such stock split, dividend or combination to be effected consistent with the provisions of this SECTION 3.9. ARTICLE IV ACCOUNTING, BOOKS AND RECORDS 4.1 FISCAL YEAR. The fiscal year of Newco shall be the period commencing January 1 in any year and ending December 31 of that year, except that the first fiscal year of Newco shall commence on the Closing Date and end on December 31 of the year in which the Closing Date occurs. 4.2 BOOKS AND RECORDS. Newco shall keep at its principal executive offices books and records typically maintained by Persons engaged in similar businesses and which set forth a true, accurate and complete account of the business and affairs of Newco and its Subsidiaries, including a fair presentation of all income, expenditures, assets and liabilities thereof. Such books and records shall include all information reasonably necessary to permit the preparation of financial statements required by applicable Law in accordance with GAAP. Each Stockholder who, together with its Affiliates, owns 17-1/2% or more of the outstanding common equity of Newco (a "17-1/2% Stockholder") and its respective authorized representatives shall have the right, at all reasonable times and upon reasonable advance written notice to Newco, to have access to, inspect, audit and copy the original books, records, files, securities, vouchers, canceled checks, employment records, bank statements, bank deposit slips, bank reconciliations, cash receipts and disbursement records, and other documents of Newco and its Subsidiaries. 4.3 AUDITORS. Newco shall engage one of the Big Five accounting firms as the initial independent public auditors of Newco and its Subsidiaries. -11- 89 4.4 REPORTING. Newco shall use its reasonable best efforts to deliver to each Stockholder unaudited consolidated interim financial statements for Newco and its Subsidiaries for such fiscal quarter (including a balance sheet as of the end of such period and statements of income, stockholders' equity and cash flows for such period within 30 days after the close of each fiscal quarter. Newco will use its reasonable best efforts to deliver to each Stockholder within 60 days after the close of each fiscal year of Newco consolidated annual financial statements for Newco and its Subsidiaries for such fiscal year (including a balance sheet as of the end of such fiscal year and statements of income, stockholders' equity and cash flows for such fiscal year), in each case audited and certified by the CPA Firm. Such annual and interim financial statements shall contain such statements and schedules, prepared in accordance with the requirements of the Stockholders, as may be requested in writing by any of the 17-1/2% Stockholders. Newco shall bear the cost of providing financial and accounting information reasonably required by any of the 17-1/2% Stockholders in the preparation of such 17-1/2% Stockholder's own financial statements. Such annual and interim financial statements shall be prepared in accordance with GAAP, shall be true and accurate in all material respects and shall present fairly the financial position and results of operations of Newco. 4.5 STOCKHOLDER'S AUDIT. Upon reasonable advance written notice to Newco, any Stockholder may request an audit of the books and records of Newco and its Subsidiaries (a "STOCKHOLDER'S AUDIT") by an independent auditor of its selection, other than the CPA Firm. Any Stockholder's Audit shall be at the expense of the requesting 17-1/2% Stockholder unless material error or fraud is found, in which case such audit shall be at the expense of Newco. All information obtained by any 17-1/2% Stockholder in any such audit shall be treated as confidential. 4.6 CONSENT OF NEWCO AUDITORS. Upon request from time to time by TPI, Newco shall use its commercially reasonable efforts to obtain the written agreements of Newco's auditors to permit the use of Newco's Audited Financial Statements in connection with TPI's and/or its Affiliates filings made with the Securities and Exchange Commission and, subject to such auditor's normal procedures, in private or public offerings of securities of TPI and/or its Affiliates as may be reasonably requested by TPI. In addition, Newco will use commercially reasonable efforts to cause Newco's auditors to provide a comfort letter in accordance with SAS 72 for any such offering. ARTICLE V CERTAIN MATTERS REGARDING STOCKHOLDERS AND NEWCO 5.1 TRANSACTIONS BETWEEN STOCKHOLDERS AND NEWCO. The Stockholders hereby approve on behalf of Newco the Contribution Agreement and each of the Ancillary Agreements and other documents and agreements to be delivered by Newco at the Closing pursuant to the Contribution Agreement, and the transactions contemplated thereby. 5.2 SALE OF TIMBERLANDS. Newco, TPI and PCA hereby acknowledge that it is their mutual intention to effect a sale for cash of the timberlands (and the assets and operations related thereto and located thereon) included in the Contributed Assets and to distribute the net proceeds from any such sale as soon as practicable following the Closing Date. If and to the extent the net proceeds from any such sale are distributed to the holders of the Common Stock, such distribution shall be on a pro-rata basis among such holders. -12- 90 ARTICLE VI TRANSFER OF SHARES 6.1 GENERAL. No Stockholder will directly or indirectly sell, assign, pledge, encumber, hypothecate, dispose of or otherwise transfer ("TRANSFER") any Shares or interest in any Shares, agree to any such Transfer or permit any such interest to be subject to Transfer, directly or indirectly, by merger or other operation of law, agreement or otherwise, except pursuant to and in compliance with the provisions of this ARTICLE VI. Any purported Transfer in any other manner, unless otherwise expressly permitted by this ARTICLE VI, shall be null and void, and shall not be recognized or given effect by Newco or any Stockholder. Any other provision of this Agreement, including, without limitation, in this Article VI, to the contrary notwithstanding (except pursuant to Section 8.1), neither TPI nor PCA shall Transfer any Shares of the Series A Preferred Stock prior to the termination of this Agreement. 6.2 TRANSFERS BY TPI HOLDERS. (a) PERMITTED TRANSFERS. A TPI Holder may at any time, without the consent of any other Stockholder, Transfer any or all of its Shares or interests in Shares to any Affiliate or third Person or Persons or pursuant to a Public Sale, subject to the remaining provisions of this SECTION 6.2; provided, however, that, except in the case of a Public Sale, TPI shall not Transfer any Shares to any other Person then engaged, directly or indirectly, in a business within the Business Scope with annual revenues from such business in excess of $100 million without PCA's prior written consent. The foregoing consent right shall not be assignable by PCA or inure to the benefit of any transferee, successor or assign of PCA, except for an Affiliate of PCA who is (or becomes) a Stockholder. Notwithstanding the foregoing and except in the case of a Public Sale or sale to directors, officers or employees of Newco pursuant to the Management Buy-In, any Transfer of Shares by a TPI Holder shall be null and void and Newco shall refuse to recognize such Transfer unless the transferee executes and delivers to each party hereto an agreement (a "TPI JOINDER AGREEMENT"): (i) acknowledging that all Shares or interests in any Shares so transferred are and shall remain subject to this Agreement; and (ii) agreeing to be bound hereby. Upon execution of a TPI Joinder Agreement, except as otherwise expressly provided herein and except for any right hereunder to consent to any action or proposed action (including, without limitation, any proposed Transfer of Shares), the rights of the transferring TPI Holder hereunder with respect to the Shares transferred shall be assigned to such transferree. Any TPI Holder shall notify the other parties of any intended Transfer of Shares or interests in Shares pursuant to this SECTION 6.2 (other than pursuant to an Exempt Sale), giving the name and address of the intended transferee; provided, however, that no otherwise valid Transfer shall be rendered invalid solely as a result of a failure to give notice hereunder. Transferees of a TPI Holder shall assume all obligations of the transferring TPI Holder hereunder, but, except with respect to an Affiliate of TPI, shall not be entitled to any rights of a TPI Holder. 6.3 TRANSFERS BY PCA HOLDERS. (a) PERMITTED TRANSFERS. A PCA Holder may at any time, without the consent of any other Stockholder, (i) Transfer any or all of its Shares to an affiliate of PCA, (ii) Transfer any -13- 91 or all its Shares pursuant to an Exempt Sale, or (iii) sell any or all of its Shares to any other third Person or Persons or pursuant to a Public Sale or otherwise Transfer Shares, subject to the remaining provisions of this SECTION 6.3. The foregoing consent right shall not be assignable by TPI or inure to the benefit of any transferee, successor or assign of TPI, except for an Affiliate of TPI who is (or becomes) a Stockholder. Notwithstanding the foregoing and except in the case of a Public Sale or sale to directors, officers or employees of Newco pursuant to the Management Buy-In, any Transfer of Shares by an PCA Holder shall be null and void and Newco shall refuse to recognize such Transfer unless the transferee executes and delivers to each party hereto an agreement (an "PCA JOINDER AGREEMENT"): (i) acknowledging that all Shares or interests in any Shares so transferred are and shall remain subject to this Agreement; and (ii) agreeing to be bound hereby. Upon execution of an PCA Joinder Agreement, except as otherwise expressly provided herein and except for any right hereunder to consent to any action or proposed action (including, without limitation, any proposed Transfer of Shares), the rights of the transferring PCA Holder hereunder with respect to the Shares transferred shall be assigned to such transferee. Any PCA Holder shall notify the other parties of any intended Transfer of Shares or interests in Shares pursuant to this SECTION 6.3 (other than an Exempt Sale), giving the name and address of the intended transferee; provided, however, that no otherwise valid Transfer shall be rendered invalid solely as a result of a failure to give notice hereunder. (b) TAG-ALONG RIGHTS. TPI and its Affiliates shall have tag-along rights as provided in this SECTION 6.3(b): (i) In the event any PCA Holder desires to sell all or any part of any class or series of its Shares to a third Person (other than pursuant to an Exempt Sale), it shall provide prior written notice (the "SALE NOTICE") to TPI setting forth in reasonable detail the terms and conditions on which the proposed sale is to be made and identifying the proposed purchaser. TPI shall have the option (the "TAG-ALONG OPTION") to sell any or all of its Shares of the same class and series to the proposed purchaser on the terms and conditions set forth in such Sale Notice subject to the provisions set forth in this Section 6.3(b). TPI shall exercise its Tag-Along Option by giving written notice to PCA within ten Business Days following its receipt of the Sale Notice, which notice shall specify the number of Shares of the same class and series as to which TPI is exercising its Tag- Along Right (the "SPECIFIED SHARES"). In the event TPI exercises its Tag-Along Option with respect to any Sale Notice: (A) if such exercise is within 14 months after the Closing Date, the PCA Holder shall not be entitled to sell any of its Shares unless and until the prospective purchasers or PCA has purchased all of the Specified Shares; and (B) if such exercise is more than 14 months after the Closing Date, TPI shall be entitled to sell its pro rata share (based on the number of Shares proposed to be sold by the PCA Holder and TPI, respectively) of the Shares proposed to be sold by the PCA Holder in the Sale Notice, in each case on terms and conditions no less favorable than specified in the Sale Notice or otherwise applicable to the sale to such prospective purchasers by the PCA Holder. In the event TPI does not exercise its Tag-Along Option with respect to any Sale Notice, the PCA Holder shall be entitled to sell all or any part of its Shares as specified in the Sale Notice to the prospective purchaser specified in the Sale Notice on the terms and conditions set forth in the Sale Notice (subject to the provisions of the third sentence of SECTION 6.3(a) hereof). (ii) Notwithstanding SUBSECTION 6.3(b)(i) above, with respect to sales by a PCA Holder of any part of any class or series of its Shares to a third Person (other than pursuant to an Exempt Sale) prior to the expiration of the six-month period beginning on the Closing Date at a per -14- 92 share price which does not exceed the per share price paid (excluding any interest for the carrying cost of such Share) by such PCA Holder for such Shares pursuant to the Contribution Agreement: (A) TPI and its Affiliates shall not have a Tag-Along Option during such six-month period for (i) sales of Shares (other than PIK Preferred) in the aggregate amount of $40 million; and (ii) the sale of 9.3% of the number of Shares of PIK Preferred issued at Closing ("EXCLUDED TAG-ALONG SALES); and (B) TPI shall have a Tag-Along Option on a pro-rata basis (i.e., on the same basis applicable 14 months after the Closing Date as provided in SUBSECTION 6.3(b)(i) above) with respect to such sales of Shares by PCA Holders during such six-month period in excess of the Excluded Tag Along Sales up to an aggregate amount of consideration for such additional sales of $100 million (the "INITIAL PERIOD PRO-RATA TAG -ALONG"). The provisions of this SUBSECTION 6.3(b)(ii) shall terminate upon the expiration of the six-month period beginning on the Closing Date. (iii) Notwithstanding anything in this Agreement to the contrary, the rights under this SECTION 6.3(b) shall be exclusive to TPI and its Affiliates and shall not be assignable to or inure to the benefit of any transferee of TPI or any successors or assigns of TPI, other than Affiliates of TPI. 6.4 DRAG-ALONG RIGHTS. (a) DRAG-ALONG SALE. If a sale of all or substantially all of Newco's assets determined on a consolidated basis or a sale of all or substantially all of Newco's outstanding capital stock (whether by merger, recapitalization, consolidation, reorganization, combination or otherwise) to any Independent Third Party or group of Independent Third Parties is approved by the Board or the holders of a majority of the Shares of Common Stock held by the PCA Holders (a "DRAG-ALONG SALE"), each Stockholder will consent to raise no objections against such Drag-Along Sale on the terms and subject to the conditions set forth in the remaining provisions of this SECTION 6.4. (b) DRAG-ALONG NOTICE. A notice regarding any Drag-Along Sale (a "DRAG-ALONG NOTICE") shall be delivered within two Business Days following approval of any Drag-Along Sale by Newco or the PCA Holders to each Stockholder. The Drag-Along Notice shall include a copy of a bona fide offer from the intended buyer, which shall set forth the principal terms of the Drag-Along Sale, including the name and address of the intended buyer. (c) DRAG-ALONG SALE OBLIGATIONS. In connection with any Drag-Along Sale, the Stockholders shall, and shall elect directors who shall, take all necessary or desirable actions in connection with the consummation of the Drag-Along Sale. If the Drag-Along Sale is structured as: (i) a merger or consolidation, each Stockholder shall waive any dissenters rights, appraisal rights or similar rights in connection with such merger or consolidation; (ii) a sale of stock, each Stockholder shall agree to sell all of its Shares and rights to acquire Shares on the terms and conditions so approved; or (iii) a sale or assets, each Stockholder shall vote in favor of such sale and any -15- 93 subsequent liquidation of Newco or other distribution of the proceeds therefrom. Each Stockholder shall take all necessary or desirable actions in connection with the consummation of the Drag-Along Sale reasonably requested by PCA or Newco, and each Stockholder shall be obligated to agree on a pro rata, several (and not joint) basis (based on the share of the aggregate proceeds paid in such Drag-Along Sale) to any indemnification obligations that the PCA Holders agree to provide in connection with such Drag-Along Sale (other than any such obligations that relate specifically to a particular holder of Shares such as indemnification with respect to representations and warranties given by a holder regarding such holder's title to and ownership of Shares). (d) CONDITIONS TO DRAG-ALONG SALE OBLIGATIONS. The obligations of each Stockholder with respect to a Drag-Along Sale are subject to the satisfaction of the following conditions: (i) the consideration to be received by the Stockholders with respect to the Drag-Along Sale shall consist only of cash, publicly-traded securities, or a combination of cash and publicly-traded Securities; (ii) if any holders of a class or series of Shares are given an option as to the form and amount of consideration to be received, each holder of such class or series of Shares will be given the same option; (iii) each holder of then currently exercisable rights to acquire shares of a class or series of Shares will be given an opportunity to exercise such rights prior to the consummation of the Drag-Along Sale and participate in such sale as holders of such class or series of Shares; and (iv) each Stockholder shall be entitled to receive consideration per each Share in connection with the Drag-Along Sale at least equivalent to the consideration received per each Share of the same class and series by any PCA Holder in connection with the Drag-Along Sale. (e) EXPENSES. Each Stockholder will bear its pro-rata share (based on the share of the aggregate proceeds paid in such Drag-Along Sale) of the costs of any sale of Shares pursuant to a Drag-Along Sale to the extent such costs are incurred for the benefit of all holders of Common Stock and are not otherwise paid by Newco or the acquiring party. For purposes of this SECTION 6.4(e), costs incurred in exercising reasonable efforts to take all necessary actions in connection with the consummation of a Drag-Along Sale in accordance with this SECTION 6.4 shall be deemed to be for the benefit of all holders of Common Stock. Costs incurred by Stockholders on their own behalf will not be considered costs of the transaction hereunder. (f) EXCEPTION TO DRAG-ALONG. Notwithstanding anything to the contrary contained in this SECTION 6.4, no Stockholder shall have any obligation under this SECTION 6.4 with respect to a Drag-Along Sale if the Drag-Along Notice with respect to the Drag-Along Sale is received by TPI after the holders of TPI Registrable Securities have requested a Demand Registration and for a period thereafter ending on the date following consummation of the sale of all Shares subject to such Demand Registration unless, in the opinion of the managing underwriter for such Demand Registration, the per Share consideration payable pursuant to the Drag-Along Sale exceeds the net proceeds per Share expected to be received by selling stockholders pursuant to the Demand Registration. 6.5 INDIRECT TRANSFERS OF INTERESTS. Any Transfer of equity securities of PCA which results in the group of Persons holding such equity securities immediately following the transactions contemplated in the Contribution Agreement from ceasing to beneficially own, as a group, directly or indirectly, 50.1% or more of the equity securities of PCA or enough voting equity of PCA to be able to cause a majority of the board of managers (or equivalent governing body or -16- 94 members) to be elected shall be deemed to be a Transfer of Shares hereunder and any such Transfer shall be subject to the provisions of this ARTICLE VI as if PCA had directly transferred Shares. 6.6 LEGENDS. A copy of this Agreement shall be filed with the Secretary of Newco and kept with the records of Newco. Each of the Stockholders hereby agrees that each outstanding certificate representing Shares shall bear a conspicuous legend reading substantially as follows: "The securities represented by this Certificate have not been registered under the Securities Act of 1933 or the applicable state and other securities laws and may not be sold, pledged, hypothecated, encumbered, disposed of or otherwise transferred without compliance with the Securities Act of 1933 or any exemption thereunder and applicable state and other securities laws. The securities represented by this Certificate are subject to the restrictions on transfer and other provisions of a Stockholders Agreement dated as of __________, 1999, (as amended from time to time, the "Agreement") by and among Packing Corporation of America (the "Company") and certain of its stockholders, and may not be sold, pledged, hypothecated, encumbered, disposed of or otherwise transferred except in accordance therewith. A copy of the Agreement is on file at the principal executive offices of the Company. ARTICLE VII RIGHTS ON NEW SECURITY ISSUANCE 7.1 PREEMPTIVE RIGHTS. Newco hereby grants to each Stockholder the irrevocable and exclusive first option (the "FIRST OPTION") to purchase all or part of its Pro Rata Portion of any New Securities which Newco may, from time to time after the date of this Agreement, propose to issue and sell or otherwise transfer. 7.2 NOTICES WITH RESPECT TO PROPOSED ISSUANCE OF NEW SECURITIES. In the event Newco proposes to undertake an issuance or other transfer of New Securities, it shall give each Stockholder entitled to a First Option pursuant to this ARTICLE VII written notice (the "COMPANY NOTICE") of its intention, describing in detail the type of New Securities, the price and the terms upon which Newco proposes to issue or otherwise transfer such New Securities. Each such Stockholder shall have 10 Business Days from the date of receipt of any such Company Notice to agree to purchase, pursuant to the exercise of the First Option, up to such Stockholder's Pro Rata Portion of each type and class and series of such New Securities (i.e., the same strips) for the price and upon the terms and conditions specified in the Company Notice by giving written notice to Newco and stating therein the quantity of New Securities to be purchased. 7.3 COMPANY'S RIGHT TO COMPLETE PROPOSED SALE OF NEW SECURITIES TO THE EXTENT PREEMPTIVE RIGHTS ARE NOT EXERCISED. In the event the Stockholders fail to exercise a preemptive right with respect to any New Securities within the periods specified in SECTION 7.2, Newco shall have 90 days thereafter to sell or enter into an agreement (pursuant to which the sale of such New Securities shall be closed, if at all, within 45 days from the date of said agreement) to sell the New Securities not elected to be purchased by the Stockholders at the price and upon terms not -17- 95 substantially more favorable to the prospective purchasers of such securities than those specified in Newco Notice. In the event Newco has not sold the New Securities or entered into an agreement to sell the New Securities within said 90-day period. Newco shall not thereafter issue or sell or otherwise transfer such New Securities without first offering such securities to the Stockholders in the manner provided in this ARTICLE VII. 7.4 CLOSING OF PURCHASE. If a Stockholder elects to purchase up to its Pro Rata Portion of any New Securities set forth in any Company Notice, such purchase shall be consummated at such time and at such location selected by Newco upon reasonable advance notice. At the consummation of any purchase and sale of New Securities pursuant to this ARTICLE VII: (i) Newco shall issue or otherwise transfer to the Stockholder the certificates evidencing the New Securities being purchased, together with such other documents or instruments reasonably required by counsel for the Stockholder to consummate such purchase and sale; (ii) the Stockholder will deliver the cash consideration payable by wire transfer of immediately available funds to an account or accounts designated in writing by Newco (such designation to be made no later than two Business Days prior to the date of such consummation); (iii) Newco shall deliver to the Stockholder a written representation that the New Securities are being purchased and sold free and clear of any and all Encumbrances; and (iv) the Stockholder shall deliver to Newco such written investment representations as may reasonably be required by counsel to Newco for securities Laws purposes and all other applicable representations and warranties as other purchasers of New Securities. Notwithstanding the foregoing, any purchase of New Securities pursuant to this Article VII shall be on the same terms and conditions as set forth in the Company Notice. ARTICLE VIII TERM 8.1 TERM. Subject to the next sentence, unless earlier terminated by mutual agreement of TPI and PCA, this Agreement shall terminate upon the earliest to occur of: (i) the complete liquidation or dissolution of Newco or its Subsidiaries; (ii) a Public Offering; (iii) such date as TPI and its Affiliates first hold less than 17-1/2% of Newco's outstanding Common Stock or; (iv) the acquisition of all or substantially all of the stock or assets of TPI (whether by stock sale, asset sale, merger, consolidation, combination or otherwise) by a Person engaged, directly or indirectly, in a business within the Business Scope with annual revenues from such business in excess of $100 million; provided; however, that in the case of termination pursuant to clause (iv), TPI (or its successor in interest) shall (unless or until this Agreement is terminated pursuant to clauses (i)-(iii)) have the right at each election of directors to designate as the two TPI Directors of Newco and each Subsidiary who are not directors, officers, employees or affiliates of such Person and are approved by PCA, such approval not to be unreasonably withheld; provided, further, that in case of any termination pursuant to this SECTION 8.1, unless otherwise determined by PCA, this Agreement shall nevertheless remain in full force and effect with respect to the drag-along provisions set forth in SECTION 6.4 and all related definitions and provisions to the extent necessary or desirable to give full force and effect to SECTION 6.4. The rights of each of TPI and PCA to terminate this Agreement by mutual agreement and the right of PCA to terminate this Agreement with respect to the drag-along provisions of SECTION 6.4 are not assignable by TPI or PCA, and shall not inure to the benefit of any transferee, successor or assign of TPI or TPI, other than to an Affiliate of such party who is (or -18- 96 becomes) a Stockholder, without the prior written consent of the other. Upon the termination of this Agreement pursuant to clauses (i)-(iv) (regardless of whether certain provisions of this Agreement survive such termination), TPI shall sell the 45 shares of Series A Preferred Stock held by it to PCA for the fair market value thereof, as determined by the auditors of Newco. ARTICLE IX MISCELLANEOUS 9.1 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been given if: (i) delivered in person (to the individual whose attention is specified below) or via facsimile (followed immediately with a copy in the manner specified in clause (ii) hereof); (ii) sent by prepaid first-class registered or certified mail, return receipt requested; or (iii) sent by recognized overnight courier service, as follows: to Newco: Packaging Corporation of America 1900 West Field Court Lake Forest, IL 60045 Attention: President to TPI: Tenneco Packaging Inc. 1900 West Field Court Lake Forest, IL 60045 Attention: President Facsimile: (847) 482-4589 with a copy to: Tenneco Packaging Inc. 1900 West Field Court Lake Forest, IL 60045 Attention: General Counsel Facsimile: (847) 482-4589 with a copy to: Jenner & Block One IBM Plaza Chicago, Illinois 60611 Attention: Timothy R. Donovan Facsimile: (312) 840-7271 -19- 97 to PCA: PCA Packaging LLC c/o Madison Dearborn Partners, Inc. Three First National Plaza Suite 3800 Chicago, IL 60602 Attention: Samuel M. Mencoff Justin S. Huscher Facsimile: (312) 895-1056 with a copy to: Kirkland & Ellis 200 E. Randolph Drive Chicago, IL 60601 Attention: William S. Kirsch, P.C. Facsimile: (312) 861-2200 to other Stockholders: To the address which appears on the books and records of Newco or to such other address as any party hereto may, from time to time, designate in a written notice given in like manner. All notices and other communications hereunder shall be effective: (i) the day of delivery when delivered by hand, facsimile or overnight courier; and (ii) three Business Days from the date deposited in the mail in the manner specified above. 9.2 AMENDMENT; WAIVER. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed: (i) in the case of an amendment, by: (A) Newco; (B) Stockholders holding a majority of the Shares of Common Stock held by the TPI Holders; (C) Stockholders holding a majority of the Shares of Common Stock held by PCA Holders; and (D) by each of PCA and TPI (in each case only so long as such Person or any of its Affiliates is a Stockholder); or (ii) in the case of a waiver, by the party against whom the waiver is to be effective. The rights of TPI and PCA to consent to a amendment to this Agreement shall not be assignable by TPI or PCA and shall not inure to the benefit of any transferee, successor or assign of TPI or PCA, other than to an Affiliate of such party who is a (or in connection therewith, becomes) Stockholder, without the prior written consent of the other. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Except as otherwise provided herein, the rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. -20- 98 9.3 ASSIGNMENT. Except as otherwise expressly provided herein, no party to this Agreement may assign any of its rights or obligations under this Agreement without the prior written consent of the other parties hereto. 9.4 ENTIRE AGREEMENT. This Agreement (including the exhibits hereto), contains the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters. 9.5 PUBLIC DISCLOSURE. Each of the parties hereby agrees that, except as may be required to comply with the requirements of any applicable Laws or the rules and regulations of any stock exchange upon which its securities (or the securities of one of its Affiliates) are traded, it shall not make or permit to be made any press release or similar public announcement or communication concerning the execution or performance of this Agreement unless specifically approved in advance by all parties hereto. In the event, however, that legal counsel for any party is of the opinion that a press release or similar public announcement or communication is required by Law or by the rules and regulations of any stock exchange on which such party's securities (or the securities of one of such party's Affiliates) are traded, then such party may issue a public announcement limited solely to that which legal counsel for such party advises is required under such Law or such rules and regulations (and the party making any such announcement shall provide a copy thereof to the other party for review before issuing such announcement). 9.6 PARTIES IN INTEREST. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any Person other than Newco, TPI, PCA or their respective successors or permitted assigns, any rights or remedies under or by reason of this Agreement. 9.7 GOVERNING LAW; SUBMISSION TO JURISDICTION; SELECTION OF FORUM. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to its principles of conflicts of laws. Each party hereto agrees that it shall bring any action or proceeding in respect of any claim arising out of or related to this agreement or the transactions contained in or contemplated by this agreement, whether in tort or contract or at law or in equity, exclusively in any United States federal court or any state court located in the State of Illinois (the "CHOSEN COURTS") and: (i) irrevocably submits to the exclusive jurisdiction of the Chosen Courts; (ii) waives any objection to laying venue in any such action or proceeding in the Chosen Courts; (iii) waives any objection that the Chosen Courts are an inconvenient forum or do not have jurisdiction over any party hereto; and (iv) agrees that service of process upon such party in any such action or proceeding shall be effective if notice is given in accordance with SECTION 9.1 of this Agreement. 9.8 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. 9.9 SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof or thereof. If any provision of this Agreement, or the application thereof to -21- 99 any Person or any circumstance, is invalid or unenforceable: (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision; and (b) the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. 9.10 HEADINGS. The heading references and the table of contents herein are for convenience purposes only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 9.11 EQUITABLE RELIEF. Each party acknowledges that money damages would be inadequate to protect against any actual or threatened breach of this Agreement by any party and that each party shall be entitled to equitable relief, including specific performance and/or injunction, without posting bond or other security in order to enforce or prevent any violations of the provisions of this Agreement. 9.12 NO PARTNERSHIP. This Agreement shall not constitute an appointment of any party as the agent of any other party, nor shall any party have any right or authority to assume, create or incur in any manner any obligation or other liability of any kind, express or implied, against, in the name or on behalf of, any other party. Nothing herein or in the transactions contemplated by this Agreement shall be construed as, or deemed to be, the formation of a partnership by or among the parties hereto. * * * * -22- 100 IN WITNESS WHEREOF, the parties have executed or caused this Agreement to be executed as of the date first written above. TENNECO PACKAGING INC. By: ----------------------------- Name: Title: PCA HOLDINGS LLC By: ----------------------------- Name: Title: PACKAGING CORPORATION OF AMERICA By: ----------------------------- Name: Title: -23- 101 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement ("AGREEMENT") is made this __ day of __________, 1999 by and among Tenneco Packaging Inc., a Delaware corporation ("TPI"), PCA Holdings LLC, a Delaware limited liability company ("PCA"), and Packaging Corporation of America, a Delaware corporation ("NEWCO"). PRELIMINARY RECITALS 1. TPI, PCA and Newco are parties to that certain Contribution Agreement, dated as of __________, 1999 (the "CONTRIBUTION AGREEMENT"), relating to the organization, ownership and management of Newco and certain other matters. 2. As an inducement to TPI and PCA to enter into and consummate the transactions contemplated by the Contribution Agreement, Newco has agreed to provide certain registration rights to TPI and PCA and transferees (to the extent provided herein) of their equity securities of Newco as provided herein. NOW, THEREFORE, the parties hereto AGREE as follows: 1. CERTAIN DEFINITIONS. "COMMON STOCK" means the common stock, par value $.01 per share, of Newco. "PERSON" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, a limited liability company or other unincorporated organization, and a governmental entity or any department, agency or political subdivision thereof. "PIK SECURITIES" means the preferred stock of Newco with a pay-in-kind feature, as described in the Commitment Letters (as such term is defined in the Contribution Agreement). "REGISTRABLE SECURITIES" means, as of any date: (i) Common Stock and PIK Securities issued pursuant to the Contribution Agreement to TPI, PCA or any of their respective Affiliates on the date hereof; and (ii) any Common Stock or PIK Securities issued or issuable with respect to the Common Stock or PIK Securities in the preceding clause (i) by way of or in connection with a stock dividend, stock split, combination of shares, share subdivision, share exchange, recapitalization, merger, consolidation or other reorganization or transaction (including without limitation any PIK Securities issued pursuant to the terms of PIK Securities). As of any date, Registrable Securities owned by TPI or any of its Affiliates are sometimes referred to herein as "TPI REGISTRABLE SECURITIES." As of any date, Registrable Securities owned by PCA or any of its Affiliates are sometimes referred to herein as "PCA REGISTRABLE SECURITIES." As of any date, Registrable Securities owned by any direct or indirect transferee of TPI (other than an Affiliate of 102 TPI) or by any direct or indirect transferee of PCA (other than an Affiliate of PCA) are sometimes referred to herein as "TRANSFEREE REGISTRABLE SECURITIES." As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been distributed to the public pursuant to a offering registered under the Securities Act of 1933, as amended from time to time (the "SECURITIES ACT"), or distributed to the public in compliance with Rule 144 under the Securities Act. For purposes of this Agreement, a Person will be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected. "REGISTRATION EXPENSES" means any and all expenses incident to performance of, or compliance with any registration of securities pursuant to, this Agreement, including, without limitation: (i) the fees, disbursements and expenses of Newco's counsel and accountants; (ii) the fees, disbursements and expenses of one or more firms, as applicable pursuant to the terms of this Agreement, selected as counsel for the holders of the Registrable Securities in connection with the registration of the securities to be disposed of; (iii) all expenses, including registration and filing fees, in connection with the preparation, printing, filing and distribution of the registration statement, any preliminary prospectus or final prospectus, term sheets and any other offering documents, and amendments and supplements thereto, and the mailing and delivering of copies thereof to any underwriters and dealers; (iv) the cost of printing or producing any underwriting agreements and blue sky or legal investment memoranda, and any other documents in connection with the offering, sale or delivery of the securities to be disposed of; (v) all expenses in connection with the qualification of the securities to be disposed of for offering and sale under state securities laws, including the fees, disbursements and expenses of counsel for the underwriters or the holders of the Registrable Securities in connection with such qualification and in connection with any blue sky and legal investment surveys; (vi) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the securities to be disposed of; (vii) transfer agents' and registrars' fees and expenses and the fees and expenses of any other agent or trustee appointed in connection with such offering; (viii) all security engraving and security printing expenses; (ix) all fees, disbursements and expenses payable in connection with the listing of the securities on any securities exchange or automated interdealer quotation system and the rating of such securities; (x) any other fees, disbursements and expenses of underwriters customarily paid by the sellers of securities (excluding underwriting discounts and commissions); (xi) all liability insurance expense; and (xii) other out-of-pocket expenses of the holders of the Registrable Securities participating in such registration. Notwithstanding the foregoing, each holder of the Registrable Securities and Newco shall be responsible for its own internal administrative and similar costs. 2. DEMAND REGISTRATIONS. (a) GENERAL. At any time and from time to time, upon written notice from either the holders of at least 75% of the TPI Registrable Securities or the holders of at least 75% of the PCA Registrable Securities requesting that Newco effect the registration under the Securities Act of any or all the TPI Registrable Securities or the PCA Registrable Securities, respectively, Newco shall effect the registration (under the Securities Act and applicable state securities laws) of such securities (and other Registrable Securities subject to Sections 2(c) and 2(d) below) in accordance with such -2- 103 notice, Section 5 below and the other provisions of this Agreement. The notice shall specify the approximate number of Registrable Securities to be registered and the expected per share price range for the offering. A registration pursuant to this Section 2 is sometimes referred to herein as a "DEMAND REGISTRATION." (b) LIMITATIONS ON DEMAND REGISTRATIONS; DEMAND REGISTRATION FORMS AND EXPENSES. The holders of the TPI Registrable Securities, on the one hand, and the holders of the PCA Registrable Securities, on the other hand, each shall be entitled to separately request pursuant to this Section 2: (i) three (3) effected registrations on Form S-1 or any similar or successor long form registration including, without limitation, Form A contemplated by the Securities and Exchange Commission ("SEC") in Release No. 33-7606 dated October 15, 1998 (the "AIRCRAFT CARRIER RELEASE") ("LONG-FORM REGISTRATIONS") in which Newco shall pay all Registration Expenses; (ii) an unlimited number of registrations on Form S-2 or S-3 or any similar or successor short form registration including, without limitation, Form B contemplated by the SEC in the Aircraft Carrier Release ("SHORT-FORM REGISTRATIONS") in which Newco shall pay all Registration Expenses; and (iii) an unlimited number of Long-Form Registrations in which the holders of the Registrable Securities participating in such registration shall pay all Registration Expenses. For purposes of clause (iii) above, each holder of securities included in accordance with this Agreement in any registration pursuant to clause (iii) shall pay those Registration Expenses allocable to the registration of such holder's securities so included, and any Registration Expenses not so allocable will be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered. Newco shall pay and be solely responsible for Registration Expenses with respect to registrations effected under clause (i) and (ii) above. After Newco has become subject to the Securities Exchange Act of 1934, as amended from time to time ("EXCHANGE ACT"), Newco will use its reasonable best efforts to make Short-Form Registrations available for the sale of Registrable Securities. Demand Registrations will be Short- Form Registrations whenever Newco is permitted to use any applicable short form; provided, however, that Newco shall nevertheless use a Long-Form Registration Statement in the event that both: (i) the use of a Short-Form Registration Statement would limit the offering to existing security holders, qualified institutional buyers or other classes of offerees or would otherwise, in the opinion of the managing underwriters, have an adverse effect on the offering under the Securities Act and regulations thereunder as then in effect; and (ii) the holders of 90% of the TPI Registrable Securities or PCA Registrable Securities, as the case may be, initially requesting the Demand Registration direct in such request that Newco utilize a Long-Form Registration Statement. -3- 104 Notwithstanding any other provision of this Agreement to the contrary, a registration requested hereunder shall not be deemed to have been effected: (i) unless it has become and remains effective for the period specified in Section 5(b); (ii) if after it has become effective such registration is interfered with by any stop order, injunction or other order or requirement of the Securities and Exchange Commission ("SEC") or other governmental agency or court for any reason other than due solely to the fault of the holders of the Registrable Securities participating therein and, as a result thereof, the Registrable Securities requested to be registered cannot be completely distributed in accordance with the plan of distribution set forth in the registration statement; or (iii) if the conditions to closing specified in any purchase agreement or underwriting agreement entered into in connection with any such registration are not satisfied or waived other than due solely to the fault of the holders of the Registrable Securities participating therein. In addition, a Demand Registration initially requested by the holders of the TPI Registrable Securities shall not be deemed to have been effected if the holders of the TPI Registrable Securities are unable, as a result of the priority provisions in Section 2(d) below, to sell at least 90% of the TPI Registrable Securities initially requested to be included in such registration. Similarly, a Demand Registration initially requested by the holders of the PCA Registrable Securities shall not be deemed to have been effected if the holders of the PCA Registrable Securities are unable, as a result of the priority provisions in Section 2(d) below, to sell at least 90% of the PCA Registrable Securities initially requested to be included in such registration. (c) NOTICE TO OTHER HOLDERS; SELECTION OF UNDERWRITER AND HOLDER'S COUNSEL. Within five (5) days after receipt of a request for a Demand Registration, Newco will give prompt written notice (in any event within five (5) days after its receipt of notice of any exercise of Demand Registration rights under this Agreement) of such request to all other holders of Registrable Securities, and subject to Section 2(d) below, will include within such registration all Registrable Securities with respect to which Newco has received written requests for inclusion therein within fifteen (15) days after receipt of Newco's notice. The holders of a majority of the TPI Registrable Securities or PCA Registrable Securities, as applicable, submitting the initial request (i.e. excluding the holders submitting requests after Newco's notice) shall have the right to select the investment bankers and managers for the offering, subject to the approval of the other holders of the TPI Registrable Securities and PCA Registerable Securities, if any, participating in such registration pursuant to this Agreement, which approval shall not be unreasonably withheld. Counsel for all holders of Registrable Securities in connection with such registration shall be selected: (i) by the holders of a majority of the TPI Registrable Securities, if holders of the TPI Registrable Securities make the initial registration request; or (ii) by the holders of a majority of the PCA Registrable Securities, if the holders of the PCA Registrable Securities make the initial registration request; provided, however, if the holders of a majority of the PCA Registrable Securities, on the one hand, and a majority of the TPI Registrable Securities, on the other hand, reasonably conclude, after consultation with the other, that such representation is likely to result in a conflict of interest or materially adversely affect either group's rights in connection with such registration, then the holders of a majority of the PCA Registrable Securities and the holders of a majority of the TPI Registrable Securities, respectively, shall each be entitled to select a separate firm to represent them as counsel in connection with such registration. The fees and expenses of such firm or firms acting as counsel for the holders of the Registrable Securities shall be paid by Newco. -4- 105 (d) PRIORITY ON DEMAND REGISTRATIONS. Newco shall not include in any Demand Registration any securities which are not Registrable Securities without the prior written consent of the holders of at least 90% of the Registrable Securities included in such registration. If a Demand Registration is an underwritten offering and the managing underwriters advise Newco in writing that in their opinion the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold in an orderly manner in such offering within a price range acceptable to the holders of a majority of the TPI Registrable Securities or PCA Registrable Securities, as applicable, initially requesting registration, Newco will include in such registration: (A) if requested by the holders of the TPI Registrable Securities or by the holders of the PCA Registrable Securities at any time during the 14-month period commencing on the date hereof (the "SPECIAL PRIORITY PERIOD"), only the number of Registrable Securities which such underwriters advise in writing can be sold in such manner and within such price range in the following order of priority: (i) first, the TPI Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such TPI Registrable Securities on the basis of the number of shares requested to be included by each such holder; (ii) second, the PCA Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such PCA Registrable Securities on the basis of the number of shares requested to be included by each such holder; (iii) third, the Transferee Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such Transferee Registrable Securities on the basis of the number of shares requested to be included by each such holder; and (iv) fourth, any other securities requested to be included in such registration; and (B) if requested by the holders of the TPI Registrable Securities or by the holders of the PCA Registrable Securities at any time after the Special Priority Period, only the number of Registrable Securities which such underwriters advise in writing can be sold in such manner and within such price range in the following order of priority: -5- 106 (i) first, the TPI Registrable Securities and the PCA Registrable Securities requested to be included therein, pro-rata among the holders of such Registrable Securities on the basis of the number of shares requested to be included by each such holder; (ii) second, the Transferee Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such Transferee Registrable Securities on the basis of the number of shares requested to be included by each such holder; and (iii) third, any other securities requested to be included in such registration. (e) RESTRICTIONS ON DEMAND REGISTRATIONS. Newco will not be obligated to effect any Demand Registration within 90 days after the effective date of a previous Demand Registration or previous registration in which holders of Registrable Securities were given piggyback rights pursuant to Section 3 at an offering price acceptable to the holders of the Registrable Securities and in which there was no reduction in the number of Registrable Securities requested to be included. Additionally, Newco may postpone for up to 90 days (on not more than one occasion during any 12-month period) the filing or the effectiveness of a registration statement for a Demand Registration if, based on the advice of counsel, Newco reasonably determines that such Demand Registration would likely have an adverse effect on any proposal or plan by Newco to engage in any acquisition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or similar transaction; provided, however, that in such event, the holders of Registrable Securities initially requesting such Demand Registration will be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration will not count as one of the permitted Demand Registrations hereunder and Newco will pay all Registration Expenses in connection with such registration. (f) OTHER REGISTRATION RIGHTS. Newco will not register for the benefit of any Person other than TPI, PCA or their respective direct or indirect transferees, or grant to any such other Person the right to request Newco to register or to participate in Piggyback Registrations with respect to, any equity securities of Newco, or any securities convertible or exchangeable into or exercisable for such securities, without the prior written consent of both (i) TPI, as long as it or any of its Affiliates owns any TPI Registrable Securities and (ii) PCA, as long as it or any of its Affiliates owns any PCA Registrable Securities. 3. PIGGYBACK REGISTRATIONS. (a) GENERAL; NOTICE TO HOLDERS. In addition to the registration rights in Section 2 above, whenever Newco proposes to register any of its securities under the Securities Act (other than pursuant to a Demand Registration hereunder) and the registration form to be used may be used for the registration of Registrable Securities, Newco will give prompt written notice (in any event within five (5) days after its receipt of notice of any exercise of demand registration rights other than under this Agreement) to all holders of Registrable Securities of its intention to effect such a registra tion. Subject to Sections 3(c) and 3(d) below, Newco shall include in such registration all Registrable -6- 107 Securities with respect to which Newco has received written requests for inclusion therein within fifteen (15) days after the receipt of Newco's notice. Registrations under this Section 3 are sometimes referred to herein as "PIGGYBACK REGISTRATIONS." (b) NUMBER OF PIGGYBACK REGISTRATIONS; PIGGYBACK REGISTRATION EXPENSES. The holders of the Registrable Securities shall be entitled to participate in an unlimited number of Piggyback Registrations. The Registration Expenses of the holders of Registrable Securities will be paid by Newco in all Piggyback Registrations. (c) PRIORITY ON PRIMARY PIGGYBACK REGISTRATIONS. Subject to Section 3(f) below, if a Piggyback Registration is an underwritten primary registration on behalf of Newco, and the managing underwriters advise Newco in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to Newco, Newco will include in such registration: (A) in the case of a registration with respect to which Newco has provided notice under Section 3(a) above at any time during the Special Priority Period, only the number of securities (including Registrable Securities) which such underwriters advise in writing can be sold in such manner and within such price range in the following order of priority: (i) first, the securities Newco proposes to sell; (ii) second, the TPI Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such TPI Registrable Securities on the basis of the number of shares requested to be included by each such holder; (iii) third, the PCA Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such PCA Registrable Securities on the basis of the number of shares requested to be included by each such holder; (iv) fourth, the Transferee Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such Transferee Registrable Securities on the basis of the number of shares requested to be included by each such holder; and (v) fifth, any other securities requested to be included in such registration; and (B) in the case of a registration with respect to which Newco has provided notice under Section 3(a) above at any time after the Special Priority Period, only the number of securities (including Registrable Securities) which such underwriters advise in writing can be sold in such manner and within such price range in the following order of priority: -7- 108 (i) first, the securities Newco proposes to sell; (ii) second, the TPI Registrable Securities and the PCA Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such Registrable Securities on the basis of the number of shares requested to be included by each such holder; (iii) third, the Transferee Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such Transferee Registrable Securities on the basis of the number of shares requested to be included by each such holder; and (iv) fourth, any other securities requested to be included in such registration. (d) PRIORITY ON SECONDARY PIGGYBACK REGISTRATIONS. Subject to Section 3(f) below, if a Piggyback Registration is an underwritten secondary registration on behalf of holders of Newco's securities, and the managing underwriters advise Newco in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such registration, Newco will include in such registration: (A) in the case of a registration with respect to which Newco has provided notice under Section 3(a) above at any time during the Special Priority Period, only the number of securities (including Registrable Securities) which can be sold in such manner and within such price range in the following order of priority: (i) first, the securities requested to be included therein by the holders requesting such registration and the TPI Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such securities (including Registrable Securities) on the basis of the number of shares requested to be included by each such holder; (ii) second, the PCA Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such PCA Registrable Securities on the basis of the number of shares requested to be included by each such holder; (iii) third, the Transferee Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such Transferee Registrable Securities on the basis of the number of shares requested to be included by each such holder; and (iv) fourth, any other securities requested to be included in such registration; and -8- 109 (B) in the case of a registration with respect to which Newco has provided notice under Section 3(a) above at any time after the Special Priority Period, only the number of securities (including Registrable Securities) which can be sold in such manner and within such price range in the following order of priority: (i) first, the securities requested to be included therein by the holders requesting such registration, the TPI Registrable Securities, if any, requested to be included therein, and the PCA Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such securities (including Registrable Securities) on the basis of the number of shares requested to be included by each such holder; (ii) second, the Transferee Registrable Securities, if any, requested to be included therein, pro-rata among the holders of such Transferee Registrable Securities on the basis of the number of shares requested to be included by each such holder; and (iii) third, any other securities requested to be included in such registration. (e) SELECTION OF UNDERWRITER AND HOLDER'S COUNSEL. If any Piggyback Registration is an underwritten offering, the selection of investment bankers and managers for the offering must be approved by the holders of a majority of the Registrable Securities included in such Piggyback Registration. Such approval will not be unreasonably withheld. The holders of the TPI Registrable Securities and the PCA Registrable Securities shall have the right to select one or two firms as counsel as provided in Section 2(c) above, the fees and expenses of which shall be paid by Newco. (f) OTHER REGISTRATIONS. If Newco has been requested by the holders of Registrable Securities to file a registration statement pursuant to Section 2 above or if it has filed a Registration Statement pursuant to this Section 3, and if such previous request or registration has not been withdrawn or abandoned, Newco will not file or cause to be effected any other registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until the expiration of the effectiveness period required under Section 5(b) below. 4. HOLDBACK AGREEMENTS. (a) AGREEMENT BY HOLDERS. Each holder of Registrable Securities agrees not to effect any public sale or distribution (including sales pursuant to Rule 144 under the Securities Act) of equity securities of Newco, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the 180-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration in which -9- 110 Registrable Securities are included (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree. (b) AGREEMENTS BY NEWCO. Newco agrees: (i) not to effect or facilitate any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the thirty days prior to and during the 180-day period beginning on the effective date of any underwritten Demand Registration or Piggyback Registration (except as part of such underwritten Piggyback Registration or pursuant to registrations on Form S-8 or any successor form), unless the underwriters managing the registered public offering (and in the case of a Demand Registration, the holders of a majority of the Registrable Securities included therein) otherwise agree; and (ii) to cause Newco's directors, officers and affiliates not to effect or facilitate any public sale or distribution (including sales pursuant to Rule 144 under the Securities Act) of any equity securities, or any securities convertible into or exchangeable or exercisable for such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering, the holders of a majority of the TPI Registrable Securities participating in such registration and the holders of a majority of the PCA Registrable Securities participating in such registration otherwise agree. 5. REGISTRATION AND QUALIFICATION. If and whenever Newco is required to effect the registration of any Registrable Securities, Newco shall as promptly as possible: (a) prepare, file and use its reasonable best efforts to cause to become effective a registration statement under the Securities Act relating to the Registrable Securities to be offered and effect the sale of such Registrable Securities, in each case in accordance with the intended method of disposition thereof (Newco shall cause such registration statement to be effective as promptly as possible but in any event within 120 days of the request); (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities included therein until the earlier of: (i) such time as all of such Registrable Securities included therein have been disposed of in accordance with the intended methods of disposition; and (ii) the expiration of 180 days after such registration statement becomes effective; provided, that such 180-day period shall be extended for such number of days that equals the number of days elapsing from (x) the date the written notice contemplated by paragraph 5(g) below is given by Newco to (y) the date on which Newco delivers to the holders of the Registrable Securities included in such registration statement the supplement or amendment contemplated by paragraph 5(g) below; (c) provide copies of all registration statements, prospectus and amendments and supplements to each firm selected by the holders of the Registrable Securities in accordance with this Agreement at least ten days prior to the filing thereof (if practicable, at least one day in the case of an amendment or supplement prepared pursuant to Section 5(g) below), with such counsel being provided with the opportunity (but not the obligation) to review and comment on such documents; -10- 111 (d) furnish to the holders of the Registrable Securities included in such registration statement and to any underwriter of such Registrable Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus) in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, such number of other offering documents, copies of any and all transmittal letters or other correspondence to or received from, the SEC or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering, and such other documents, as the holders of such Registrable Securities or such underwriter may reasonably request; (e) use its reasonable best efforts to register or qualify all Registrable Securities covered by such registration statement under the securities or blue sky laws of such jurisdictions as the holders of the Registrable Securities included in such registration statement or any underwriter of such Registrable Securities shall request, and use its reasonable best efforts to obtain all appropriate registrations, permits and consents in connection therewith, and do any and all other acts and things which may be necessary or advisable to enable such holders of such Registrable Securities or any such underwriter to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement; (f) furnish to the holders of the Registrable Securities included in such registration statement and to any underwriter of such Registrable Securities: (i) an opinion of counsel for Newco addressed to the holders of such Registrable Securities and dated the date of the closing under the underwriting agreement (if any) (or if such offering is not underwritten, dated the effective date of the registration statement); and (ii) a "cold comfort" letter addressed to the holders of such Registrable Securities and signed by the independent public accountants who have audited the financial statements of Newco included in such registration statement, in each such case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the holders of such Securities may reasonably request and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements; (g) as promptly as practicable, notify the holders of the Registrable Securities included in such registration statement in writing: (i) at any time when a prospectus relating to a registration statement hereunder is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (ii) of any request by the SEC or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and in either such case, prepare and furnish to the holders of such Registrable Securities a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; -11- 112 (h) cause all such Registrable Securities included in such registration statement to be listed on each securities exchange on which similar securities issued by Newco are then listed and, if not so listed, to be listed on the New York Stock Exchange; (i) furnish for delivery in connection with the closing of any offering of Registrable Securities pursuant to a registration hereunder unlegended certificates representing ownership of the Registrable Securities being sold in such denominations as shall be requested by the holders of the Registrable Securities or the underwriters; (j) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (k) enter into such customary agreements and take all such other actions as the holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including effecting a stock split or a combination of shares); (l) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first day of Newco's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (m) permit any holder of Registrable Securities which holder, in its sole and exclusive judgment, might be deemed to be an underwriter or a controlling person of Newco, to participate in the preparation of such registration statement and to require the insertion therein of material, furnished to Newco in writing, which in the reasonable judgment of such holder and its counsel should be included; and (n) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Common Stock included in such registration statement for sale in any jurisdiction, Newco will use its reasonable best efforts promptly to obtain the withdrawal of such order. If any such registration or comparable statement refers to any holder of Registrable Securities by name or otherwise as the holder of any securities of Newco and if in its sole and exclusive judgment, such holder is or might be deemed to be a controlling person of Newco, such holder will have the right to require: (i) the insertion therein of language, in form and substance satisfactory to such holder and presented to Newco in writing, to the effect that the holding by such holder of such securities is not to be construed as a recommendation by such holder of the investment quality of Newco's securities covered thereby and that such holding does not imply that such holder will assist in meeting any future financial requirements of Newco; or (ii) in the event that such reference to such holder by name or otherwise is not required by the Securities Act or any similar -12- 113 federal statute then in force, the deletion of the reference to such holder; provided that with respect to this clause (ii) such holder will furnish to Newco an opinion of counsel to such effect. 6. RECAPITALIZATION; UNDERWRITING; DUE DILIGENCE. (a) For any Piggyback Registration or Demand Registration prior to the time Newco becomes subject to the Exchange Act with respect to Registrable Securities, Newco shall effect a stock split, stock dividend or stock combination which in the opinion of the underwriters is desirable for the sale and marketing of the Registrable Securities to the public. (b) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration requested under this Agreement, Newco shall enter into an underwriting agreement with such underwriters for such offering, which agreement will contain such representations and warranties by Newco and such other terms and provisions as are customarily contained in underwriting agreements of Newco to the extent relevant and as are customarily contained in underwriting agreements generally with respect to secondary distributions to the extent relevant, including, without limitation, indemnification and contribution provisions substantially to the effect and to the extent provided in Section 7(a), and agreements as to the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 5(f). Subject to Section 9 below, the holders of the Registrable Securities included in such registration shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, Newco to and for the benefit of such underwriters, shall also be made to and for the benefit of the holders of such Registrable Securities. (c) In connection with the preparation and filing of each registration statement registering Registrable Securities under the Securities Act pursuant to this Agreement, Newco shall give the holders of the Registrable Securities included in such registration and the underwriters, if any, and their respective counsel, accountants and agents, the opportunity (but such persons shall not have the obligation) to review the books and records of Newco and to discuss the business of Newco with its officers and the independent public accountants who have certified the financial statements of Newco as shall be necessary, in the opinion of the holders of such Registrable Securities and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 7. INDEMNIFICATION. (a) NEWCO INDEMNIFICATION. Newco agrees to indemnify, to the extent permitted by law, each holder of Registrable Securities, its officers and directors and each Person who controls such holder (within the meaning of the Securities Act) and the officers, directors, affiliates, employees and agents of each of the foregoing (whether or not any litigation is commenced or threatened and whether or not such indemnified Persons are parties to any litigation commenced or threatened), against all losses, claims, damages, liabilities and expenses including, without limitation, attorneys' fees, expert fees and amounts paid in settlement, resulting from or arising out of any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not 114 misleading, except insofar as the same are caused by or contained in any information furnished in writing to Newco by such holder expressly for use therein or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after Newco has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, Newco will indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the holders of the Registrable Securities or any underwriter and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability that Newco may otherwise have to the holders of the Registrable Securities or any underwriter of the Registrable Securities or any controlling Person of the foregoing and the officers, directors, affiliates, employees and agents of each of the foregoing. (b) HOLDER INDEMNIFICATION. In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder agrees to indemnify, to the extent permitted by law, Newco, its directors and officers and each Person who controls Newco (within the meaning of the Securities Act) and the officers, directors, affiliates, employees and agents of each of the foregoing (whether or not any litigation is commenced or threatened and whether or not such indemnified Persons are parties to any litigation commenced or threatened), against any losses, claims, damages, liabilities and expenses including, without limitation, attorneys' fees, expert fees and amounts paid in settlement, resulting from or arising out of any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information furnished in writing to Newco by such holder expressly for use in such registration statement; provided, however, that the obligation to indemnify will be individual to each such holder and will be limited to the net amount of proceeds received by such holder from the sale of Registrable Securities pursuant to such registration statement. (c) RESOLUTION OF CLAIMS. Any Person entitled to indemnification hereunder will: (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification hereunder; and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) CONTRIBUTION. If the indemnification provided for in this Section 7 shall for any reason be unavailable (other than in accordance with its terms) to an indemnified party in respect -14- 115 of any loss, claim, damage, liability or expense referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage, liability or expense in such proportion as shall be appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other with respect to the statements or omissions which resulted in such loss, claim, damage, liability or expense as well as any other relevant equitable considerations. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the indemnifying party on the one hand or the indemnified party on the other. The amount paid or payable by an indemnified party as a result of the loss, cost, claim, damage, liability or expense, or action in respect thereof, referred to above in this Section 7(d) shall be deemed to include, for purposes of this Section 7(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. In any event, a holder's obligation to provide contribution pursuant to this Section 7(d) shall be limited to the net amount of proceeds received by such holder from the sale of Registrable Securities pursuant to such registration statement. (e) STATE SECURITIES LAWS. Indemnification and contribution similar to that specified in the preceding paragraphs of this Section 7 (with appropriate modifications) shall be given by Newco, the holders of the Registrable Securities and underwriters with respect to any required registration or other qualification of securities under any state law or regulation or governmental authority. (f) OTHER RIGHTS. The obligations of the parties under this Section 7 shall be in addition to any liability which any party may otherwise have to any other party. 8. RULE 144. Newco shall use its reasonable best efforts to ensure that the conditions to the availability of Rule 144 set forth in paragraph (c) thereof shall be satisfied. Upon the request of the holders of a majority of the TPI Registrable Securities or the holders of a majority of the PCA Registrable Securities, Newco will deliver to such holders a written statement as to whether it has complied with such requirements. 9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No holder of Registrable Securities may participate in any registration hereunder which is underwritten unless such holder: (a) agrees to sell such holder's securities on the basis provided in any underwriting arrangements contemplated by such offering; and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements; provided, however, that no holder of Registrable Securities included in any underwritten registration will be required to make: (i) any representations or warranties to Newco, the underwriters or other Persons other than representations and warranties regarding such holder and such holder's intended method of distribution; or (ii) any indemnities to Newco, the underwriter or other Persons on terms which are not substantially identical to the provisions in Section 7(b) above. -15- 116 10. MISCELLANEOUS. (a) NO INCONSISTENT AGREEMENTS. Newco represents and warrants to the holders of the Registrable Securities that it has not entered into, and agrees with the holders of the Registrable Securities that it will not hereafter enter into, any agreement with respect to its securities which is inconsistent or conflicts with, or violates the rights granted to the holders of Registrable Securities in, this Agreement. (b) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. In addition to Newco's obligations under Section 6(a) above, Newco will not take any action, or permit any change to occur, with respect to its securities which would adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agree ment or which would adversely affect the marketability of such Registrable Securities in any such registration (including effecting a stock split or a combination of shares). (c) REMEDIES. Each holder of Registrable Securities will have all rights and remedies set forth in this Agreement, Newco's Certificate of Incorporation and all rights and remedies which such holders have been granted at any time under any other agreement and all of the rights which such holders have under any law. Any Person having any rights under any provision of this Agreement will be entitled to enforce such rights specifically, without posting a bond or other security, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. (d) AMENDMENTS; WAIVER. Except as otherwise expressly provided herein, the provisions of this Agreement may be amended and Newco may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if Newco has obtained the written consent of both: (i) TPI, as long as it or any of its Affiliates owns any TPI Registrable Securities; and (ii) PCA, as long as it or any of its Affiliates owns any PCA Registrable Securities. No other course of dealing between Newco and the holder of any Registrable Securities or any delay in exercising any rights hereunder or under the Certificate of Incorporation will operate as a waiver of any rights of any such holders. For purposes of this Agreement, shares held by Newco or any of its Subsidiaries will not be deemed to be Registrable Securities. If Newco pays any consideration to any holder of Registrable Securities for such holder's consent to any amendment, modification or waiver hereunder, Newco will also pay each other holder granting its consent hereunder equivalent consideration computed on a pro rata basis. In the event that the Securities Act, Exchange Act and/or regulations thereunder, respectively, are amended in a material respect and one or more of such amendments reduce or diminish the benefits hereunder to the holders of the Registrable Securities, including, without limitation, amendments which may be adopted in connection with the Aircraft Carrier Release (any such reducing or diminishing amendments being referred to herein as "SECURITIES LAW AMENDMENTS"), Newco shall, upon the written request of both (i) TPI, as long as it or any of its Affiliates owns any TPI Registrable Securities, and (ii) PCA, as long as it or any of its Affiliates owns any PCA Registrable Securities, amend this Agreement to provide the holders of the Registrable Securities with benefits which, after giving effect to such Securities Law Amendments, are equivalent to the benefits hereunder absent such Securities Law Amendments. -16- 117 (e) HEADINGS. The headings in this Agreement are inserted for convenience only and shall not be deemed to define or limit the scope of any section or subsection. (f) NOTICES. All requests, notices, demands or other communications shall be in writing and will be deemed to have been given when delivered to the recipient, when received by facsimile, one (1) business day after the date when sent to the recipient by overnight courier service or five (5) business days after the date when mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such requests, notices, demands and other communications will be sent to TPI, PCA and to Newco at the addresses indicated below: If to TPI: Tenneco Packaging Inc. 1900 West Field Court Lake Forest, Illinois 60045 Attn: General Counsel Telecopy: 847/482-4589 With a copy to: Jenner & Block One IBM Plaza Chicago, Illinois 60611 Attn: Timothy R. Donovan, Esq. Telecopy: 312/840-7271 If to PCA: PCA Holdings, LLC c/o Madison Dearborn Partners, Inc. Three First National Plaza Suite 3800 Chicago, Illinois 60602 Attn: Samuel M. Mencoff Justin S. Huscher Telecopy: (312) 895-1056 With a copy to: Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attn: William S. Kirsh, P.C. Telecopy: 312/861-2200 -17- 118 If to Newco: Packaging Corporation of America --------------------------------- --------------------------------- --------------------------------- Telecopy: ------------------------ or to such other address or to the attention of such other Person as the recipient party has specified by prior written notice in accordance with the procedures provided above. Notices to any other holders of Registrable Securities shall be sent to the address specified by prior written notice to Newco, TPI and PCA in accordance with the procedures provided above. (g) NO THIRD-PARTY BENEFICIARIES. Subject to Section 10(k), this Agreement will not confer any rights or remedies upon any Person other than Newco, TPI and PCA and their respective successors. (h) ENTIRE AGREEMENT. This Agreement (including the documents referred to herein) constitutes the entire agreement among the parties and supersedes any prior understandings, agreements, or representations by or among the parties, written or oral, that may have related in any way to the subject matter hereof. (i) GOVERNING LAW. The corporate law of the State of Delaware will govern all issues concerning the relative rights of Newco and its stockholders. All other questions concerning the construction, validity and interpretation of this Agreement will be governed by the internal law, and not the law of conflicts, of the State of Illinois. (j) SEVERABILITY. In the event any provision in this Agreement is held to be invalid as applied to any fact or circumstance, it shall be ineffective only to the extent of such invalidity, and such invalidity shall not affect the other provisions of this Agreement or the same provision as applied to any other fact or circumstance. (k) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the parties hereto and their respective successors and any Person who becomes a holder of Registrable Securities. This Agreement shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and any Person who becomes a holder of Registrable Securities (to the extent provided herein with respect to Registrable Securities of the type held by such holder). (l) COUNTERPARTS. This Agreement may be executed in counterparts. (m) TERMINATION. The rights of all holders of TPI Registrable Securities under this Agreement shall terminate as of the date when TPI, together with its Affiliates, holds Registrable Securities with a fair market value of less than $500,000. -18- 119 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. NEWCO: Packaging Corporation of America By ------------------------------------ Its ----------------------------------- TPI: Tenneco Packaging Inc. By ------------------------------------ Its ----------------------------------- PCA: PCA Holdings, LLC By ------------------------------------ Its ----------------------------------- -19- EX-12 7 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHANGES 1 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, ------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) Income from continuing operations........................... $255 $361 $218 $258 $238 Add: Interest.................................................. 240 216 195 160 104 Portion of rentals representative of interest factor...... 54 54 60 57 52 Preferred stock dividend requirements of majority-owned subsidiaries........................................... 28 21 21 23 -- Income tax expense and other taxes on income.............. 116 163 194 231 114 Amortization of interest capitalized...................... 2 2 2 2 1 Undistributed (earnings) losses of affiliated companies in which less than a 50% voting interest is owned......... 2 2 (1) -- -- ---- ---- ---- ---- ---- Earnings as defined.................................. $697 $819 $689 $731 $509 ==== ==== ==== ==== ==== Interest.................................................... $240 $216 $195 $160 $104 Interest capitalized........................................ 1 2 6 5 2 Portion of rentals representative of interest factor........ 54 54 60 57 52 Preferred stock dividend requirements of majority-owned subsidiaries on a pre-tax basis........................... 43 33 37 42 -- ---- ---- ---- ---- ---- Fixed charges as defined............................. $338 $305 $298 $264 $158 ==== ==== ==== ==== ==== Ratio of earnings to fixed charges.......................... 2.06 2.69 2.31 2.77 3.22 ==== ==== ==== ==== ====
EX-21 8 SUBSIDIARIES OF TENNECO INC. 1 EXHIBIT 21 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 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 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).............................. 99.75 (Tenneco Inc. owns 99.75%; and Kobusch Folien GmbH owns .25%) 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%) 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).......................... <1 (Tenneco Inc. owns >99%; and Scriptoria N.V. owns <1%) Sentinel GmbH Verpackungen (Germany).............................. 99 (Tenneco Inc. owns >99%; and Scriptoria N.V. owns <1%) Tenneco Asia Inc. (Delaware)...................................... 100 Tenneco Asheville Inc. (Delaware)................................. 100 Tenneco Automotive Deutschland GmbH (Germany)..................... 1 (Tenneco Inc. owns 1%; and Tenneco Deutschland Holdinggesellschaft mbH owns 99%) 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.) 1 2 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Automotive Inc. (Delaware) Beijing Monroe Automobile Shock Absorber Company Ltd (Peoples Republic of China)............................. 51% (Tenneco Automotive Inc. owns 51%; and Beijing Automotive Industry Corporation, an unaffiliated company, owns 49%) Dalian Walker-Gillet Muffler Co. Ltd. (Peoples Republic of China)............................................... 55 (Tenneco Automotive Inc. owns 55%; and non-affiliates own 45%) McPherson Strut Company Inc. (Delaware)...................... 100 Precision Modular Assembly Corp. (Delaware).................. 100 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 Japan Ltd. (Japan)........................ 100 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 100% 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 Autopartes Walker S.A. de C.V. (Mexico)................ 100 Consorcio Terranova S.A. de C.V. (Mexico)........... 99.99 (Autopartes Walker S.A. de C.V. owns 99.99%; and Josan Latinamericana S.A. de C.V., an unaffiliated company, owns 0.01%) Monroe-Mexico S.A. de C.V. (Mexico)................. 100 Tenneco Automotive Servicios de Mexico, S.A. de C.V. (Mexico)................................ 0.01 (Proveedora Walker S. de R.L. de C.V. owns 49,999 shares, and Monroe-Mexico, S.A. de C.V. owns 1 share) Proveedora Walker S. de R.L. de C.V. (Mexico)....... 99.99 (Autopartes Walker S.A. de C.V. owns 99.99%; and Pullmex S. de R.L. de C.V. owns .01%) Pullmex S. de R.L. de C.V. (Mexico)............. 0.01 (Proveedora Walker S. de R.L. de C.V. owns 0.01% and Autopartes Walker S.A. de C.V. owns 99.99%) Tenneco Automotive Servicios de Mexico, S.A. de C.V. (Mexico)................................ 99.99 (Proveedora Walker S. de R.L. de C.V. owns 49,999 shares, and Monroe-Mexico, S.A. de C.V. owns 1 share) Pullmex S. de R.L. de C.V........................... 99.99 (Autopartes Walker S.A. de C.V. owns 99.9%; and Proveedora Walker S. de R.L. de C.V. owns 0.1%) Proveedora Walker S. de R.L. de C.V. (Mexico)... 0.01 (Pullmex S. de R.L. de C.V. owns 0.01%; and Autopartes Walker S.A. de C.V. owns 99.99%) 2 3 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Automotive Inc. (Delaware) Subsidiaries of The Pullman Company (Delaware) Clevite Industries Inc. (Delaware).................... 100% Peabody International Corporation (Delaware).......... 100 Barasset Corporation (Ohio)....................... 100 Peabody Galion Corporation (Delaware)............. 100 Peabody Gordon-Piatt, Inc. (Delaware)............. 100 Peabody N.E., Inc. (Delaware)..................... 100 Peabody World Trade Corporation (Delaware)........ 100 Peabody-Myers Corporation (Illinois).............. 100 Pullman Canada Ltd. (Canada)...................... 61 (Peabody International Corporation owns 61%; and The Pullman Company owns 39%) Pullman Canada Ltd. (Canada).......................... 39 (The Pullman Company owns 39%; and Peabody International Corporation owns 61%) Pullman Standard Inc. (Delaware)...................... 100 Tenneco Brazil Ltda. (Brazil)......................... 100 Tenneco Automotive Brazil Ltda. (Brazil).......... 100 Tenneco Automotive RSA Company (Delaware)...................... 100 Tenneco Automotive Trading Company (Delaware).................. 100 Tenneco Brake, Inc. (Delaware)................................. 100 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 Vermoegensverwaltung, an unaffiliated company, owns 0.03%) GILLET Unternehmesverwaltungs GmbH (Germany)............... 100 Heinrich Gillet GmbH & Co. KG (Germany)............... 0.1 (GILLET Unternehmesverwaltungs GmbH owns 0.1%; and Tenneco Deutschland Holdinggesellschaft mbH owns 99.9%. The subsidiaries of Heinrich Gillet GmbH & Co. KG are listed below.) Heinrich Gillet GmbH & Co. KG (Germany).................... 99.9 (Tenneco Deutschland Holdinggesellschaft mbH owns 99.9%; and GILLET Unternehmesverwaltungs GmbH owns 0.1%) ELGIRA Montagebetrieb fur Abgasanlagen Rastatt GmbH (Germany)................................ 50 (Heinrich Gillet GmbH & Co. KG owns 50%; and an unaffiliated party owns 50%) Exhaust Systems Technology Limited (United Kingdom)... 0.01 (Heinrich Gillet GmbH & Co. owns 0.01%; and Gillet Torsmaskiner UK Limited owns 99.99%) 3 4 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Deutschland Holdinggesellschaft mbH (Germany) Subsidiaries of Heinrich Gillet GmbH & Co. KG (Germany) Gillet-Abgassysteme Zickau Gmbh (Germany)................. 100 % Elagest AB (Sweden)................................... 50 (Gillet-Abgassysteme Zickau GmbH owns 50%; and an unaffiliated party owns 50%) 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)...................... 0.25 (Kobusch Folien GmbH owns 0.25%; and Tenneco Inc. owns 99.75%) 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 Tenneco Automotive Deutschland GmbH (Germany).................. 99 (Tenneco Deutschland Holdinggesellschaft mbH owns 99%; and Tenneco Inc. owns 1%) WALKER GILLET (Europe) GmbH (Germany).......................... 100 Tenneco Europe Limited (Delaware).................................. 100 - --------------------- (1) - - In dissolution 4 5 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Europe Limited (Delaware) Wimetal S. A. (France)......................................... <1 % (Tenneco Europe Limited owns 1 share; Walker Limited owns 1 share; Walker France S.A. owns 99%; and each of David Zerhusen, Howard van Schoyck, Daniel Barth, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share) Tenneco Inc. (Nevada).............................................. 100 Tenneco International Business Development Limited (Delaware)...... 100 Ambassador Packaging (Ireland) Limited (Ireland)............... 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 100% of Variable Rate Voting Participating Preferred Stock) Alupak, A.G. (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)................... 99.3 (Tenneco International Holding Corp. owns 99.3%; Tenneco Automotive Europe N.V. owns 1 share; and each of Larry Stevenson, Geert Everaert, Theo Bonneu, Roy Kolotylo, Joe Budo and Robert Vlassenroot owns 1 share) Tenneco Automotive Europe Coordination Center N.V. (Belgium).................................... 0.1 (Tenneco Automotive Europe N.V. owns 99.9%; and Monroe Auto Equipement France, S.A. owns 0.1%) Monroe Packaging N.V. (Belgium).......................... 0.1 (Tenneco Automotive 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%) Tenneco Automotive Europe N.V. (Belgium)....................... 100 Monroe Amortisor Imalat Ve Ticaret A.S. (Turkey).......... 99.85 (Tenneco Automotive Europe N.V. owns 99.85%; and various unaffiliated individual stockholders own 0.15%) - -------------------- (1) In dissolution 5 6 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of International Holding Corp. (Delaware) Subsidiaries of Tenneco Automotive Europe N.V. (Belgium) Monroe Auto Equipement France. S.A. (France)............ <1 (Tenneco International Holding Corp. owns 99.3%; Tenneco Automotive Europe N.V. owns 1 share; and each of Larry Stevenson, Geert Everaert, Theo Bonneu, Roy Kolotylo, Joe Budo and Robert Vlassenroot owns 1 share. The subsidiaries of Monroe Auto Equipement France S.A. are listed on page 5.) Tenneco Automotive Europe Coordination Center N.V. (Belgium)................................... 99.9 (Tenneco Automotive Europe N.V. owns 99.9%; and Monroe Auto Equipement France, S.A. owns 0.1%) Monroe Packaging N.V. (Belgium)......................... 99.9 (Tenneco Automotive 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 International Holding Corp. owns 1%; and Tenneco Global Holdings Inc. owns 99%) Tenneco Automotive Sverige A.B. (Sweden)..................... 100 Tenneco Canada Inc. (Ontario)................................ 100 Tenneco Credit Canada Corporation (Alberta)............. 100 Tenneco Global Holdings Inc. (Delaware)...................... 100 Fric-Rot S.A.I.C. (Argentina)........................... 54.99 (Tenneco Global Holdings Inc. owns 54.99%; Maco Inversiones S.A. owns 44.85%; Thomas E. Evans, an affiliated person, owns .01%; and unaffiliated parties own .15%) Maco Inversiones S.A. (Argentina)....................... 100 Fric-Rot S.A.I.C. (Argentina)....................... 44.85 (Maco Inversiones S.A. owns 44.85%; Tenneco Global Holdings Inc. owns 54.99%; Thomas E. Evans, an affiliated person, owns .01%; and unaffiliated parties own .15%) Monroe Springs (New Zealand) Pty. Ltd. (New Zealand).... 100 Monroe Czechia s.r.o. (Czech Republic).................. 100 Tenneco Automotive Iberica, S.A. (Spain)................ 100 Tenneco Packaging Hexacomb S.A. (Spain)............. 100 Tenneco Automotive Polska Sp. z.O.O. (Poland)........... 99 (Tenneco Global Holdings Inc. owns 99%; Tenneco International Holdings Corp. owns 1%) Tenneco Mauritius Limited (Mauritius)................... 100 6 7 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco International Holdings Corp. (Delaware) Subsidiaries of Tenneco Global Holdings Inc. (Delaware) Subsidiaries of Tenneco Mauritius Limited (Mauritius) Hydraulics Limited (India)........................... 51 % (Tenneco Mauritius Limited owns 51% and Bangalore Union Services Limited, an unaffiliated company, owns 49%) Renowned Automotive Products Manufacturers Ltd. (India)....................... 83 (Hydraulics Limited owns 83%; and non-affiliates own 17%) Tenneco Automotive India Private Limited (India)..... 100 Walker Exhaust India Private Limited (India)..... <100 (Tenneco Automotive India Private Limited owns less than 100%; and an unaffiliated party owns the balance) Tenneco Holdings Danmark A/S (Denmark)........................ 100 Gillet Exhaust Technologie (Proprietary) Limited (South Africa)........................................... 100 Gillet Lazne Belohrad, s.r.o. (Czech Republic)........... 100 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 Monroe Manufacturing (Pty.) Ltd. (South Africa)...... 100 Tenneco Automotive Port Elizabeth (Proprietary) Limited (South Africa)........................................... 100 Tenneco Automotive Portugal - Componentes para Automovel, S.A. (Portugal)............................................... 100 Walker Danmark A/S (Denmark)............................. 100 Walker France S.A. (France)................................... 100 (Tenneco International Holding Corp. owns 470,371 shares; Daniel Bellanger owns 16 shares; Robert Bellanger owns 8 shares; and each of Walker Europe, Inc., Alain Bellanger, Theodore Bonneu, Roy Kolotylo and David Zerhusen owns 1 share) Gillet Tubes Technologies G.T.T. (France)................ 100 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 David Zerhusen, Howard van Schoyck, Daniel Barth, 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 Europe B.V. (Netherlands)....................... 100 Nederlandse Pillo-Pak Maatshchappij B.V. (Netherlands)........ 100 Tenneco Packaging Hungary Holdings Inc. (Delaware)................ 100 Tenneco Packaging Inc. (Delaware)................................. 100 7 8 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Packaging Inc. (Delaware) 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 Valdosta Southern Railroad Company (Florida).............. 100 Dahlonega Packaging Corporation (Delaware)..................... 100 Dixie Container Corporation (Virginia)......................... 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%) Kinarot Pallet Ltd. (Israel)...................... 50 (Ha'Lakoach Ha'Neeman owns 50%; and I.M.A. Engineering, an Israeli company and a non-affiliate, owns 50% Yamaton Ltd. (Israel)............................. 33.3 (Ha'Lakoach Ha'Neeman owns 33.3%; and non-affiliates, Kibbutz Ein Hamifietz and Kibbutz Ga'aton own 66.7% Hexacomb Corporation (Illinois)................................ 100 Ha'Lakoach Ha' Neeman Ha' Sheesheem Ou' Shena'yim Ltd. (Israel).................................. 1 (Hexacomb Corporation owns 1%; and Glacier-Cor US Holding Corporation owns 99%. Subsidiaries are listed above.) Hexajapan Company, Ltd. (Japan)........................... 60 (Hexacomb Corporation owns 60%; and non-affiliates owns 40%) Packaging Corporation of America (Nevada)...................... 100 PCA Box Company (Delaware)(1)................................... 100 PCA Hydro, Inc. (Delaware)..................................... 100 PCA Romania Srl (Romania)...................................... 50 (Tenneco Packaging Inc. owns 50%; and Kraftcorr Inc., an unaffiliated company, owns 50%) - -------------------- (1) In dissolution 8 9 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Packaging Inc. (Delaware) 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)(1)..................... 100 Tenneco CPI Holding Company (Delaware)......................... 100 Tenneco Forest Products GmbH (Germany)......................... 100 PCA Embalajes Espana S.L. (Spain)......................... 99 (Tenneco Forest Products GmbH owns 99%; and 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)(2)........................................... 100 Budafok Recycling Waste Paper Recovery Ltd. (Hungary)..... 63.8 (Tenneco Packaging Hungary Packaging Material Limited owns 63.8%; and Asco Hungaria Kft., an unaffiliated company, owns 36.2%) Tenneco Packaging Specialty and Consumer Products Inc. (Delaware)............................................... 100 Tenneco Protective Packaging Inc. (Delaware)................... 100 AVI Technologies, Inc. (Delaware)......................... 100 Tenneco Rochester Acquisition Inc. (Delaware)(1)............... 100 Tenneco Windsor Box & Display, Inc. (Delaware)(1).............. 100 798795 Ontario Limited (Ontario)............................... 100 Astro-Valcour, Ltd. (Ontario)............................. 100 Tenneco Packaging Canada Inc. (Ontario)................... 100 Tenneco Packaging - Hexacomb Limited (Ontario)............ 100 Shearmat Structures Ltd. (Manitoba)................... 100 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 Packaging International Holdings Inc. owns 2%; and Tenneco Inc. owns 98%) - --------------- (1) In dissolution (2) This company is commonly referred to as "Tenneco Packaging Hungary Kft." 9 10 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Packaging International Holdings Inc. (Delaware) Scriptoria N.V. (Belgium)...................................... <1 % (Tenneco Packaging International Holdings Inc. owns <1% or 18 shares; Tenneco Inc. owns approximately 99.6%; and the remainder of the shares are held by unknown third parties) Tenneco Packaging de Mexico, S.A. de C.V....................... 99.99 (Tenneco Packaging International Holdings Inc. owns 499,999 shares; and Tenneco Packaging Inc. owns 1 share) Wellenfoam N.V. (Belgium)...................................... <1 (Tenneco Packaging International Holdings Inc. owns <1% or 1 share; and Tenneco Inc. owns 99+%) Tenneco Packaging Leasing Company (Delaware)....................... 100 Counce Limited Partnership (Texas Limited Partnership)......... 5 (Tenneco Packaging Leasing Company owns 5%, as General Partner; and Tenneco Inc. owns 95%, as Limited Partner) Counce Finance Corporation (Delaware)..................... 100 Tenneco Packaging RSA Company (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) The Baldwin Group, Ltd. (U.K.)..................................... 100 Ambassador Packaging Ltd. (U.K.)............................... 100 Coastal Packaging Ltd. (U.K.)............................. 100 Prempack Limited (U.K.)................................... 100 R & H Robinson (Sheffield) Ltd. (U.K.).................... 100 Baldwin Packaging Limited (U.K.)............................... <1 (The Baldwin Group owns <1% or 1 share J&W Baldwin (Holdings) Ltd. owns 99.9%) J&W Baldwin (Holdings) Ltd. (U.K.)............................. 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 <1% or 1 share) Jiffy Rugated Products Limited (U.K.)................. 99.9 (Baldwin Packaging Limited owns 99.9%; and The Baldwin Group owns <1% or 1 share) J&W Baldwin (Manchester) Limited (U.K.)............... 99.9 (Baldwin Packaging Limited owns 99.9%; and The Baldwin Group owns <1% or 1 share) 10 11 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of The Baldwin Group, Ltd. (U.K.) Subsidiaries of J&W Baldwin (Holdings) Ltd. (U.K.) Jifcour (UK) Limited (U.K.)............................... 99.9% (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns <1% or 1 share) Jiffy Packaging Company Ltd. (U.K.)...................... 99.9 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns <1% or 1 share) Pentland Packaging Limited (Scotland).................... 99.9 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns <1% or 1 share) J&W Baldwin (Manchester) Limited (U.K.)....................... <1 (The Baldwin Group, Ltd. owns <1% or 1 share; and Baldwin Packaging Limited owns 99.9%) Jifcour (UK) Limited (U.K.)................................... <1 (The Baldwin Group, Ltd. owns <1% or 1 share; and J&W Baldwin (Holdings) Ltd. owns 99.9%) Jiffy Packaging Company Ltd. (U.K.)........................... <1 (The Baldwin Group, Ltd. owns <1% or 1 share; and J&W Baldwin (Holdings) Ltd. owns 99.9%) Jiffy Rugated Products Limited (U.K.)......................... <1 (The Baldwin Group, Ltd. owns <1% or 1 share; and Baldwin Packaging Limited owns 99.9%) Pentland Packaging Limited (Scotland)......................... <1 (The Baldwin Group, Ltd. owns <1% or 1 share; and J&W Baldwin (Holdings) Ltd. owns 99.9%) Thompson and Stammers Dunmow (Number 6) Limited (United Kingdom).. 100 Thompson and Stammers Dunmow (Number 7) Limited (United Kingdom).. 100 TMC Texas Inc. (Delaware)......................................... 100 Walker Europe, Inc. (Delaware).................................... 100 Walker France S.A. (France)................................... <1 (Tenneco International Holding Corp. owns 470,371 shares; Daniel Ballenger owns 16 shares; Robert Bellanger owns 8 shares; and each of Walker Europe, Inc., Alain Bellanger, Theodore Bonneu, Roy Kolotylo and David Zerhusen owns 1 share) Walker 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 total equity) 11 12 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 1998 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Walker Limited (United Kingdom) Subsidiaries of Gillet Torsmaskiner UK Limited (United Kingdom) Exhaust Systems Technology Limited (United Kingdom)...... 99.99% (Gillet Torsmaskiner UK Limited owns 99.99%; and Heinrich Gillet GmbH & Co. owns .01%) 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 Management (Europe) Limited (United Kingdom).......... 100 Tenneco Packaging Limited (Scotland)......................... 100 Alpha Products (Bristol) Limited (United Kingdom)........ 100 Brucefield Plastics Limited (Scotland)................... 100 Polbeth Packaging (Corby) Limited (Scotland)............. 100 Tenneco Packaging (Caerphilly) Limited (United Kingdom).. 100 Tenneco Packaging (Films) Limited (United Kingdom)....... 100 Tenneco Packaging (Livingston) Limited (Scotland)........ 100 Tenneco Packaging (Stanley) Limited (United Kingdom)..... 100 Tenneco Packaging (UK) Limited (United Kingdom)............... 100 Wimetal S. A. (France)........................................ <1 (Walker Limited owns 1 share; Tenneco Europe Limited owns 1 share; Walker France S.A. owns 99%; and each of David Zerhusen, Howard van Schoyck, Daniel Barth, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share) 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 <1% or 1 share) Wood Products Leasing Company (Delaware).......................... 100 12 EX-23 9 CONSENT OF ARTHUR ANDERSEN LLP 1 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, 1999, included in the Annual Report of Tenneco Inc. on Form 10-K for the year ended December 31, 1998, 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. 333-48777 S-8 710,000 shares of Common Stock issuable under the Hourly Thrift Plan and Salaried Thrift Plan.
ARTHUR ANDERSEN LLP Houston, Texas March 10, 1999 EX-24 10 POWERS OF ATTORNEY 1 EXHIBIT 24 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, 1998, 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 9th day of March 1999. /s/ MARK ANDREWS -------------------------------------- Mark Andrews 2 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, 1998, 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 9th day of March 1999. /s/ W. MICHAEL BLUMENTHAL -------------------------------------- W. Michael Blumenthal 3 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, 1998, 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 9th day of March 1999. /s/ LARRY D. BRADY -------------------------------------- Larry D. Brady 4 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 him 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, 1998, 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 9th day of March 1999. /s/ M. KATHRYN EICKHOFF -------------------------------------- M. Kathryn Eickhoff 5 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, 1998, 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 9th day of March 1999. /s/ HENRY U. HARRIS, JR. -------------------------------------- Henry U. Harris, Jr. 6 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, 1998, 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 9th day of March 1999. /s/ BELTON K. JOHNSON -------------------------------------- Belton K. Johnson 7 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, 1998, 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 9th day of March 1999. /s/ DAVID PLASTOW -------------------------------------- Sir David Plastow 8 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, 1998, 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 9th day of March 1999. /s/ ROGER B. PORTER -------------------------------------- Roger B. Porter 9 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, 1998, 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 9th day of March 1999. /s/ PAUL T. STECKO -------------------------------------- Paul T. Stecko 10 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, 1998, 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 9th day of March 1999. /s/ WILLIAM L. WEISS -------------------------------------- William L. Weiss 11 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, 1998, 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 9th day of March 1999. /s/ CLIFTON R. WHARTON, JR. -------------------------------------- Clifton R. Wharton, Jr. EX-27 11 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from 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-31-1998 JAN-01-1998 DEC-31-1998 36 0 773 0 988 2,157 5,737 2,109 8,791 2,387 2,360 0 0 2 2,502 8,791 7,597 7,597 5,410 5,410 1,554 0 240 401 116 255 0 0 0 255 1.52 1.51
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