-----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, PfqxwHWVMlu3XLKclyZ1BaC3I6n2/xi3HjKxZCjQ7wP5dZBodupmpEDDdqiemPVl 0/zS7jRRAc4vI2B9GvdOww== 0000950144-01-510179.txt : 20020413 0000950144-01-510179.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950144-01-510179 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCK TENN CO CENTRAL INDEX KEY: 0000230498 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD CONTAINERS & BOXES [2650] IRS NUMBER: 620342590 STATE OF INCORPORATION: GA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12613 FILM NUMBER: 1819922 BUSINESS ADDRESS: STREET 1: 504 THRASHER ST CITY: NORCROSS STATE: GA ZIP: 30071 BUSINESS PHONE: 7704482193 MAIL ADDRESS: STREET 1: PO BOX 4098 CITY: NORCROSS STATE: GA ZIP: 30091 10-K 1 g73384e10-k.txt ROCK-TENN COMPANY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM__________TO__________
COMMISSION FILE NUMBER 0-23340 --------------------- ROCK-TENN COMPANY (Exact name of registrant as specified in its charter) GEORGIA 62-0342590 (state or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 504 THRASHER STREET, NORCROSS, GEORGIA 30071 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 448-2193 Securities Registered Pursuant to Section 12(B) of the Act: CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 6, 2001 (based on the last reported closing price per share of Class A Common Stock as reported on the New York Stock Exchange on such date) was approximately $330 million. As of December 6, 2001, the registrant had 23,040,671 and 10,601,853 shares of Class A Common Stock and Class B Common Stock outstanding, respectively. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended September 30, 2001 are incorporated by reference in Part II. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on January 25, 2002 are incorporated by reference in Parts III and IV. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX TO FORM 10-K ROCK-TENN COMPANY
PAGE REFERENCE --------- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 8 Item 3. Legal Proceedings........................................... 8 Item 4. Submission of Matters to a Vote of Security Holders......... 9 Item X. Executive Officers of the Registrant........................ 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 12 Item 6. Selected Financial Data..................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 12 Item 8. Financial Statements and Supplementary Data................. 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 12 PART III Item 10. Directors and Executive Officers of the Registrant.......... 13 Item 11. Executive Compensation...................................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 13 Item 13. Certain Relationships and Related Transactions.............. 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 14
2 PART I ITEM 1. BUSINESS Unless the context otherwise requires, "we", "us", "our" or "Rock-Tenn" refers to the business of Rock-Tenn Company and its subsidiaries, including RTS Packaging, LLC, which we refer to as RTS. We own 65% of RTS and conduct our interior packaging products business through RTS. GENERAL We are a manufacturer of packaging, merchandising displays and 100% recycled clay-coated and specialty paperboard. Our packaging operations manufacture folding cartons, solid fiber interior packaging, corrugated packaging and corrugated sheet stock and plastic packaging and other products. We also produce laminated paperboard products and corrugating medium, as well as collect and sell recycled fiber. We operate 64 converting operations, 12 paperboard mills and one distribution facility. These facilities are located in 24 states, Canada, Mexico and Chile. PRODUCTS We report our results of operations in three industry segments: (1) packaging products, (2) merchandising displays and corrugated packaging, and (3) paperboard. For financial information relating to our segments, please see the information set forth in Note 11 to our audited consolidated financial statements incorporated by reference into "Item 8 -- Financial Statements and Supplementary Data" in this Annual Report. PACKAGING PRODUCTS In our packaging segment, we manufacture three lines of packaging products: - folding cartons, - solid fiber interior packaging, and - plastic packaging. Folding Cartons. We believe that we are the fourth largest producer of folding cartons in North America. Customers use our folding cartons to package frozen, dry and perishable food items, paper goods, hardware products, textile, automotive, apparel and other products. We manufacture folding cartons from recycled or virgin paperboard, which we print, coat, die-cut and glue in accordance with customer specifications. We then ship finished cartons to customers' plants for packing and sealing. We operate 17 folding carton plants and one distribution facility. Sales of folding cartons to unaffiliated customers accounted for 41.6%, 40.5% and 42.9% of our net sales in fiscal 2001, 2000 and 1999, respectively. Interior Packaging Products. We believe that we are the largest manufacturer of solid fiber interior packaging in North America, which we market principally to glass container manufacturers and producers of food, beer, wine and electrical components. We manufacture solid fiber interior packaging primarily from 100% recycled specialty paperboard. Our solid fiber interior packaging comes in varying thicknesses to meet different structural requirements for high speed casing, uncasing and filling lines due to their precision die-cut construction. We focus on developing high quality, value-added interior packaging products for specific applications to meet customers' packaging needs. We operate 11 solid fiber interior packaging plants. Sales of solid fiber interior packaging products to unaffiliated customers accounted for 8.8%, 9.3% and 10.3% of our net sales in fiscal 2001, 2000 and 1999, respectively. Plastic Packaging Products. We manufacture custom thermoformed plastic packaging and extruded plastic roll stock for sale to the food service, industrial products, consumer products, healthcare and food processor markets. We use contact heat and radiant heat thermoforming equipment to manufacture thermoformed products from plastic roll stock in a wide range of thicknesses, enabling us to serve a range of product applications. We also operate film extruders to manufacture plastic roll stock in a wide range of resins 3 and colors. We use virgin and recycled plastic resin purchased from third parties in the extrusion process, including high impact polystyrene, high density polyethylene, polypropylene, polyethylene terephthalate (PET) and K resin blends. We operate two plastic packaging plants. Sales of plastic packaging products to unaffiliated customers accounted for 5.3%, 4.3% and 3.6% of our net sales in fiscal 2001, 2000 and 1999, respectively. MERCHANDISING DISPLAYS AND CORRUGATED PACKAGING In our merchandising displays and corrugated packaging segment, we manufacture three lines of products: - temporary and permanent point of purchase displays, - corrugated packaging, and - corrugated sheet stock. Merchandising Displays. We believe we are the largest manufacturer of temporary point of purchase displays in North America. We manufacture displays for sale to many of the largest national consumer products companies and to smaller national and regional consumer products companies. We also manufacture permanent displays and provide contract packing services for completed displays, which may include customer products. We operate one facility that manufactures displays and lithographic laminated packaging and one facility that manufactures only lithographic laminated packaging. We also operate six contract packing facilities and nine display sales and design centers. Sales of our merchandising displays and lithographic laminated packaging to unaffiliated customers accounted for 12.6%, 10.5% and 8.5% of our net sales in fiscal 2001, 2000 and 1999, respectively. Corrugated Packaging. We manufacture corrugated packaging and corrugated sheet stock in a range of flute configurations and structural designs. We market corrugated packages and corrugated sheet stock products primarily in the Southeastern U.S. To make corrugated sheet stock, we simultaneously feed linerboard and corrugating medium into a corrugator that flutes the medium to specified sizes, glues the linerboard and fluted medium together and slits and cuts the resulting corrugated paperboard into sheets in accordance with customer specifications. We market corrugated sheets to corrugated box manufacturers. We also convert corrugated sheets into corrugated products ranging from one-color protective cartons to graphically brilliant point-of-purchase containers and displays. We operate one corrugator, four corrugated packaging plants and one fulfillment center. Sales of our corrugated packaging products to unaffiliated customers accounted for 5.3%, 5.5% and 5.0% of our net sales in fiscal 2001, 2000 and 1999, respectively. PAPERBOARD In our paperboard segment, we collect recovered paper and produce four paperboard products: - 100% recycled clay-coated paperboard, - 100% recycled specialty paperboard, - 100% recycled corrugating medium, and - laminated paperboard products. Clay-Coated and Specialty Paperboard and Corrugating Medium. We believe we are the second largest U.S. manufacturer of 100% recycled paperboard (excluding linerboard, medium and paperboard used in the manufacture of gypsum wallboard). We market our recycled clay-coated and specialty paperboard to manufacturers of folding cartons, solid fiber interior packaging, laminated paperboard products, tube and core products, set-up boxes and other paperboard products. We also manufacture recycled corrugating medium, which we market to corrugated sheet manufacturers. We operate 12 paperboard mills. Sales of recycled paperboard (including corrugating medium) to unaffiliated customers accounted for 16.3%, 17.3% and 16.4% of our net sales in fiscal 2001, 2000 and 1999, respectively. 4 Laminated Paperboard Products. We believe we are the largest U.S. producer of laminated paperboard products for the furniture market and the second largest U.S. manufacturer of laminated paperboard products in the book cover market. We convert specialty paperboard into laminated paperboard products for use in book covers and binders, furniture, automotive components, fiber drums and other industrial products. We operate six laminated paperboard products plants. Sales of laminated paperboard products to unaffiliated customers accounted for 7.8%, 9.3% and 11.2% of our net sales in fiscal 2001, 2000 and 1999, respectively. Recycled Fiber. We operate 14 paper recovery facilities that collect paper from a number of sources including factories, commercial printers, office buildings, retail stores and paper converters as well as from other wastepaper collectors. After sorting and baling, we transfer collected paper to our paperboard mills for processing or sell it principally to other U.S. manufacturers of recycled paperboard. Several of our paper recovery facilities are located near our paperboard mills. This helps minimize freight costs and provides an additional source of supply of recovered paper for our operations, which is the principal raw material used to produce recycled paperboard. We also operate a marketing and brokerage group that serves large national accounts. Sales of recovered paper to unaffiliated customers accounted for 2.3%, 3.3% and 2.1% of our net sales in fiscal 2001, 2000 and 1999, respectively. SALES AND MARKETING In fiscal 2001, we sold: - packaging products to approximately 3,100 customers, - merchandising display and corrugated packaging products to approximately 1,100 customers, and - recycled paperboard, corrugating medium, laminated paperboard products and recovered paper to approximately 2,100 customers. None of our customers accounted for more than 5% of our net sales in fiscal 2001. We generally manufacture our products pursuant to customers' orders. Some of our products are marketed to key customers. The loss of any key customer could have an adverse effect on the net income attributable to the applicable segment and, depending on the significance of such product line to our operations, our results of operations. We believe that we have strong relationships with our customers. Each of our product lines is marketed through its own sales force. Each sales force maintains direct sales relationships with customers. We also market several product lines, including folding cartons and book covers, through independent sales representatives and independent distributors, respectively. Sales personnel are supervised by regional sales managers, plant general managers or the general manager for the particular product line, who support and coordinate the sales activities within their designated area. We pay our paperboard and laminated paperboard products sales personnel a base salary, and we generally pay our packaging products and merchandising display products sales personnel a base salary plus commission. We pay our independent sales representatives on a commission basis. COMPETITION The packaging products and paperboard industries are highly competitive, and no single company dominates either industry. Our competitors include large, vertically integrated packaging products and paperboard companies and numerous smaller companies. In the folding carton and corrugated packaging markets, we compete with a significant number of national, regional and local packaging suppliers. In the fiber interior packaging, point-of-purchase display, thermoformed plastic packaging and laminated paperboard products markets, we compete with a smaller number of national, regional and local companies offering highly specialized products. We also compete with foreign companies in the book cover market. In the paperboard segment, we compete with integrated and non-integrated national, regional and local companies manufacturing various grades of recycled and recycled content paperboard. Our paperboard also competes with virgin paperboard. 5 The primary competitive factors in the packaging products and paperboard industries are price, design, product innovation, quality and service, with varying emphasis on these factors depending on the product line and customer preferences. We believe that we compete effectively with respect to each of these factors. However, to the extent any of our competitors becomes more successful with respect to any key competitive factor, our business could be materially adversely affected. The packaging products and recycled paperboard industries have undergone significant consolidation in recent years. We believe that current trends within these industries will result in further consolidation. Within the packaging products industry, larger corporate customers with an expanded geographic presence have tended in recent years to seek suppliers who can, because of their broad geographic presence, efficiently and economically supply all of the customers' packaging needs. In addition, during recent years, purchasers of recycled paperboard and packaging products have demanded higher quality products meeting stricter quality control requirements. These market trends could adversely affect our results of operations or, alternatively, favor our products depending on our competitive position in specific product lines. GOVERNMENTAL REGULATION HEALTH AND SAFETY REGULATIONS Our operations are subject to federal, state, local and foreign laws and regulations relating to workplace safety and worker health including the Occupational Safety and Health Act and regulations promulgated thereunder. This Act, among other things, establishes asbestos and noise standards and regulates the use of hazardous chemicals in the work place. Although we do not use asbestos in manufacturing our products, some of our facilities contain asbestos. For those facilities where asbestos is present we have properly contained this asbestos or we have implemented comprehensive operations and maintenance plans for those facilities. We do not believe that future compliance with health and safety laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. ENVIRONMENTAL REGULATION We are subject to various federal, state, local and foreign environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances. These laws and regulations include, among others, the Comprehensive Environmental Response, Compensation and Liability Act, which we refer to as CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the U.S. Environmental Protection Agency. In addition, some states in which we operate have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies. We do not believe that future compliance with these environmental laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. However, environmental laws and regulations are becoming increasingly stringent. Consequently, our compliance and remediation costs could increase materially. In addition, we cannot currently assess with certainty the impact that the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act will have on our operations or capital expenditure requirements. However, we believe that any such impact or capital expenditures will not have a material adverse effect on our results of operations, financial condition or cash flows. We estimate that we will spend $1.0 million to $2.0 million for capital expenditures during fiscal year 2002 in connection with matters relating to environmental compliance. Over the next twelve months, we will also need to upgrade or replace a boiler at one of our facilities in Texas to comply with new state air pollution control requirements. We estimate the cost for upgrading or replacing that boiler to be in the range of $0.3 million to $3.5 million. In the event we are not able to upgrade or replace the boiler prior to the new air pollution control requirements going into effect, we may have to temporarily suspend a portion of our 6 operations at our Dallas, Texas facility. We do not believe that such a disruption, if it were to occur, would have a material adverse effect on our results of operations. In addition, we may need to modify or replace the coal-fired boilers at two of our facilities in order to operate cost effectively while complying with emissions regulations under the Clean Air Act. We estimate these improvements could cost from $4.0 million to $9.0 million. If required, we anticipate those costs to be incurred within the next three years. On February 9, 1999, we received a letter from the Michigan Department of Environmental Quality, which we refer to as MDEQ, in which the MDEQ alleged that we were in violation of the Michigan Natural Resources and Environmental Protection Act, as well as the facility's wastewater discharge permit at one of our Michigan facilities. The letter alleged that we exceeded several numerical limitations for chemical parameters outlined in the wastewater permit and violated other wastewater discharge criteria. The MDEQ further alleged that we are liable for contamination contained on the facility property as well as for contributing contamination to the Kalamazoo River site. The letter requested that we commit, in the form of a binding agreement, to undertake the necessary and appropriate response activities and response actions to address contamination in both areas. We have entered into an administrative consent order pursuant to which improvements are being made to the facility's wastewater treatment system and we have paid a $75,000 settlement amount. We have also agreed to pay an additional $30,000 for past and future oversight costs incurred by the State of Michigan, which payment will be made in three equal installments over the next two years, the first of which has already been made. The cost of making upgrades to the wastewater treatment systems is estimated to be approximately $1.4 million, of which we have incurred $0.5 million as of September 30, 2001. Nothing contained in the order constitutes an admission of liability or any factual finding, allegation or legal conclusion on our part. The order was completed during the first quarter of fiscal 2001. To date, the MDEQ has not made any other demand regarding our alleged liability for contamination at the Kalamazoo River site. We have been identified as a potentially responsible party, which we refer to as a PRP, at eight active "superfund" sites pursuant to CERCLA or comparable state statutes. No remediation costs or allocations have been determined with respect to such sites other than costs that were not material to us. Based upon currently available information and the opinions of our environmental compliance managers and general counsel, although there can be no assurance, we believe that any liability we may have at any site will not have a material adverse effect on our results of operations, financial condition or cash flows. EMPLOYEES At September 30, 2001, we had 8,514 employees. Of these employees, 6,614 were hourly and 1,900 were salaried. Approximately 3,009 of our hourly employees are covered by union collective bargaining agreements, which generally have three-year terms. We have not experienced any work stoppages in the past 10 years, and management believes that our relations with our employees are good. 7 ITEM 2. PROPERTIES The following table shows information about our paperboard mills:
FISCAL 2001 PRODUCTION CAPACITY LOCATION OF MILL (IN TONS) PAPERBOARD PRODUCED - ------------------------------------ ----------- ------------------------------------ St. Paul, MN........................ 185,000 Recycled corrugating medium St. Paul, MN........................ 167,000 Clay-coated recycled paperboard Battle Creek, MI.................... 134,000 Clay-coated recycled paperboard Sheldon Springs, VT (Missisquoi 100,000 Clay-coated recycled paperboard Mill)............................. Dallas, TX.......................... 94,000 Clay-coated recycled paperboard Stroudsburg, PA..................... 52,000 Clay-coated recycled paperboard Chattanooga, TN..................... 130,000 Specialty recycled paperboard Otsego, MI.......................... 95,000 Specialty recycled paperboard Lynchburg, VA....................... 76,500* Specialty recycled paperboard Dallas, TX.......................... 75,000 Specialty recycled paperboard Eaton, IN........................... 59,000 Specialty recycled paperboard Cincinnati, OH...................... 51,000 Specialty recycled paperboard Aurora, IL.......................... 32,000 Specialty recycled paperboard
- --------------- * Reflects the production capacity of one of our two paperboard machines that has been converted to manufacture gypsum wallboard facing paper and is owned by Seven Hills Paperboard, LLC, an entity in which we own 49% of the equity. The other paperboard machine at our Lynchburg, Virginia paperboard mill has been temporarily shutdown. In addition to our paperboard mills set forth above, we also operate 64 converting operations and one distribution facility that are located in 22 states (mainly in the Southwestern, Southeastern, Midwestern and Northeastern U.S.), Canada, Mexico and Chile. Of our facilities, we own 62 and lease 15. Our principal executive offices, which we own, are located in Norcross, Georgia. We believe that our existing production capacity is adequate to service existing demand for our products. We consider our plants and equipment to be in good condition. ITEM 3. LEGAL PROCEEDINGS We are a party to litigation incidental to our business from time to time. We are not currently a party to any litigation that management believes, if determined adversely to us, would have a material adverse effect on our results of operations, financial condition or cash flows. For additional information regarding litigation to which we are a party, which is incorporated by reference into this item, see "Item 1 -- Business -- Environmental Regulation." 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of our company are as follows:
NAME AGE POSITION HELD - ------------------------------------- --- ------------------------------------------------ James A. Rubright.................... 55 Chairman of the Board and Chief Executive Officer David E. Dreibelbis.................. 49 Executive Vice President and General Manager of the Paperboard Group* Nicholas G. George................... 51 Executive Vice President and General Manager of the Folding Carton Division Steven C. Voorhees................... 47 Executive Vice President and Chief Financial Officer Russell M. Currey.................... 40 Executive Vice President and General Manager of the Corrugated Packaging Division Vincent J. D'Amelio.................. 50 Executive Vice President and General Manager of the Plastic Packaging Division Terry W. Durham...................... 46 Executive Vice President and General Manager of the Laminated Paperboard Products Division James L. Einstein.................... 56 Executive Vice President and General Manager of the Alliance Division Paul J. England...................... 46 Executive Vice President and General Manager of the Specialty Paperboard Division Stephen P. Flanagan.................. 47 Executive Vice President and General Manager of the Recycled Fiber Division James K. Hansen...................... 63 Executive Vice President and General Manager of the Coated Paperboard Division Jodi L. Littlestone.................. 37 Vice President of Employee and Organizational Effectiveness Robert B. McIntosh................... 44 Senior Vice President, General Counsel and Secretary Richard E. Steed..................... 50 President and Chief Executive Officer of RTS
- --------------- * The paperboard group consists of the recycled fiber, specialty paperboard, coated paperboard and laminated paperboard products divisions. James A. Rubright has served as chairman of the board since January 2000 and chief executive officer since October 1999. Prior to joining our company, from February 1994 until October 1999, Mr. Rubright served as an executive officer of Sonat, Inc., an energy concern. From 1995 to 1996 Mr. Rubright was senior vice president, general counsel and chief accounting officer of Sonat, Inc. In 1996 Mr. Rubright became senior vice president of Sonat, Inc. and head of Sonat's interstate natural gas pipeline group, and in 1998 he became executive vice president of Sonat, Inc. with responsibility for Sonat's interstate natural gas pipeline group and energy services businesses. Mr. Rubright is also a director of AGL Resources Inc., an energy company, and Avondale Incorporated, a textile manufacturing company. David E. Dreibelbis has served as executive vice president and general manager of our paperboard group since November 2000. From September 1992 to October 2000, Mr. Dreibelbis was the executive vice president and general manager of our mill group. From July 1985 until September 1992, Mr. Dreibelbis was executive vice president and general manager of our recycled division. Mr. Dreibelbis joined our company in April 1979. 9 Nicholas G. George has served as executive vice president and general manager of our folding carton division since June 1991. Mr. George was vice president and general sales manager of our folding carton division from January 1991 until June 1991. Mr. George was vice president of folding sales, western area, from July 1986 until January 1991. Mr. George joined our company in May 1980. Steven C. Voorhees has served as executive vice president and chief financial officer since September 2000. From November 1999 to August 2000, Mr. Voorhees served as managing partner of Kinetic Partners LLC, a power plant development and energy consulting firm. From July 1980 to October 2000, Mr. Voorhees served as an executive of Sonat, Inc., an energy company. From 1995 to 2000, Mr. Voorhees served in a variety of executive positions including executive vice president of Sonat Marketing, a natural gas marketing company, executive vice president of Sonat Power Marketing, a natural gas marketing company and as executive vice president of Sonat Power, a power plant development company. Russell M. Currey has served as executive vice president and general manager of our corrugated packaging division since March 2001. From December 1994 to February 2001, Mr. Currey was the senior vice president of marketing and planning. Mr. Currey served as executive vice president and general manager of our recycled fiber division from September 1992 until August 1994. From February 1990 until September 1992, Mr. Currey served as manager of strategic development for our paperboard group. From July 1986 until February 1990, he was general manager of one of our recycled fiber plants. Mr. Currey joined our company in July 1983. Mr. Currey is the son of Bradley Currey, Jr. and the nephew of Robert B. Currey, both of whom are directors of our company. Vincent J. D'Amelio has served as executive vice president and general manager of our plastic packaging division since July 1998. From 1994 until July 1998, he was vice president of manufacturing for our plastic packaging division. Mr. D'Amelio joined our company in 1994. Terry W. Durham has served as executive vice president and general manager of our laminated paperboard products division since July 2000. From September 1997 through July 2000, Mr. Durham served as senior vice president and chief operating officer of RTS. From April 1992 through August 1997, Mr. Durham was division general manager of the fiber partition division of Sonoco Products Company. James L. Einstein has served as executive vice president and general manager of our Alliance division since November 2000. From January 1995 until October 2000, Mr. Einstein served as vice president and general manager of our display operations. Prior to joining our company, Mr. Einstein served as president and chief executive officer of Alliance Display and Packaging Company from 1991 until 1995. Paul J. England has served as executive vice president and general manager of our specialty paperboard division since September 1997. Mr. England served as executive vice president and general manager of our recycled fiber division from September 1994 until September 1997. From September 1989 to September 1994, Mr. England served in various capacities, including general manager of one of our paperboard mills. Mr. England joined our company in September 1989. Stephen P. Flanagan has served as executive vice president and general manager of our recycled fiber division since July 1998. From 1983 until 1995, he was general manager of one of our recycled fiber plants. From 1995 until July 1998, Mr. Flanagan served as regional manager, southwest region, for our recycled fiber division. Mr. Flanagan joined our company in 1983. James K. Hansen has served as executive vice president and general manager of our coated paperboard division since September 1997. Mr. Hansen served as executive vice president and general manager of our mill division from May 1990 until September 1997. From 1984 until May 1990, he was general manager of one of our paperboard mills. Mr. Hansen joined our company in April 1979. Jodi L. Littlestone has served as vice president of employee and organizational effectiveness since May 2001. From January 2001 until April 2001, Ms. Littlestone served as vice president of human capital for Idapta, a software product development company, and from May 1998 until January 2001, Ms. Littlestone served as senior vice president of worldwide human resources for iXL, Inc. (which merged in November 2001 with Scient, Inc.), an Internet strategy and consulting firm. From March 1997 until April 1998, 10 Ms. Littlestone served as director of human resources for BellSouth.net, the Internet division of BellSouth Corporation, and from January 1995 until February 1997, she served as director of human resources for the 1996 Atlanta Paralympic Games. Robert B. McIntosh has served as senior vice president, general counsel and secretary since August 2000. From September 1995 until July 2000, Mr. McIntosh served as vice president, general counsel and assistant secretary. Richard E. Steed has served as the president and chief executive officer of RTS since September 1997. From December 1991 until September 1997, Mr. Steed served as executive vice president and general manager of our partition division. From December 1986 until December 1991, Mr. Steed served as executive vice president and general manager of our plastic packaging division. Mr. Steed joined our company in December 1975. All our executive officers are elected annually by and serve at the discretion of either the board of directors or the chairman of the board. Mr. Steed is elected annually and serves at the discretion of the managing board of RTS. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The market price information under the heading "Shareholder Information -- Price Range of Class A Common Stock" on page 55, the shareholder information under the heading "Shareholder Information -- Common Stock" on page 55 and the dividend information under the heading "Five-Year Selected Financial and Operating Highlights" on page 22 of the Annual Report to Shareholders for the year ended September 30, 2001 are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information under the heading "Five-Year Selected Financial and Operating Highlights" for the years ended September 30, 1997 through 2001 on page 22 of the Annual Report to Shareholders for the year ended September 30, 2001 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the heading "Management Discussion and Analysis of Results of Operations and Financial Condition" on pages 23 through 33 of the Annual Report to Shareholders for the year ended September 30, 2001 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the heading "Market Risk Sensitive Instruments and Positions" on pages 29 through 30 of the Annual Report to Shareholders for the year ended September 30, 2001 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of our company and our subsidiaries included in the Annual Report to Shareholders for the year ended September 30, 2001 are incorporated herein by reference: Consolidated Statements of Operations for the years ended September 30, 2001, 2000 and 1999. Consolidated Balance Sheets as of September 30, 2001 and 2000. Consolidated Statements of Shareholders' Equity for the years ended September 30, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. The information in Note 12, "Financial Results by Quarter (Unaudited)" for the years ended September 30, 2001, 2000 and 1999 on page 51 of the Annual Report to Shareholders for the year ended September 30, 2001 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections under the heading "Election of Directors" entitled "Nominees for Election -- Term Expiring 2005," "Incumbent Directors -- Term Expiring 2004," "Incumbent Directors -- Term Expiring 2003" and "Incumbent Director -- Term Expiring 2002" in the Proxy Statement for the Annual Meeting of Shareholders to be held January 25, 2002 are incorporated herein by reference for information on the directors of the Registrant. See Item X in Part I hereof for information regarding the executive officers of the Registrant. The section under the heading "Other Matters" entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 25, 2002 is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section under the heading "Election of Directors" entitled "Compensation of Directors" and the sections under the heading "Executive Compensation" entitled "Summary Compensation Table," "Option Grants Table," "Aggregated Options Table," "Pension Plan Table" in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 25, 2002 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the heading "Common Stock Ownership by Management and Principal Shareholders" in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 25, 2002 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the heading "Certain Transactions" in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 25, 2002 is incorporated herein by reference. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements of our company and our consolidated subsidiaries and the Report of the Independent Auditors, included in our Annual Report to Shareholders for the year ended September 30, 2001 are incorporated by reference in Part II, Item 8: Consolidated Statements of Operations for the years ended September 30, 2001, 2000 and 1999. Consolidated Balance Sheets as of September 30, 2001 and 2000. Consolidated Statements of Shareholders' Equity for the years ended September 30, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. Report of Independent Auditors. No Current Reports on Form 8-K have been filed in the last quarter of the fiscal year ended September 30, 2001. 2. FINANCIAL STATEMENT SCHEDULE OF ROCK-TENN COMPANY. The following financial statement schedule is included in Part IV of this report: Schedule II -- Valuation and Qualifying Accounts. All other schedules are omitted because they are not applicable or not required. 3. EXHIBITS.
EXHIBIT NUMBER - ------- 3.1 -- Restated and Amended Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 3.2 -- Articles of Amendment to the Registrant's Restated and Amended Articles of Incorporation (incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the year ended September 30, 2000). 3.3 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 4.1 -- Credit Agreement, dated as of June 30, 2000 among Rock-Tenn Company, the Lenders listed therein, SunTrust Bank, as Agent, Bank of America, N.A., as Syndication Agent and Wachovia Bank, N.A., as Documentation Agent (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000), as amended by the First Amendment to Credit Agreement dated as of April 6, 2001 by and among Rock-Tenn Company, the Lenders listed therein, SunTrust Bank, as Agent, Bank of America, N.A., as Syndication Agent and Wachovia Bank, N.A., as Documentation Agent (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001), and as further amended by the Second Amendment to Credit Agreement dated as of July 26, 2001 by and among Rock-Tenn Company, the Lenders listed therein, SunTrust Bank, as Agent, Bank of America, N.A., as Syndication Agent and Wachovia Bank, N.A., as Documentation Agent.
14
EXHIBIT NUMBER - ------- 4.2 -- The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any instrument defining the rights of holders of long-term debt of the Registrant and all of its consolidated subsidiaries and unconsolidated subsidiaries for which financial statements are required to be filed with the Securities and Exchange Commission. 4.3 -- Indenture between Rock-Tenn Company and SunTrust Bank, as successor trustee to Trust Company Bank (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-3, File No. 33-93934). 10.1 -- Rock-Tenn Company 1989 Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 10.2 -- Rock-Tenn Company 1993 Employee Stock Option Plan (incorporated by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 10.3 -- Rock-Tenn Company Key Employee Incentive Bonus Plan as amended on October 27, 1994 (incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended September 30, 2000). 10.4 -- Rock-Tenn Company Supplemental Executive Retirement Plan Effective as of October 1, 1994 (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended September 30, 2000). 10.5 -- 2000 Incentive Stock Plan (incorporated by reference to the Registrant's definitive Proxy Statement for the 2001 Annual Meeting of Shareholders filed with the SEC on December 18, 2000). 10.6 -- Amendment to 1993 Employee Stock Purchase Plan (incorporated by reference to the Registrant's definitive Proxy Statement for the 2001 Annual Meeting of Shareholders filed with the SEC on December 18, 2000). 10.7 -- Rock-Tenn Company Annual Executive Bonus Program (incorporated by reference to Appendix A to the Registrant's definitive Proxy Statement for the 2002 Annual Meeting of Shareholders filed with the SEC on December 19, 2001). 12 -- Statement re: Computation of Ratio of Earnings to Fixed Charges. 13 -- Annual Report to Shareholders submitted herewith but not "filed," except for those portions expressly incorporated by reference herein. 21 -- Subsidiaries of the Registrant. 23 -- Report and Consent of Ernst & Young LLP. 99.1 -- Audited Financial Statements for the Rock-Tenn Company 1993 Employee Stock Purchase Plan for the years ended September 30, 2001, 2000 and 1999. 99.2 -- Cautionary Statement relative to Forward-Looking Statements.
(B) REPORTS ON FORM 8-K Not applicable. (C) SEE ITEM 14(A)(3) AND SEPARATE EXHIBIT INDEX ATTACHED HERETO. (D) NOT APPLICABLE. 15 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. ROCK-TENN COMPANY Dated: December 20, 2001 By: /s/ JAMES A. RUBRIGHT ------------------------------------ James A. Rubright Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES A. RUBRIGHT Director, Chairman of the Board December 20, 2001 - ----------------------------------------------------- and Chief Executive Officer James A. Rubright (Principal Executive Officer) /s/ STEVEN C. VOORHEES Executive Vice President and December 20, 2001 - ----------------------------------------------------- Chief Financial Officer Steven C. Voorhees (Principal Financial and Accounting Officer) /s/ STEPHEN G. ANDERSON Director December 20, 2001 - ----------------------------------------------------- Stephen G. Anderson /s/ J. HYATT BROWN Director December 20, 2001 - ----------------------------------------------------- J. Hyatt Brown /s/ BRADLEY CURREY, JR. Director December 20, 2001 - ----------------------------------------------------- Bradley Currey, Jr. /s/ ROBERT B. CURREY Director December 20, 2001 - ----------------------------------------------------- Robert B. Currey /s/ G. STEPHEN FELKER Director December 20, 2001 - ----------------------------------------------------- G. Stephen Felker /s/ LAWRENCE L. GELLERSTEDT, III Director December 20, 2001 - ----------------------------------------------------- Lawrence L. Gellerstedt, III /s/ JOHN D. HOPKINS Director December 20, 2001 - ----------------------------------------------------- John D. Hopkins /s/ LOU BROWN JEWELL Director December 20, 2001 - ----------------------------------------------------- Lou Brown Jewell /s/ JAMES W. JOHNSON Director December 20, 2001 - ----------------------------------------------------- James W. Johnson /s/ CHARLES R. SEXTON Director December 20, 2001 - ----------------------------------------------------- Charles R. Sexton /s/ JOHN W. SPIEGEL Director December 20, 2001 - ----------------------------------------------------- John W. Spiegel
16 INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF EXHIBITS PAGE NO. - ------- ----------------------- ---------- 3.1 -- Restated and Amended Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 3.2 -- Articles of Amendment to the Registrant's Restated and Amended Articles of Incorporation (incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the year ended September 30, 2000). 3.3 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 4.1 -- Credit Agreement, dated as of June 30, 2000 among Rock-Tenn Company, the Lenders listed therein, SunTrust Bank, as Agent, Bank of America, N.A., as Syndication Agent and Wachovia Bank, N.A., as Documentation Agent (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000), as amended by the First Amendment to Credit Agreement dated as of April 6, 2001 by and among Rock-Tenn Company, the Lenders listed therein, SunTrust Bank, as Agent, Bank of America, N.A., as Syndication Agent and Wachovia Bank, N.A., as Documentation Agent (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001), and as further amended by the Second Amendment to Credit Agreement dated as of July 26, 2001 by and among Rock-Tenn Company, the Lenders listed therein, SunTrust Bank, as Agent, Bank of America, N.A., as Syndication Agent and Wachovia Bank, N.A., as Documentation Agent. 4.2 -- The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any instrument defining the rights of holders of long-term debt of the Registrant and all of its consolidated subsidiaries and unconsolidated subsidiaries for which financial statements are required to be filed with the Securities and Exchange Commission. 4.3 -- Indenture between Rock-Tenn Company and SunTrust Bank, as successor trustee to Trust Company Bank (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-3, File No. 33-93934). 10.1 -- Rock-Tenn Company 1989 Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 10.2 -- Rock-Tenn Company 1993 Employee Stock Option Plan (incorporated by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 10.3 -- Rock-Tenn Company Key Employee Incentive Bonus Plan as amended on October 27, 1994 (incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended September 30, 2000). 10.4 -- Rock-Tenn Company Supplemental Executive Retirement Plan Effective as of October 1, 1994 (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended September 30, 2000). 10.5 -- 2000 Incentive Stock Plan (incorporated by reference to the Registrant's definitive Proxy Statement for the 2001 Annual Meeting of Shareholders filed with the SEC on December 18, 2000). 10.6 -- Amendment to 1993 Employee Stock Purchase Plan (incorporated by reference to the Registrant's definitive Proxy Statement for the 2001 Annual Meeting of Shareholders filed with the SEC on December 18, 2000).
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF EXHIBITS PAGE NO. - ------- ----------------------- ---------- 10.7 -- Rock-Tenn Company Annual Executive Bonus Program (incorporated by reference to Appendix A to the Registrant's definitive Proxy Statement for the 2002 Annual Meeting of Shareholders filed with the SEC on December 19, 2001). 12 -- Statement re: Computation of Ratio of Earnings to Fixed Charges. 13 -- Annual Report to Shareholders submitted herewith but not "filed," except for those portions expressly incorporated by reference herein. 21 -- Subsidiaries of the Registrant. 23 -- Report and Consent of Ernst & Young LLP. 99.1 -- Audited Financial Statements for the Rock-Tenn Company 1993 Employee Stock Purchase Plan for the years ended September 30, 2001, 2000 and 1999. 99.2 -- Cautionary Statement relative to Forward-Looking Statements.
SCHEDULE II ROCK-TENN COMPANY SEPTEMBER 30, 2001
CHARGED TO BALANCE AT COSTS BALANCE AT BEGINNING AND END OF DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD - ---------------------------------------------- ---------- ---------- ----- ---------- ---------- Year ended September 30, 2001: Allowance for Doubtful Accounts, Returns.... $3,732 $13,261 -- $11,593 $5,400 Reserve for Facility Closures and Consolidation............................. 3,780 2,863(1) -- 4,452 2,191 Year ended September 30, 2000: Allowance for Doubtful Accounts, Returns.... 3,610 14,338 -- 14,216 3,732 Reserve for Facility Closures and Consolidation............................. 2,714 14,785(1) -- 13,719 3,780 Year ended September 30, 1999: Allowance for Doubtful Accounts, Returns.... 3,817 11,417 -- 11,624 3,610 Reserve for Facility Closures and Consolidation............................. 3,884 3,050(1) -- 4,220 2,714
- --------------- (1) This reserve was recorded in connection with plant closings and employee terminations, net of reversals of $197, $649 and $300 in fiscal 2001, 2000 and 1999, respectively. EX-4.1 3 g73384ex4-1.txt SECOND AMENDMENT TO CREDIT AGREEMENT EXHIBIT 4.1 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT dated as of July 26, 2001 (the "Amendment") by and among ROCK-TENN COMPANY, a Georgia corporation (the "Borrower"), SUNTRUST BANK, a banking corporation organized under the laws of the State of Georgia ("SunTrust"), the other banks and financial institutions listed on the signature pages hereof, (SunTrust, and such other banks, lending institutions, and assignees referred to collectively herein as the "Lenders"), SUNTRUST BANK, in its capacity as Agent for the Lenders (the "Agent"), BANK OF AMERICA, N.A., as Syndication Agent (the "Syndication Agent") and WACHOVIA BANK, N.A., as Documentation Agent (the "Documentation Agent"). WHEREAS, the Borrower, the Agent and the Lenders are parties to that certain Credit Agreement dated as of June 30, 2000, by and among the Borrower, the Agent and the other Lenders (as amended, the "Credit Agreement"; all capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement), pursuant to which the Lenders have made available certain financial accommodations to the Borrower; WHEREAS, the parties wish to amend the Credit Agreement on the terms and conditions contained herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto agree as follows: Section 1. Amendments. (a) The Credit Agreement is hereby amended by adding the following new definition of "Acquired EBITDA" to Section 1.1 in its appropriate alphabetical place: "Acquired EBITDA" shall mean, with respect to any Person, property, business or asset (any of the foregoing, a "Pro Forma Entity") acquired pursuant to a Permitted Acquisition for any period, the sum of the amounts for such period of (a) the net income (or net loss) of such Pro Forma Entity as defined according to GAAP minus the gain or loss (net of any tax effect) resulting from the sale of any Capital Assets by such Pro Forma Entity other than in the ordinary course of business minus other extraordinary items, as defined by GAAP plus (b) the aggregate amount deducted in determining such net income (loss) in respect of (i) interest expense, (ii) income taxes, and (iii) depreciation and amortization expense, all as determined on a consolidated basis for such Pro Forma Entity in accordance with GAAP. (b) The Credit Agreement is hereby amended by deleting the definition of "EBITDA" from Section 1.1 and substituting in lieu thereof the following new definition of "EBITDA": "`EBITDA' shall mean for any fiscal period, Consolidated Net Income (or Consolidated Net Loss, as the case may be) for such period plus (a) the aggregate amount deducted in determining such Consolidated Net Income (Loss) in respect of (i) Interest Expense, (ii) Income Taxes of the Consolidated Companies determined in accordance with GAAP, (iii) depreciation and amortization expense of the Consolidated Companies determined in accordance with GAAP, in each case for the applicable fiscal period, (iv) the amount of any non-cash charges relating to plant shut-downs and asset impairment charges actually taken by the Borrower for the quarter ending March 31, 2000, (v) any non-cash charges actually taken by the Consolidated Companies after March 31, 2000 which are associated with the accelerated write-off of any tangible or intangible assets related to the acquisition of Waldorf Corporation provided such amounts do not exceed $100,000,000 in the aggregate through the Maturity Date, (vi) any non-cash charges actually taken which are associated with the accelerated write-off of any tangible or intangible assets provided such amounts do not exceed $50,000,000 in the aggregate through the Maturity Date and (vii) the amount of cash charges actually taken which resulted from the Home Office and Folding Carton Division reorganizations and the closing of the Borrower's Downingtown, Pennsylvania converting facility, Norcross, Georgia folding facility, Lynchburg, Virginia converting facility, Augusta, Georgia folding facility, Madison, Wisconsin folding facility, and Chicago, Illinois folding facility in an aggregate amount not to exceed $4,832,000 for the fiscal quarter ending June 30, 2000, $5,637,000 for the fiscal quarter ending September 30, 2000, $1,906,000 for the fiscal quarter ending December 31, 2000 and an aggregate of $7,000,000 thereafter; in each case for the Consolidated Companies determined on a consolidated basis in accordance with GAAP, (b) actual rental expense associated with any Synthetic Lease and (c) cash distributions of earnings of Unrestricted Subsidiaries made to a Consolidated Company to the extent previously excluded in the determination of Consolidated Net Income or Consolidated Net Loss by virtue of clause (i) of the respective definitions thereof. For purposes of determining EBITDA hereunder, there shall be included in such determination of EBITDA for any period the Acquired EBITDA of any Person, property, business or asset (other than an Unrestricted Subsidiary) acquired by a Consolidated Company pursuant to a Permitted Acquisition and not subsequently sold, transferred or otherwise disposed of by any Consolidated Company during such period based on the actual Acquired EBITDA of such Person, property, business or asset for such period (including the portion thereof occurring prior to such acquisition)." (c) The Credit Agreement is hereby amended by deleting the definition of "Indebtedness" from Section 1.1 and substituting in lieu thereof the following new definition of "Indebtedness": "`Indebtedness' of any Person shall mean, without duplication, such Person's (i) Indebtedness for Borrowed Money, (ii) obligations representing the deferred purchase price of property or services (other than accounts payable arising in the ordinary course of such Person's business), (iii) obligations, whether or not assumed, secured by liens or payable out of the proceeds or production from property or assets now or hereafter owned or acquired by such Person, (iv) Capital Lease Obligations, (v) any Guaranty, letter of credit reimbursement obligations (without duplication of any of the underlying obligations which otherwise constitutes Indebtedness), and other contingent obligations in respect of repayment of other types of Indebtedness, (vi) any off-balance sheet liability retained by such Person in connection with asset securitization programs and Synthetic Leases provided that with respect to any Synthetic Lease, only the principal obligations under such Synthetic Lease for which any Consolidated Company has recourse liability shall constitute Indebtedness, and (vii) any obligation under any foreign exchange agreement. Notwithstanding the foregoing, Indebtedness shall exclude all obligations, contingent or otherwise, provided for in Statement of Financial Accounting Standards No. 133, as in effect from time to time ("FASB 133"), other than obligations provided for in FASB 133 which relate to clause (vii) of the definition of Indebtedness." (d) The Credit Agreement is hereby amended by deleting Section 8.1(i) in its entirety and substituting in lieu thereof the following new Section 8.1(i): (i) Fixed Charges. Suffer or permit the ratio of (a) Consolidated EBITR to (b) Fixed Charges as of the last day of each fiscal quarter ending during the periods set forth below as calculated for a period consisting of the four preceding fiscal quarters, to be less than the ratio set forth opposite such period: -2-
PERIOD RATIO - ------------------------------------------------------------------- Closing Date through September 1.75:1.0 30, 2001 - ------------------------------------------------------------------- October 1, 2001 through the 2.00:1.0 Maturity Date - -------------------------------------------------------------------
(e) The Credit Agreement is hereby amended by deleting Section 8.1(ii) in its entirety and substituting in lieu thereof the following new Section 8.1(ii): (ii) Total Funded Debt to EBITDA. Permit the ratio of (a) Total Funded Debt to (b) EBITDA as of the last day of each fiscal quarter ending during the periods set forth below as calculated for a period consisting of the four preceding fiscal quarters, to exceed the ratio set forth opposite such period:
PERIOD RATIO - ------------------------------------------------------------------- Closing Date through September 3.75:1.0 30, 2001 - ------------------------------------------------------------------- October 1, 2001 through the 3.50:1.0 Maturity Date - -------------------------------------------------------------------
(f) The Credit Agreement is hereby amended by deleting Section 8.12 in its entirety and substituting in lieu thereof the following new Section 8.12: SECTION 8.12. RESTRICTIVE AGREEMENTS. Neither the Borrower nor any Restricted Subsidiary shall, directly or indirectly, enter into, incur or permit to exist any agreement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Restricted Subsidiary to create, incur or permit any Lien upon any of its assets or properties, whether now owned or hereafter acquired, or (b) the ability of any Restricted Subsidiary to pay dividends or other distributions with respect to its common stock, to make or repay loans or advances to the Borrower or any other Restricted Subsidiary, to Guaranty Indebtedness of the Borrower or any other Restricted Subsidiary or to transfer any of its property or assets to the Borrower or any Restricted Subsidiary; provided, that (i) the foregoing shall not apply to restrictions or conditions imposed by law or by this Agreement or any other Credit Document, (ii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Restricted Subsidiary pending such sale, provided such restrictions and conditions apply only to the Restricted Subsidiary that is sold and such sale is permitted hereunder, (iii) clause (a) shall not apply to restrictions or conditions imposed by any agreement relating to Purchase Money Indebtedness permitted by this Agreement if such restrictions and conditions apply only to the property or assets securing such Indebtedness, (iv) clause (a) shall not apply to customary provisions in leases restricting the assignment thereof and (v) clause (a) shall not apply to restrictions or conditions imposed by that certain Indenture dated July 31, 1995 between Rock-Tenn Company and SunTrust Bank, N.A. (as successor trustee to Trust Company Bank), provided that the aggregate amount of notes issued thereunder does not exceed $500,000,000. -3- Section 2. Reduction of Revolving Credit Commitment. Notwithstanding any other provision contained in this Amendment, the amendments set forth in Sections 1(d) and (e) shall not become effective unless and until the Revolving Credit Commitment of all Lenders shall be reduced to an amount less than or equal to $300,000,000 and each Lender's Revolving Credit Commitment as of the date thereof shall be reduced as set forth in Section 2.3 of the Credit Agreement. Section 3. Benefits of Loan Documents. Each reference to the Credit Agreement in any of the Loan Documents shall be deemed to be a reference to the Credit Agreement as amended by this Amendment, and as the Credit Agreement may from time to time be further amended, supplemented, restated or otherwise modified in the future by one or more other written amendments or supplemental or modification agreements entered into pursuant to the applicable provisions thereof. Section 4. Conditions to Effectiveness of Amendment. The effectiveness of this Amendment is subject to the condition precedent that each of the following be received by the Agent (unless otherwise waived in writing by the Agent), each of which shall be satisfactory in form and substance to the Agent: (a) this Amendment executed by the Borrower and by the Required Lenders; (b) the Acknowledgment and Consent of the Guarantors, substantially in the form of Exhibit A hereto, executed by each of the Guarantors (as defined below) (the "Acknowledgment"); (c) payment by the Borrower to the Agent, of any expenses incurred by the Agent which are due and payable; (d) no Default or Event of Default shall then be in existence; and (e) such other approvals, opinions or documents as the Agent may reasonably request. Section 5. Representations. The Borrower represents to the Lenders that: (a) The Borrower has the right and power, and has taken all necessary action to authorize it, to execute and deliver this Amendment, and to perform this Amendment, and the Credit Agreement, as amended by this Amendment, in accordance with their respective terms. This Amendment has been duly executed and delivered by the duly authorized officers of the Borrower, and each of this Amendment, and the Credit Agreement, as amended by this Amendment, is a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. (b) The execution and delivery of this Amendment, and the performance by the Borrower of this Amendment, and the Credit Agreement, as amended by this Amendment, in accordance with their respective terms, do not and will not, by the passage of time or the giving of notice, or otherwise: (i) violate any Requirement of Law relating to the Borrower; (ii) conflict with, result in a breach of or constitute a default under the charter or by-laws of the Borrower, or any of its Material Contractual Obligations; or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by the Borrower other than those permitted by the Credit Agreement. (c) The articles of incorporation and bylaws of the Borrower have not changed since delivery of such articles of incorporation and bylaws to the Lenders in connection with the consummation of the Credit Agreement. Section 6. Reaffirmation. The Borrower hereby repeats and reaffirms all representations and warranties made by the Borrower in the Credit Agreement and the other Loan Documents to which it is a party as of the date hereof with the same force and effect as if such representations and warranties were set forth in this Amendment in -4- full except to the extent such representations expressly relate to an earlier date or have been updated to the extent permitted by the Credit Agreement. Section 7. Reaffirmation and Representations by Guarantors. By execution of the Acknowledgment, each Subsidiary that has executed a Subsidiary Guarantee (a "Guarantor"): (a) reaffirms its continuing obligations to the Agent and the Lenders under the Subsidiary Guarantee to which it is a party, and agrees that the transactions contemplated by this Amendment shall not in any way affect the validity and enforceability of such Subsidiary Guarantee, or reduce, impair or discharge the obligations of such Guarantor thereunder; and (b) represents to the Lenders that: (i) Such Guarantor has the right and power, and has taken all necessary action to authorize it, to execute and deliver this Acknowledgement, and to perform this Acknowledgement in accordance with its terms. This Acknowledgement has been duly executed and delivered by the duly authorized officers of such Guarantor, and the Acknowledgement is a legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity; and (ii) the execution and delivery of this Acknowledgement, and the performance by such Guarantor of this Acknowledgement, do not and will not, by the passage of time or the giving of notice, or otherwise: (i) violate any Requirement of Law relating to such Guarantor; (ii) conflict with, result in a breach of or constitute a default under the charter or by-laws of such Guarantor, or any of its Material Contractual Obligations; or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Guarantor other than those permitted by the Credit Agreement. Section 8. Benefits. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Section 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA. Section 10. Effect. Except as expressly herein amended, the terms and conditions of the Credit Agreement shall remain in full force and effect. Section 11. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon all parties. [Signatures on following page] -5- IN WITNESS WHEREOF, the parties have caused this Second Amendment to Credit Agreement to be executed by their authorized officers all as of the day and year first above written. ROCK-TENN COMPANY (CORPORATE SEAL) By: ------------------------------------- Title: ------------------------------- Attest: By: --------------------------------- Title: [Signatures Continued on Next Page] -6- [SIGNATURE PAGE TO SECOND AMENDMENT TO CREDIT AGREEMENT] SUNTRUST BANK, AS AGENT, SWING LINE LENDER AND A LENDER By: ------------------------------------- Title: ----------------------------- WACHOVIA BANK, N.A., AS A LENDER AND DOCUMENTATION AGENT By: ------------------------------------- Title: ----------------------------- BANK OF AMERICA, N.A., AS A LENDER AND SYNDICATION AGENT By: ------------------------------------- Title: ----------------------------- THE CHASE MANHATTAN BANK, AS A LENDER By: ------------------------------------- Title: ----------------------------- THE BANK OF TOKYO-MITSUBISHI, LTD., AS A LENDER By: ------------------------------------- Title: ----------------------------- THE BANK OF NEW YORK, AS A LENDER By: ------------------------------------- Title: ----------------------------- [Signatures Continued on Next Page] -7- [SIGNATURE PAGE TO SECOND AMENDMENT TO CREDIT AGREEMENT] FIRST UNION NATIONAL BANK, AS A LENDER By: ------------------------------------- Title: ----------------------------- THE FUJI BANK, LIMITED, AS A LENDER By: ------------------------------------- Title: ----------------------------- BNP PARIBAS, AS A LENDER By: ------------------------------------- Title: ----------------------------- By: ------------------------------------- Title: ----------------------------- -8- EXHIBIT A ACKNOWLEDGMENT AND CONSENT OF SUBSIDIARY GUARANTORS Each of the undersigned Subsidiaries hereby (i) acknowledges receipt of the foregoing Second Amendment to Credit Agreement by and among Rock-Tenn Company, the Lenders under the Credit Agreement (the "Lenders") and SunTrust Bank, in its capacity as Agent for the Lenders (the "Agent") (the "Amendment"), (ii) consents to the Amendment, (iii) agrees and acknowledges to the terms thereof including, without limitation, the representations and agreements of the each of the undersigned set forth in Section 7 of the Amendment, and (iv) restates and affirms its respective obligations under its Subsidiary Guarantee previously executed and delivered in favor of the Agent (for the ratable benefit of the Lenders) without defense, counterclaim or set-off. IN WITNESS WHEREOF, each of the undersigned Subsidiaries has executed this Acknowledgment and Consent of Subsidiary Guarantors this 26th day of July, 2001. ROCK-TENN COMPANY, MILL DIVISION, a Tennessee corporation ROCK-TENN COMPANY OF TEXAS, a Georgia corporation ROCK-TENN COMPANY OF ARKANSAS, a Georgia corporation ROCK-TENN COMPANY OF CALIFORNIA, INC., a Delaware corporation ROCK-TENN COMPANY OF ILLINOIS, INC., an Illinois corporation ROCK-TENN CONVERTING COMPANY, a Georgia corporation CONCORD INDUSTRIES, INC., an Illinois corporation WABASH CORPORATION, a Delaware corporation WALDORF CORPORATION, a Delaware corporation BEST RECYCLING, INC., an Iowa corporation WALDORF REALTY, INC., a Delaware corporation ROCK-TENN PARTITION COMPANY, a Georgia corporation WALDORF CORPORATION OF MINNESOTA, a Delaware corporation By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- -9- EX-4.2 4 g73384ex4-2.txt INSTRUMENT DEFINING RIGHTS OF HOLDERS OF DEBT EXHIBIT 4.2 Long-Term Debt - -------------- The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any instrument defining the rights of holders of long-term debt of the Registrant and all of its consolidated subsidiaries and unconsolidated subsidiaries for which financial statements are required to be filed with the Securities and Exchange Commission. EX-12 5 g73384ex12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 ROCK-TENN COMPANY STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (AMOUNTS IN THOUSANDS, EXCEPT RATIO)
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------------- 1997 1998 1999 2000 2001 --------- ---------- ---------- --------- --------- Fixed Charges: Interest expense ............................... $ 26,466 $ 34,664 $ 30,813 $ 34,933 $ 33,992 Amortization of debt issuance costs ............ 320 360 365 642 1,050 Interest capitalized during period ............. 1,214 888 931 1,097 1,541 Portion of rent expense representative of interest .................................... 2,584 3,034 3,169 3,539 3,768 --------- ---------- ---------- --------- --------- Fixed charges .................................. $ 30,584 $ 38,946 $ 35,278 $ 40,211 $ 40,351 ========= ========== ========== ========= ========= Earnings: Pretax income (loss) from continuing operations .................................. $ 37,756 $ 74,613 $ 70,253 $ (4,346) $ 52,134 Fixed charges .................................. 30,584 38,946 35,278 40,211 40,351 Interest capitalized during period ............. (1,214) (888) (931) (1,097) (1,541) Amortization of interest capitalized ........... 173 300 433 590 810 --------- ---------- ---------- --------- --------- Earnings ....................................... $ 67,299 $ 112,971 $ 105,033 $ 35,358 $ 91,754 ========= ========== ========== ========= ========= Ratio of earnings to fixed charges ............... 2.20 2.90 2.98 0.88 2.27 ========= ========== ========== ========= =========
EX-13 6 g73384ex13.txt ANNUAL REPORT EXHIBIT 13 ROCK-TENN COMPANY 2001 ANNUAL REPORT In our 2000 annual report, we said that we planned to raise the bar on our own expectations and performance. OUR 2001 RESULTS SPEAK FOR THEMSELVES: STRONG EARNINGS: UP 15% Our net income is up 15% before plant closing and other one-time costs. EBITDA: $181 MILLION EBITDA is up $8 million from last year.* FOLDING CARTON OPERATING INCOME: UP 61% We consolidated our operations and improved our business mix. CONTINUED GROWTH AT ALLIANCE: SALES UP 19% Alliance sales increases drove operating income of our Merchandising Displays and Corrugated Packaging Segment up 9% IMPRESSIVE PERFORMANCE IN PLASTICS: SALES UP 20% Plastic Packaging achieved a 20% increase in sales. REDUCED DEBT: $49 MILLION We used our free cash flow to repay $49 million in debt. OUTSTANDING SAFETY RECORD: 2.24 At 2.24 incidents per 200,000 man hours, our OSHA recordable incident rate is now the lowest it has been in our history. THIS IS RELENTLESS PERFORMANCE. *EBITDA represents earnings before interest, taxes, depreciation and amortization, and plant closing and other one-time charges. [PHOTO - James A. Rubright Chairman and Chief Executive Officer] Q&A with Jim Rubright WHAT WAS ROCK-TENN'S MOST SIGNIFICANT ACHIEVEMENT IN 2001? I believe the fact that we were able to continue our strong capital investment program and still reduce debt by $49 million and pay $10 million in dividends shows the significant financial strength of this company and that we can generate substantial free cash flow. Rock-Tenn 2001 Annual Report pg. 3 DEAR SHAREHOLDERS: Satisfy our customers completely. Invest for competitive advantage. Empower action and change. Commit to high performance. Simple but powerful fundamentals that are driving our results. Last year we announced our commitment to high performance and told you that we saw encouraging evidence of improvement ahead for Rock-Tenn. At the time we published our 2000 annual report, the signs of the economic downturn were all around us, and we may have appeared optimistic. Nonetheless, in 2001 we made our first down payment on our commitment. During a year when all of our markets faced serious downturns, the U.S. entered a recession and we and our competitors struggled with the effects of decreasing volumes and intense pressure on margins, Rock-Tenn increased core earnings per share (excluding plant closing costs) by 15%. We also significantly increased cash flow to continue our capital expenditure program, repay $49 million in debt and pay our shareholders $10 million in dividends. These results encourage us to stay with our strategy in 2002. This year, with the recession in full swing, we are committed to doing even better. In this report we will trace the reasons we improved in 2001 and mark the initiatives that we believe will lead to even better results in 2002. RELENTLESS EFFORTS PROVIDE RESULTS There are many specific achievements that contributed to the results of 2001, some of which we detail in this report, but they all evidence one trait imbedded in our culture -- we are relentless. Relentless in the pursuit of customer satisfaction, relentless in the pursuit of product and process innovation, relentless about lowering our costs and relentless in our commitment to high performance. Our culture is not for everyone. We have lost good people, but our culture has energized so many people and attracted so many more to our company who thrive on our culture that we are a much stronger company today than we were before. We are a home to people who are committed to working for a great company and who will do all they can to make Rock-Tenn just that. PACKAGING PRODUCTS SEGMENT LOGS SIGNIFICANT IMPROVEMENT Rock-Tenn's commitment to performance means commitment to increasing the value of our shares. That means growth in earnings power. Within our Packaging Products Segment, the Folding Carton Division is Rock-Tenn's largest business, with over $600 million in sales. Sales in 2001 were up 1% even though we closed four plants and consolidated the business into other, more efficient operations. To achieve this sales increase in the face of declining market conditions, we needed to retain almost all of our existing business despite these plant closings and deliver some strong new sales -- and we did it. OPERATING CASH FLOW (in millions of dollars) 1997 106 1998 126 1999 112 2000 102 2001 146
pg. 4 EBITDA Excluding plant closing and other one-time costs (in millions of dollars) 1997 142 1998 181 1999 180 2000 174 2001 181
Doing so in a much more efficient operating environment drove folding carton operating income up 61% in 2001, approaching our near-term goal of a return on sales of 5% across this business. This improving performance reflects the success of the consolidation program we implemented over the past two years. We have reduced the number of plants from 21 to 17 at a one-time cash cost of $13.5 million. The remaining folding carton plants provide expanded capabilities to serve the needs of both national and regional customers across the United States and Canada. Our folding carton customer base includes over 1,100 customers with our top 10 customers accounting for less than 30% of total folding carton sales. We feel that we are now positioned to grow in the folding carton business as opportunities arise, and we plan to invest approximately $10 million to add high-speed capacity in two of our folding carton plants during fiscal 2002. Rock-Tenn's relentless performance this past year was also evident in our plastic packaging business. Earnings grew significantly as we completed the transformation of this business to a low-cost leader in the high-end, custom thermoformed plastics market. Our Plastic Packaging Division continued to grow during fiscal 2001 to $77 million in annual sales. This increase reflects the continued focus of this team on identifying specific customer market needs and meeting them with high-value custom packaging products. This includes the successful DuraFresh(TM) rigid case ready tray line, which continues to attract new business from meat, poultry and seafood processors. In January of fiscal 2002, our expanded capacity will be 400 million trays per year, up from 300 million per year. While we are pleased with the performance of these two divisions, the results of our RTS Packaging joint venture with Sonoco were unsatisfactory. Volumes declined 10% primarily due to our failure to retain the business of one major glass producer with whom we have had a long-term contract. At the end of the year we CAN ROCK-TENN CONTINUE TO INCREASE EARNINGS IN 2002? Many of the operating improvements and capital investments we made in 2001 will gain traction in 2002. We also should see continuing growth at Alliance and in the Folding Carton Division's results. With all of these drivers in place, our employees should be able to produce even better results in 2002. Rock-Tenn 2001 Annual Report pg. 5 OPERATING INCOME Excluding plant closing and other one-time costs (in millions of dollars) 1997 80 1998 116 1999 114 2000 101 2001 108
further consolidated operations by eliminating one Midwestern plant, which we believe will lead to stronger results in 2002. MERCHANDISING DISPLAYS AND CORRUGATED PACKAGING SEGMENT: ALLIANCE GROWTH STILL STRONG Our focus on opportunities to expand our merchandising and display business led to another year of growth at Alliance. In 2001, our sales grew 19% with a comparable increase in earnings as the Alliance team continued to consolidate their market leadership position. Alliance capitalizes on the shift of promotional dollars into direct-to-consumer, in-store advertising. Alliance's Concept-to-Consumer(R) strategy has proven to be highly attractive to consumer products companies as they continue to seek more service from single-source vendors. Our sales at Alliance increased from $153 million to $181 million during fiscal 2001. We are excited about the prospects of continued expansion in 2002 as Alliance continues to find new avenues for meeting the growing market-driven needs of consumer products companies. Our Corrugated Packaging Division continues to provide outstanding service to customers in the Southeast. While our sales and profits declined somewhat during fiscal 2001, reflecting general conditions in the corrugated packaging industry as a whole, we continue to earn attractive returns in this business and are evaluating opportunities to expand these operations during fiscal 2002. PAPERBOARD SEGMENT: MIXED RESULTS Our coated paperboard mills produced very good results in an extremely difficult marketplace in 2001. In the face of weak demand for coated boxboard and intense price pressure, our Coated Paperboard Division actually increased operating income 24% to $37 million. Intense focus on operating excellence and product quality and a favorable cost environment for recycled fiber combined to produce these exceptional results. Within the Specialty Paperboard Division, we had our challenges during 2001, with two areas of our business adversely affecting our performance. In our laminated paperboard products converting business, very weak demand for ready-to-assemble furniture components and for book covers led to poor operating results for these converting operations, as well as adversely affecting our specialty mills through lower demand for DO YOU THINK INVESTING IN YOURSELVES IS STILL THE BEST STRATEGY? We will invest in ourselves to achieve competitive advantage and be a market leader in all of our businesses. Take that as a given. However, I think we have achieved the financial capacity to take advantage of more of the opportunities that may arise in the future. I see us being more outwardly focused on growth opportunities over time as the improvements we have made at Rock-Tenn gain momentum. pg. 6 CAPITAL EXPENDITURES (in millions of dollars) 1997 87 1998 82 1999 92 2000 95 2001 73
paperboard. In December 2000, we idled the No. 1 paper machine at our Lynchburg Mill, which helped increase operating rates at our other specialty mills to 96% for the fiscal year. However, the costs of idling this machine, as well as higher than expected start-up costs at the rebuilt No. 2 machine, which we have contributed to the Seven Hills joint venture, significantly reduced the operating income for our specialty mills. During fiscal 2002 we expect to bring our Seven Hills joint venture with Lafarge Corporation up to full production. When production for Lafarge fully ramps up during 2002, we will produce over 70,000 tons per year of gypsum paperboard liner for Lafarge's United States gypsum wallboard plants. We expect this venture to be accretive to earnings in fiscal 2002. NEW INITIATIVES FOR 2002 Over the past year, we have undertaken a number of initiatives that will support our culture of relentless performance. For fiscal 2002, we have instituted a new financial measure for all of our decision-making based on the concept of return over capital costs. Stated simply, we assess a financial charge on all of our operations for the assets they employ, and measure performance by comparing operating income to the capital charge. We believe this new measure will foster much greater long-term accountability all down the line for the decisions we make in allocating capital expenditures and investing in our business. During the past fiscal year, we also began an ongoing process of systematically asking our customers how satisfied they are with our products and services. The results of this initiative will give us an objective yardstick to measure our performance. Even in its early days we have gathered a wealth of data to improve our performance. Our goal is to satisfy our customers completely, every time, and become our customers' unquestioned supplier of choice. We are so committed to this measure of customer satisfaction that we have added it to financial performance and safety performance as the measures for our management incentive bonus plans. We are committed to continuously improving our customer satisfaction. DO YOU THINK ANY CHANGES IN ROCK-TENN'S CULTURE ARE NEEDED? Our culture is our most important asset. As long as we stay committed to empowering our employees in a decentralized environment and relentlessly pursuing high performance, we will continue to retain and attract employees who will deliver superior results. Rock-Tenn 2001 Annual Report pg. 7 NET SALES (in millions of dollars) 1997 1,114 1998 1,297 1999 1,313 2000 1,463 2001 1,442
During fiscal 2001 we also instituted the Six Sigma quality and process improvement program as a company-wide initiative. We currently have 12 black belts in training and will add 12 more in 2002. Each black belt will spend two years exclusively devoted to quality and process improvement projects. This is a very significant commitment of people and money for our company that we believe will produce breakthrough gains in quality, productivity and process effectiveness. IN 2002 WE WILL STAY WITH OUR STRATEGY Our results in fiscal 2001 confirm our commitment to our strategy for 2002. As we said last year - our strategy is very straight-forward. We will invest in ourselves for competitive advantage and growth. We will execute consistently with a relentless pursuit of improvement, and create a culture of high performance and innovation to maximize our return on invested capital and create market leaders. We made progress on all fronts in 2001, but much remains to be done in 2002, and we all look forward to the opportunities ahead for further progress this year. I want to thank Rock-Tenn's employees for their relentless efforts during a difficult economic time and for proving that this company has what it takes to be great. I look forward to working with all of you to make that goal a reality. Sincerely, /s/ James A. Rubright James A. Rubright Chairman and Chief Executive Officer RANDY SEXTON RETIRES FROM BOARD At our January shareholders' meeting, Randy Sexton will retire as a director of Rock-Tenn Company. Randy has been a director since 1967 and throughout that time has been a highly valued advisor, thoughtful contributor to our decisions and a good friend. We all thank Randy for his great service to Rock-Tenn Company. pg. 8 [PHOTO] "The growing number of magazines, television channels and other advertising outlets means that ads featured in those mediums are reaching ever-smaller individual audiences. As a result, a growing number of consumer products companies are shifting their advertising dollars to in-store advertising, where consumers really make up their minds. As that trend continues, we expect our business to only get better." Jim Einstein, Executive Vice President and General Manager, Alliance Division Rock-Tenn 2001 Annual Report pg. 9 RELENTLESS PERFORMANCE MEANS RELENTLESS GROWTH ALLIANCE SALES (in millions of dollars) 1997 65 1998 72 1999 112 2000 153 2001 181
[GRAPHIC] ALLIANCE CONTINUES GROWTH Hard work. Excellent sales and marketing. Strong customer relationships. Impeccable quality. Superb service. Those qualities, which are the essence of Rock-Tenn's Alliance Division, helped Alliance realize significant increases in volume, operating in a highly fragmented, $17 billion point-of-purchase market. The division's growth has significantly outpaced the industry - 20% annually vs. 7% for the industry. Alliance provides a fully integrated, Concept-to-Consumer(R) point-of-sale display solution with complete design, manufacturing, pack-out and distribution services. In 2001, the division's design of a countertop display for Procter & Gamble's "Visionary Light" line of Olay(R) cosmetics received the top award among hundreds of entries at the Point of Purchase Advertising International's annual meeting. pg. 10 CONSOLIDATED SHARPENS PROFITS 1999 28 2000 19 2001 30
FOLDING CARTON OPERATING INCOME (in millions of dollars) FOLDING CARTON EXECUTES During 2000 and 2001, Rock-Tenn's Folding Carton Division closed four plants in order to optimize production in more efficient operations. Folding Carton, like other Rock-Tenn business units, is focused on being the low-cost leader and on specialty product categories that offer higher-than-average returns. And by doing more with less - management and overhead - the Folding Carton Division anticipates improving profit margins and strengthening its competitiveness in a fragmented and highly competitive marketplace. [GRAPHIC] "There are three factors that typify the Folding Carton Division. One is a high-performing culture. The second is a focus on technology, which has enabled us to make giant leaps in productivity. And the third is innovative employees, who have created ingenious products like the new MillMask(TM) System, a patent-pending technological alternative fluorochemicals that prevents oil and grease from staining the surface of folding cartons and other paperboard substrates." Nick George, Executive Vice President and General Manager, Folding Carton Division [PHOTO] pg. 12 "Our new joint venture with Lafarge Corporation produces the highest-quality and lowest-cost gypsum paperboard liner available in North America." Paul England, Executive Vice President and General Manager, Specialty Paperboard Division of Rock-Tenn (left) and Tony Colak, Vice President of Manufacturing, Lafarge Gypsum Corporation [PHOTO] Rock-Tenn 2001 Annual Report pg. 13 PARTNERSHIPS OPEN NEW SPECIALITY MARKETS 1997 961 1998 1,141 1999 1,138 2000 1,148 2001 1,059
PAPERBOARD TONS SHIPPED (in thousands of tons) [GRAPHIC] JOINT VENTURE EXCELS In 2001, Seven Hills Paperboard, LLC, a joint venture between Rock-Tenn and Lafarge Corporation, a leading gypsum wallboard manufacturer, completed the rebuilding of a paperboard machine at Rock-Tenn's Lynchburg, Virginia mill. The new joint venture machine will produce lightweight gypsum paperboard liner for sale to Lafarge's gypsum wallboard operations. Strategic joint ventures like Seven Hills allow Rock-Tenn to enter new marketplaces with breakthrough technologies to establish market-leading positions. pg. 14 RETURN ON CAPITAL PAYS OFF WITH ENHANCED VALUE 1997 45 1998 46 1999 49 2000 64 2001 77
PLASTIC PACKAGING SALES (in millions of dollars) PLASTIC PACKAGING EXPANDS A leading provider of thermoformed plastic packaging and extruded plastic roll stock, Rock-Tenn's Plastic Packaging Division is one of its smallest, yet fastest-growing businesses. Sales from Plastic Packaging have grown more than 20% per year since 1999, while the growth rate of the industry as a whole has been about 6%. Profits have risen along with sales over the same period. With its emphasis on introducing new and innovative custom packaging solutions, Plastic Packaging is becoming a significant contributor to Rock-Tenn's bottom line. [GRAPHIC] "Our customers' markets demand that their products and our packaging solutions be innovative and be delivered fast. Our exceptional technical teams swiftly turn great packaging ideas into prototypes that we can quickly move into full production. Our quick turnarounds are a big competitive advantage." Vince D'Amelio, Executive Vice President and General Manager, Plastic Packaging Division [PHOTO] pg. 16 PACKAGING TAKES OFF Thousands of North American companies manufacture products that consumers buy every day, from candy to cosmetics and from processed meat to medical supplies. These companies demand inventive and cost-effective packaging for their products. Recognizing Rock-Tenn's relentless pursuit of quality, innovation and customer service, consumer products companies and manufacturers throughout North America rely on Rock-Tenn to help bring their products to market with creative, imaginative and attractively priced packaging and point-of-purchase displays. PACKAGING PRODUCTS Providing innovative solutions to customers' paperboard and plastic packaging needs. MERCHANDISING DISPLAYS AND CORRUGATED PACKAGING Offering Concept-to-Consumer(R) services for in-store merchandising and displays and corrugated packaging. PAPERBOARD Making it ourselves allows us to control the quality of the product that we use throughout Rock-Tenn. PACKAGING PRODUCTS [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] Rock-Tenn 2001 Annual Report pg. 17 MERCHANDISING DISPLAYS & CORRUGATED PACKAGING [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] PAPERBOARD [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] pg. 18 "Safety is the ultimate people issue in a manufacturing company, and nothing is more important than to be relentless about helping each person work safely. People who work safely and are in an environment that encourages safe work habits produce better quality products, have better productivity and take care of customers better." Star Evans, Human Resource and Safety Director, Specialty Paperboard Division, Lynchburg, Virginia [PHOTO] Rock-Tenn 2001 Annual Report pg. 19 SAFETY RULES The relentless pursuit of a safe work environment began over a decade ago. Rock-Tenn's focus is plain and simple: we do not believe that people have to get hurt. This approach goes beyond compliance and is built on the strong belief that all injuries are preventable. Efforts and initiatives are varied across the business units, but a strong top down and bottom up accountability structure assures continued success and even greater results. Rock-Tenn will continue to focus its resources on the creation of a safe work environment for its employees. 1990 11.64 1991 8.45 1992 9.00 1993 6.71 1994 5.98 1995 4.70 1996 3.58 1997 3.77 1998 3.77 1999 2.48 2000 2.52 2001 2.24
TOTAL RECORDABLE PERSONAL INJURY RATE (incidents per 200,000 man hours) pg. 20 ENVIRONMENT RECYCLES Preserving and conserving the environment concerns many consumers and businesses alike as they enter the 21st century. Recovering and recycling paper plays an important role in protecting the environment since recovered paper is diverted from the solid waste stream and made into new products. Rock-Tenn has turned an environmentally friendly activity into a vital part of its business. Operating 14 paper-collecting facilities and twelve 100%-recycled paperboard mills throughout the United States, each year the company handles over one and a half million tons of recovered paper - including corrugated containerboard, newsprint and office papers - to produce recycled paperboard for its own divisions as well as for other companies. Products produced from recovered paper range from packaging for pasta and overnight mailing envelopes to coverboard for books, binders and notepads. 1999 1,709 2000 1,707 2001 1,632
WASTEPAPER SOURCED BY ROCK-TENN COMPANY(*) (in thousands of tons) * Includes wastepaper purchased by Rock-Tenn mills and wastepaper sourced by the Recycled Fiber Division for third parties. [ROCK-TENN COMPANY LOGO] Rock-Tenn Company 504 Thrasher Street Norcross, GA 30071 770-448-2193 www.rocktenn.com RELENTLESS PERFORMANCE [PHOTO] ROCK-TENN COMPANY 2001 ANNUAL REPORT CONTENTS 2. letter 8. growth 10. consolidation 12. partnerships 14. return on capital 16. at-a-glance 18. safety 20. environment 21. index to financials ROCK-TENN is one of North America's leading manufacturers of packaging products, merchandising displays and recycled paperboard. Since its founding in 1936, Rock-Tenn has focused on developing packaging and paperboard products that bring high value to its customers, employees and shareholders. The Company operates over 70 manufacturing facilities throughout the United States, Canada, Mexico and Chile, and employs approximately 8,600 people. Headquartered in Norcross, Georgia, Rock-Tenn is listed on the New York Stock Exchange. The Company's Class A common stock trades under the symbol RKT. SHAREHOLDER INFORMATION HOME OFFICE 504 Thrasher Street Norcross, Georgia 30071 770-448-2193 TRANSFER AGENT AND REGISTRAR SunTrust Bank Mail Code 258 P.O. Box 4625 Atlanta, Georgia 30302 800-568-3476 INVESTOR RELATIONS Investor Relations Department Rock-Tenn Company P.O. Box 4098 Norcross, Georgia 30091 770-448-2193 Fax:770-263-3582 AUDITORS Ernst & Young, LLPP 600 Peachtree Street Suite 2800 Atlanta, Georgia 30308 DIRECT DEPOSIT OF DIVIDENDS Rock-Tenn shareholders may have their quarterly cash dividends automatically deposited to checking, savings or money market accounts through the automatic clearinghouse system. If you wish to participate in the program, please contact: SunTrust Bank Mail Code 258 P.O. Box 4625 Atlanta, Georgia 30302 800-568-3476 ANNUAL MEETING Northeast Atlanta Hilton 5993 Peachtree Industrial Boulevard Norcross, Georgia 30092 Friday, January 25, 2002 9:00 a.m. COMMON STOCK Rock-Tenn Class A common stock trades on the New York Stock Exchange under the symbol RKT. There is not an established public trading market for the Company's Class B common stock. As of December 6, 2001, there were approximately 501 Class A common shareholders of record and 116 Class B common shareholders of record. PRICE RANGE OF CLASS A COMMON STOCK
Fiscal 2001 Fiscal 2000 - ------------------------------------------------------------- High Low High Low First Quarter $10.38 $6.31 $16.44 $13.56 Second Quarter $ 8.98 $7.13 14.94 8.56 Third Quarter $13.10 $6.75 10.00 8.44 Fourth Quarter $14.00 $8.70 11.44 8.44 - -------------------------------------------------------------
FORM 10-K REPORT A copy of the Company's annual report on Form 10-K for the year ended September 30, 2001 as filed with the Securities and Exchange Commission is available at no charge to shareholders of record by writing to: Investor Relations Department Rock-Tenn Company P.O. Box 4098 Norcross, Georgia 30091 Rock-Tenn 2001 Annual Report pg. 21 ROCK-TENN COMPANY FINANCIAL REVIEW Five-Year Selected Financial and Operating Highlights 22 Management's Discussion and Analysis of Results of Operations and Financial Condition 23 Consolidated Statements of Operations 34 Consolidated Balance Sheets 35 Consolidated Statements of Shareholders' Equity 36 Consolidated Statements of Cash Flows 37 Notes to Consolidated Financial Statements 38 Report of Independent Auditors 52 Management's Statement of Responsibility for Financial Information 53 Officers and Directors 54 pg. 22 FIVE-YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
Year Ended September 30, (In Thousands, Except Per Share Amounts) 2001 2000 1999 1998 1997(e) - -------------------------------------------------------------------------------------------------------------- Net sales $1,441,632 $ 1,463,288 $1,313,371 $1,297,360 $1,113,883 Plant closing and other one-time costs 16,893 65,630 6,932 1,997 16,251 Income (loss) before income taxes 52,134 (4,346) 70,253 74,613 37,756 Net income (loss) 30,523 (15,916) 39,698 42,020 16,101 - -------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per common share(a) 0.91 (0.46) 1.13 1.20 0.47 Diluted earnings per common share excluding plant closing and other one-time costs(a) 1.17 1.02 1.25 1.23 0.90 Dividends paid per common share(a) 0.30 0.30 0.30 0.30 0.30 Book value per common share(a) 12.00 11.57 12.36 11.49 10.80 - -------------------------------------------------------------------------------------------------------------- Total assets 1,164,413 1,158,963 1,161,470 1,111,481 1,113,686 Debt, including hedge adjustment(b) 494,242 534,820 498,845 508,338 533,622 Shareholders' equity 402,760 386,303 432,164 397,415 371,212 - -------------------------------------------------------------------------------------------------------------- EBITDA(c) 181,418 173,502 180,448 181,487 142,193 Cash provided by operating activities 146,027 102,444 112,416 125,688 106,377 Goodwill amortization(d) 8,569 9,069 9,410 9,429 7,070 Capital expenditures 72,561 94,640 92,333 81,666 87,016 Cash contributed to joint venture investment 9,627 7,133 -- -- -- Cash paid for purchases of businesses -- -- -- -- 301,287 - --------------------------------------------------------------------------------------------------------------
Notes: (a) Gives effect to a 10% stock dividend paid on November 15, 1996. (b) Includes adjustment for the fair value hedge in the amount of $8,603,000 as of September 30, 2001. (c) EBITDA represents earnings before interest, taxes, depreciation and amortization, and plant closing and other one-time charges. EBITDA as presented may not be comparable to similarly titled measures reported by other companies. (d) Amount not deductible for income tax purposes was $6,189,000, $6,550,000, $6,900,000, $6,928,000 and $4,760,000 in fiscal 2001, 2000, 1999, 1998 and 1997, respectively. (e) Reflects (i) the results of operations of Waldorf Corporation, Rite Paper Products Inc. and The Davey Company beginning from the respective dates of acquisition and (ii) the results of operations of RTS Packaging, LLC from the date of formation. Rock-Tenn 2001 Annual Report pg. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS of Results of Operations and Financial Condition Segment and Market Information We report our results in three industry segments: (1) packaging products, (2) merchandising displays and corrugated packaging, and (3) paperboard. No customer accounts for more than 5% of our consolidated net sales. The packaging products segment consists of facilities that produce folding cartons, interior packaging and thermoformed plastic packaging. We compete with a significant number of national, regional and local packaging suppliers. During fiscal 2001, we sold packaging products to approximately 3,100 customers. We sell packaging products to a number of large national customers; however, the majority of our packaging products sales are to smaller national and regional customers. The packaging business is highly competitive. As a result, we regularly bid for sales opportunities to customers for new business or for renewal of existing business. The loss of business or the award of new business from our larger customers may have a significant impact on our results of operations. The merchandising displays and corrugated packaging segment consists of facilities that produce merchandising displays and flexographic and litho-laminated corrugated packaging. We compete with a number of national, regional and local suppliers of those goods and services in this segment. During fiscal 2001, we sold display products and corrugated packaging to approximately 1,100 customers. Due to the highly competitive nature of the merchandising displays and corrugated packaging business, we regularly bid for sales opportunities to customers for new business or for renewal of existing business. The loss of business or the award of new business from our larger customers may have a significant impact on our results of operations. The paperboard segment consists of facilities that collect recovered paper and that manufacture 100% recycled clay-coated and specialty paperboard, corrugating medium, and laminated paperboard products. In our clay-coated and specialty paperboard divisions, we compete with integrated and non-integrated national, regional and local companies manufacturing various grades of paperboard. In our laminated paperboard products division, we compete with a small number of national, regional and local companies offering highly specialized products. We also compete with foreign companies in the book cover market. Our recycled fiber division competes with national, regional and local companies. During fiscal 2001, we sold recycled paperboard, corrugating medium, laminated paperboard products and recovered paper to approximately 2,100 customers. A significant percentage of our sales of recycled paperboard is made to our packaging products and merchandising displays and corrugated packaging segments and to our laminated paperboard products division. Our paperboard segment's sales volumes may therefore be directly impacted by changes in demand for our packaging and laminated paperboard products. Income and expenses that are not reflected in the information used by management to make operating decisions and assess operating performance are reported as non-allocated expenses. These include elimination of intersegment profit and certain corporate expenses. Previously reported segment income results have been restated for all years presented in order to conform to changes in internal reporting measures used by management. Segment operating income now reflects adjustments to record inventory on the last-in, first-out, or "LIFO," method, reallocation of corporate expenses due to a change in methodology and non-allocation of goodwill amortization expense. pg. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS
Fiscal Year Ended September 30, (In Millions) 2001 2000 1999 - ------------------------------------------------------------------------------------ Net sales (aggregate): Packaging Products $ 806.1 $ 797.4 $ 749.9 Merchandising Displays and Corrugated Packaging 263.4 238.8 180.9 Paperboard 524.5 588.5 529.0 - ------------------------------------------------------------------------------------ Total $ 1,594.0 $ 1,624.7 $ 1,459.8 ==================================================================================== Net sales (intersegment): Packaging Products $ 3.5 $ 5.3 $ 3.5 Merchandising Displays and Corrugated Packaging 5.6 5.3 4.3 Paperboard 143.3 150.8 138.6 - ------------------------------------------------------------------------------------ Total $ 152.4 $ 161.4 $ 146.4 ==================================================================================== Net sales (unaffiliated customers): Packaging Products $ 802.6 $ 792.1 $ 746.4 Merchandising Displays and Corrugated Packaging 257.8 233.5 176.6 Paperboard 381.2 437.7 390.4 - ------------------------------------------------------------------------------------ Total $ 1,441.6 $ 1,463.3 $ 1,313.4 ==================================================================================== Segment income: Packaging Products $ 48.1 $ 39.7 $ 48.6 Merchandising Displays and Corrugated Packaging 30.2 27.6 22.2 Paperboard 41.6 51.4 60.3 - ------------------------------------------------------------------------------------ 119.9 118.7 131.1 Goodwill amortization (8.6) (9.1) (9.4) Plant closing and other one-time costs (16.9) (65.6) (6.9) Non-allocated expenses (5.4) (8.2) (7.7) Interest expense (35.0) (35.5) (31.2) Interest and other income 0.5 0.4 0.4 Minority interest in income of consolidated subsidiary (2.4) (5.0) (6.0) - ------------------------------------------------------------------------------------ Income (loss) before income taxes $ 52.1 $ (4.3) $ 70.3 - ------------------------------------------------------------------------------------
Results of Operations We provide quarterly information in the following tables to assist in evaluating trends in our results of operations. For additional discussion of quarterly information, see our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. NET SALES (UNAFFILIATED CUSTOMERS) Net sales for fiscal 2001 decreased 1.5% to $1,441.6 million from $1,463.3 million for fiscal 2000. Net sales decreased as a result of decreased volumes in specialty paperboard and laminated paperboard products as well as price decreases in recycled fiber. These price and volume declines were partially offset by price and volume increases in displays and plastic packaging. Net sales for fiscal 2000 increased 11.4% to $1,463.3 million from $1,313.4 million for fiscal 1999. Net sales increased primarily as a result of increased volumes and price increases in merchandising displays, corrugated packaging and plastic packaging. Net Sales (Aggregate) - Packaging Products Segment
First Second Third Fourth Fiscal (In Millions) Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------- 1999 $ 185.7 $ 180.7 $ 186.9 $ 196.6 $ 749.9 2000 192.9 195.1 202.8 206.6 797.4 2001 195.6 206.9 198.6 205.0 806.1
Net sales of the packaging products segment before intersegment eliminations for fiscal 2001 increased 1.1% to $806.1 million from $797.4 million for fiscal 2000. Net sales of the packaging products segment before intersegment eliminations for fiscal 2000 increased 6.3% to $797.4 million from $749.9 million for fiscal 1999. Net Sales (Aggregate) by Division - Packaging Products Segment
Folding RTS Plastic (In Millions) Carton Packaging Packaging - ----------------------------------------------------------- 1999 $ 565.3 $ 136.0 $ 48.6 2000 597.4 136.4 63.6 2001 602.7 126.5 76.9
The increase in net sales of the packaging products segment before intersegment eliminations for fiscal 2001 as compared to fiscal 2000 was primarily the result of increased prices and volumes in our plastic packaging business offset by lower volumes in our interior packaging business. The increase in net sales of the packaging products segment before intersegment eliminations for fiscal 2000 as compared to fiscal 1999 was primarily the result of increased volumes in our plastic packaging division and increased prices and volumes in our folding carton group. Rock-Tenn 2001 Annual Report pg. 25 Net Sales (Aggregate) - Merchandising Displays and Corrugated Packaging Segment
First Second Third Fourth Fiscal (In Millions) Quarter Quarter Quarter Quarter Year - -------------------------------------------------------------------------- 1999 $ 37.8 $ 41.4 $ 45.0 $ 56.7 $180.9 2000 52.3 59.2 59.1 68.2 238.8 2001 57.8 65.8 65.8 74.0 263.4
Net sales within this segment before intersegment eliminations for fiscal 2001 increased 10.3% to $263.4 million from $238.8 million for fiscal 2000. Net sales within this segment before intersegment eliminations for fiscal 2000 increased 32.0% to $238.8 million from $180.9 million for fiscal 1999. Net Sales (Aggregate) by Division - Merchandising Displays and Corrugated Packaging Segment
Alliance Corrugated (In Millions) Display Packaging - ------------------------------------------------- 1999 $ 112.0 $ 68.9 2000 152.7 86.1 2001 181.1 82.3
The increase in net sales of the merchandising displays and corrugated packaging segment before intersegment eliminations for fiscal 2001 as compared to fiscal 2000 was the result of increased volumes and increases in pricing of displays offset by lower volumes in our corrugated packaging business due to generally weaker market conditions. The increase in net sales of the merchandising displays and corrugated packaging segment before intersegment eliminations for fiscal 2000 as compared to fiscal 1999 was the result of increased volumes and increases in pricing of merchandising displays and corrugated packaging. Net Sales (Aggregate) - Paperboard Segment
First Second Third Fourth Fiscal (In Millions) Quarter Quarter Quarter Quarter Year - --------------------------------------------------------------------------- 1999 $ 122.5 $ 127.0 $ 134.5 $ 145.0 $ 529.0 2000 144.3 154.7 148.9 140.6 588.5 2001 131.5 133.1 130.5 129.4 524.5
Net sales of the paperboard segment before intersegment eliminations for fiscal 2001 decreased 10.9% to $524.5 million from $588.5 million for fiscal 2000. Net sales of the paperboard segment before intersegment eliminations for fiscal 2000 increased 11.2% to $588.5 million from $529.0 million for fiscal 1999. Net Sales (Aggregate) by Division - Paperboard Segment
Laminated Coated Specialty Recycled Paperboard (In Millions) Paperboard Paperboard Fiber Products - --------------------------------------------------------------------------- 1999 $ 268.5 $ 85.6 $ 28.0 $ 146.9 2000 304.0 100.3 48.4 135.8 2001 295.4 83.2 33.0 112.9
The decrease in net sales of the paperboard segment before intersegment eliminations for fiscal 2001 as compared to fiscal 2000 was the result of a significant decline in recycled fiber prices as well as volume declines due to a general weakening in the book and ready-to-assemble furniture industries. Reduced volumes at our interior packaging business over fiscal 2000 further contributed to the sales decline. The increase in net sales of the paperboard segment before intersegment eliminations for fiscal 2000 as compared to fiscal 1999 was the result of increased volumes and prices in the recycled fiber and coated and specialty paperboard divisions. COST OF GOODS SOLD Cost of goods sold for fiscal 2001 decreased 2.6% to $1,144.8 million from $1,174.8 million for fiscal 2000. Cost of goods sold as a percentage of net sales for fiscal 2001 decreased to 79.4% from 80.3% for fiscal 2000. The decrease in cost of goods sold as a percentage of net sales resulted from lower average recovered paper costs offset by higher energy expenses. Cost of goods sold for fiscal 2000 increased 15.3% to $1,174.8 million from $1,019.2 million for fiscal 1999. Cost of goods sold as a percentage of net sales for fiscal 2000 increased to 80.3% from 77.6% for fiscal 1999. The increase in cost of goods sold as a percentage of net sales resulted from higher average recovered paper costs and higher operating costs at several plants, some of which were related to the start-up of certain new equipment, and higher energy and freight costs. Substantially all of our U.S. inventories are valued at the lower of cost or market with cost determined on the LIFO inventory valuation method, which we believe generally results in a better matching of current costs and revenues than under the first-in, first-out, or "FIFO," inventory valuation method. In periods of increasing costs, the LIFO method generally results in higher cost of goods sold than under the FIFO method. In periods of decreasing costs, the results are generally the opposite. pg. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS The following table illustrates the comparative effect of LIFO and FIFO accounting on our results of operations. These supplemental FIFO earnings reflect the after-tax effect of eliminating the LIFO adjustment each year.
2001 2000 1999 ----------------------- ------------------------- -------------------------- (In Millions) LIFO FIFO LIFO FIFO LIFO FIFO Cost of goods sold $1,144.8 $1,147.7 $ 1,174.8 $ 1,169.5 $ 1,019.2 $ 1,019.0 Net (loss) income 30.5 28.7 (15.9) (12.6) 39.7 39.8
GROSS PROFIT
(% of First Second Third Fourth Fiscal Net Sales) Quarter Quarter Quarter Quarter Year - ----------- ------- ------- ------- ------- ------ 1999 23.0 22.1 22.3 22.3 22.4 2000 20.8 19.9 18.8 19.4 19.7 ----- ----- ----- ----- ----- 2001 19.1 20.1 21.4 21.6 20.6 ===== ===== ===== ===== =====
Gross profit for fiscal 2001 increased 2.9% to $296.8 million from $288.5 million for fiscal 2000. Gross profit as a percentage of net sales increased to 20.6% for fiscal 2001 from 19.7% for fiscal 2000. Gross profit for fiscal 2000 decreased 1.9% to $288.5 million from $294.2 million for fiscal 1999. Gross profit as a percentage of net sales decreased to 19.7% for fiscal 2000 from 22.4% for fiscal 1999. See also Cost of Goods Sold. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for fiscal 2001 increased 1.3% to $180.3 million from $178.0 million for fiscal 2000. Selling, general and administrative expenses as a percentage of net sales for fiscal 2001 increased to 12.5% from 12.2% for fiscal 2000. The increase in selling, general and administrative expenses as a percentage of net sales for fiscal 2001 resulted primarily from increased compensation expenses in relation to net sales. Selling, general and administrative expenses for fiscal 2000 increased 4.2% to $178.0 million from $170.8 million for fiscal 1999. Selling, general and administrative expenses as a percentage of net sales for fiscal 2000 decreased to 12.2% from 13.0% for fiscal 1999. The decrease in selling, general and administrative expenses as a percentage of net sales for fiscal 2000 resulted primarily from decreased compensation expenses in relation to net sales. PLANT CLOSING AND OTHER COSTS During fiscal 2001, we incurred plant closing and other costs related to announced facility closings. We generally accrue the cost of employee terminations at the time of notification to the employees. Certain other costs, such as moving and relocation costs, are expensed as incurred. These plant closing costs include the closing of a folding carton plant in Augusta, Georgia and an interior packaging plant in Eaton, Indiana. The closures resulted in the termination of approximately 210 employees. In connection with these closings, we incurred charges of $6.2 million during fiscal 2001, which consisted mainly of asset impairment, severance, equipment relocation, disposal costs and related expenses. Payments of $0.8 million were made in fiscal 2001. The remaining liability at September 30, 2001 is $1.5 million. Plant closing and other costs are not allocated to the respective segments for financial reporting purposes. Had these costs been allocated, $6.2 million would have been charged to the packaging products segment. We have consolidated the operations of the Augusta folding plant and the Eaton interior packaging plant into other existing facilities. During fiscal 2000, we closed a laminated paperboard products plant in Lynchburg, Virginia and folding carton plants in Chicago, Illinois, Norcross, Georgia and Madison, Wisconsin. The closures resulted in the termination of approximately 550 employees. In connection with these closings, we incurred charges of $61.1 million during fiscal 2000, which consisted mainly of asset impairment, severance, equipment relocation, lease write-downs and other related expenses, including business interruption and other inefficiencies. Of the $61.1 million, $46.0 million represented asset impairment charges related to the determination of material diminution in the value of assets, including goodwill of $25.4 million (which is not deductible for tax purposes), relating to our two folding carton plants that use web offset technology, as well as assets relating to the other closed facilities. We made payments of $2.4 million and $12.6 million in fiscal 2001 and fiscal 2000, respectively, and made an accrual adjustment of $0.6 million to increase the liability during fiscal 2001. The remaining liability at September 30, 2001 is $0.7 million. Plant closing and other costs are not allocated to the respective segments for financial reporting purposes. Had these costs been allocated, $50.2 million would have been charged to the packaging products segment, $9.3 million would have been charged to the paperboard segment and $1.6 million would have been non-allocated in fiscal 2000. We have consolidated the operations of these closed plants into other existing facilities. During fiscal 2000, we decided to remove certain equipment from service primarily in our laminated paperboard products division. As a result of this decision, we incurred impairment charges of $4.6 million related to this equipment. Rock-Tenn 2001 Annual Report pg. 27 During fiscal 1999, we closed a folding carton plant in Taylorsville, North Carolina, a laminated paperboard products operation in Otsego, Michigan and an uncoated paper mill serving our coverboard converting operations in Jersey City, New Jersey. The closures resulted in the termination of approximately 280 employees. In connection with these closings, we incurred charges of $6.3 million during fiscal 1999, which consisted mainly of severance, equipment relocation, expected losses on the disposition of the facility and related expenses. We made payments of $0.3 million and $4.1 million in fiscal 2000 and 1999, respectively, incurred losses of $0.2 million and $0.8 million in connection with the disposal of inventory and other assets during fiscal 2000 and 1999, respectively, made an adjustment of $0.1 million to reduce the liability during fiscal 2000 and reduced the carrying value of the Jersey City facility by $1.0 million during fiscal 1999. We do not have any remaining liability at September 30, 2001. Plant closing and other costs are not allocated to the respective segments for financial reporting purposes. Had these costs been allocated, $3.9 million would have been charged to the paperboard segment in fiscal 1999 and $2.4 million of expense would have been charged to the packaging products segment in fiscal 1999. We have consolidated the operations of these closed plants into other existing facilities. SEGMENT OPERATING INCOME Operating Income - Packaging Products Segment
(In Millions, Net Sales Operating Return Except Percentages) (Aggregate) Income on Sales - ------------------- ----------- --------- -------- First Quarter $ 185.7 $ 9.0 4.8% Second Quarter 180.7 7.5 4.2 Third Quarter 186.9 13.6 7.3 Fourth Quarter 196.6 18.5 9.4 -------- ------- ---- Fiscal 1999 $ 749.9 $ 48.6 6.5% ======== ======= ==== First Quarter $ 192.9 $ 7.6 3.9% Second Quarter 195.1 9.0 4.6 Third Quarter 202.8 10.9 5.4 Fourth Quarter 206.6 12.2 5.9 -------- ------- ---- Fiscal 2000 $ 797.4 $ 39.7 5.0% ======== ======= ==== First Quarter $ 195.6 $ 10.8 5.5% Second Quarter 206.9 11.7 5.7 Third Quarter 198.6 12.8 6.4 Fourth Quarter 205.0 12.8 6.2 -------- ------- ---- Fiscal 2001 $ 806.1 $ 48.1 6.0% ======== ======= ====
Operating income attributable to the packaging products segment for fiscal 2001 increased 21.2% to $48.1 million from $39.7 million for fiscal 2000. Operating margin for fiscal 2001 was 6.0% compared to 5.0% for fiscal 2000. The increase in operating margin primarily resulted from operational efficiencies in our folding carton operations gained through plant consolidations in fiscal 2000 and 2001. Operating income attributable to the packaging products segment for fiscal 2000 decreased 18.3% to $39.7 million from $48.6 million for fiscal 1999. Operating margin for fiscal 2000 was 5.0% compared to 6.5% for fiscal 1999. The decrease in operating margin resulted from higher raw material costs, significant losses in our web offset folding carton operations and operational inefficiencies attributable in part to the start-up of new equipment. Operating Income - Merchandising Displays and Corrugated Packaging Segment
(In Millions, Net Sales Operating Return Except Percentages) (Aggregate) Income on Sales - ------------------- ----------- --------- -------- First Quarter $ 37.8 $ 8.1 21.4% Second Quarter 41.4 9.4 22.7 Third Quarter 45.0 2.3 5.1 Fourth Quarter 56.7 2.4 4.2 -------- ------- ---- Fiscal 1999 $ 180.9 $ 22.2 12.3% ======== ======= ==== First Quarter $ 52.3 $ 6.0 11.5% Second Quarter 59.2 7.4 12.5 Third Quarter 59.1 6.4 10.8 Fourth Quarter 68.2 7.8 11.4 -------- ------- ---- Fiscal 2000 $ 238.8 $ 27.6 11.6% ======== ======= ==== First Quarter $ 57.8 $ 2.8 4.8% Second Quarter 65.8 8.5 12.9 Third Quarter 65.8 8.3 12.6 Fourth Quarter 74.0 10.6 14.3 -------- ------- ---- Fiscal 2001 $ 263.4 $ 30.2 11.5% ======== ======= ====
Operating income attributable to this segment for fiscal 2001 increased 9.4% to $30.2 million from $27.6 million for fiscal 2000. Operating margin for fiscal 2001 decreased to 11.5% from 11.6% in fiscal 2000. The decrease in operating margin resulted from lower sales volumes in our corrugated packaging business due to generally weaker market conditions. Operating income attributable to this segment for fiscal 2000 increased 24.3% to $27.6 million from $22.2 million for fiscal 1999. Operating margin for fiscal 2000 decreased to 11.6% from 12.3% in fiscal 1999. The decrease in operating margin was primarily the result of higher raw material costs. pg. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS Operating Income - Paperboard Segment
Recycled Average Corrugated Average Weighted Paperboard Recycled Medium Corrugated Average Net Sales Operating Tons Paperboard Tons Medium Recovered (Aggregate) Income Return Shipped Price Shipped Price Paper Cost (In Millions) (In Millions) on Sales (In Thousands) (Per Ton) (In Thousands) (Per Ton) (Per Ton) ------------- ------------- -------- -------------- ---------- -------------- ---------- ---------- First Quarter $ 122.5 $ 14.6 11.9% 230.7 $ 403 45.2 $ 288 $ 53 Second Quarter 127.0 12.9 10.2 229.0 399 43.5 328 52 Third Quarter 134.5 17.3 12.9 249.4 398 45.3 340 58 Fourth Quarter 145.0 15.5 10.7 249.8 406 44.7 380 76 ------- ------ ----- ------ ----- ------ ----- ----- Fiscal 1999 $ 529.0 $ 60.3 11.4% 958.9 $ 401 178.7 $ 336 $ 60 ======= ====== ===== ====== ===== ====== ===== ===== First Quarter $ 144.3 $ 16.3 11.3% 250.4 $ 420 42.4 $ 386 $ 83 Second Quarter 154.7 15.5 10.0 257.1 426 44.7 403 91 Third Quarter 148.9 8.6 5.8 242.0 445 40.9 419 108 Fourth Quarter 140.6 11.0 7.8 228.7 449 42.2 407 88 ------- ------ ----- ------ ----- ------ ----- ----- Fiscal 2000 $ 588.5 $ 51.4 8.7% 978.2 $ 435 170.2 $ 403 $ 92 ======= ====== ===== ====== ===== ====== ===== ===== First Quarter $ 131.5 $ 10.3 7.8% 216.7 $ 451 41.5 $ 393 $ 65 Second Quarter 133.1 10.3 7.7 222.3 445 39.8 385 58 Third Quarter 130.5 10.5 8.0 223.4 437 42.0 369 53 Fourth Quarter 129.4 10.5 8.1 227.1 434 45.9 368 53 ------- ------ ----- ------ ----- ------ ----- ----- Fiscal 2001 $ 524.5 $ 41.6 7.9% 889.5 $ 442 169.2 $ 378 $ 57 ======= ====== ===== ====== ===== ====== ===== =====
Operating income attributable to the paperboard segment for fiscal 2001 decreased 19.1% to $41.6 million from $51.4 million for fiscal 2000. Operating margin for fiscal 2001 decreased to 7.9% from 8.7% in fiscal 2000. The decrease in operating margin was primarily the result of higher energy costs that were not fully passed on to customers, as well as a general economic downturn in the book and ready-to-assemble furniture industries. The significant decline in recycled fiber prices further contributed to the decrease in operating margin for the paperboard segment. Operating income attributable to the paperboard segment for fiscal 2000 decreased 14.8% to $51.4 million from $60.3 million for fiscal 1999. Operating margin for fiscal 2000 decreased to 8.7% from 11.4% in fiscal 1999. The decrease in operating margin was primarily the result of raw material, energy and freight cost increases that were not fully passed on to customers, costs associated with the start-up of new equipment and operational inefficiencies at certain paper mills. INTEREST EXPENSE Interest expense for fiscal 2001 decreased to $35.0 million from $35.5 million for fiscal 2000 and increased to $35.5 million for fiscal 2000 from $31.2 million for fiscal 1999. The decrease for fiscal 2001 primarily resulted from a decrease in the average outstanding borrowings and lower interest rates. The increase in fiscal 2000 primarily resulted from an increase in average outstanding borrowings and higher interest rates. MINORITY INTEREST Minority interest in income of our consolidated subsidiary for fiscal 2001 decreased 52.0% to $2.4 million from $5.0 million for fiscal 2000. The decline was due to decreased income in the joint venture resulting from reduced volumes in the interior packaging business primarily due to the loss of one large customer with whom we have had a long-term contract. Minority interest in income of our consolidated subsidiary for fiscal 2000 decreased 16.7% to $5.0 million from $6.0 million for fiscal 1999. The decline was due to decreased income in the joint venture resulting from higher raw material costs which were not fully passed on to customers. Rock-Tenn 2001 Annual Report pg. 29 PROVISION FOR INCOME TAXES Provision for income taxes for fiscal 2001 increased to $21.9 million from $11.6 million for fiscal 2000. Provision for income taxes for fiscal 2000 decreased to $11.6 million from $30.6 million for fiscal 1999. Excluding the effect of the $25.4 million non-cash write-off during fiscal 2000 of the goodwill associated with the impairment of assets at two facilities acquired in the Waldorf acquisition, which is non-deductible for tax purposes, our effective tax rate decreased to 42.0% for fiscal 2001 compared to 54.9% for fiscal 2000 and increased to 54.9% for fiscal 2000 compared to 43.5% for fiscal 1999. The decrease in the effective tax rate in fiscal 2001 primarily resulted from non-tax-deductible goodwill amortization comprising a lower percentage of pre-tax net income. The increase in the effective tax rate in fiscal 2000 was primarily due to higher non-tax-deductible goodwill amortization as a percentage of pretax net income. NET INCOME (LOSS) AND DILUTED EARNINGS (LOSS) PER COMMON SHARE Net income for fiscal 2001 was $30.5 million compared to a net loss of $15.9 million for fiscal 2000. Net income as a percentage of net sales was 2.1% for fiscal 2001 compared to net loss as a percentage of net sales of 1.1% for fiscal 2000. Diluted earnings per share for fiscal 2001 was $0.91 compared to diluted loss per share of $0.46 for fiscal 2000. Net loss for fiscal 2000 was $15.9 million compared to net income of $39.7 million for fiscal 1999. Net loss as a percentage of net sales was 1.1% for fiscal 2000 compared to net income as a percentage of net sales of 3.0% for fiscal 1999. Diluted loss per share for fiscal 2000 was $0.46 compared to diluted earnings per share of $1.13 for fiscal 1999. Market Risk-Sensitive Instruments and Positions We are exposed to market risk from changes in interest rates, foreign exchange rates and commodity prices. To mitigate these risks, we enter into various hedging transactions. The sensitivity analyses presented below do not consider the effect of possible adverse changes in the economy generally, nor do they consider additional actions management may take to mitigate its exposure to such changes. DERIVATIVE INSTRUMENTS We enter into a variety of derivative transactions. Generally, we designate at inception that derivatives hedge risks associated with specific assets, liabilities or future commitments and monitor each derivative to determine if it remains an effective hedge. The effectiveness of the derivative as a hedge is based on a high correlation between changes in its value and changes in value of the underlying hedged item. Ineffectiveness related to our derivative transactions is not material. We include in operations amounts received or paid when the underlying transaction settles. Derivatives are included in other long-term liabilities and other assets on the balance sheet. We do not enter into or hold derivatives for trading or speculative purposes. From time to time, we use interest rate cap agreements and interest rate swap agreements to manage synthetically the interest rate characteristics of a portion of our outstanding debt and to limit our exposure to rising interest rates. Amounts to be received or paid as a result of interest rate cap agreements and interest rate swap agreements are accrued and recognized as an adjustment to interest expense related to the designated debt. The cost of purchasing interest rate caps is amortized to interest expense ratably during the life of the agreement. Gains or losses on terminations of interest rate swap agreements are deferred and amortized as an adjustment to interest expense of the related debt instrument over the remaining term of the original contract life of terminated swap agreements. From time to time, we use forward contracts to limit our exposure to fluctuations in Canadian foreign currency rates with respect to our receivables denominated in Canadian dollars. The forward contracts are settled monthly and resulting gains or losses are recognized at the time of settlement. We use commodity swap agreements to limit our exposure to falling selling prices and rising raw material costs for a portion of our recycled corrugating medium production. Amounts to be received or paid as a result of these swap agreements are recognized in the period in which the related sale is made. INTEREST RATE We are exposed to changes in interest rates, primarily as a result of our short-term and long-term debt with both fixed and floating interest rates. From time to time, we use interest rate agreements effectively to cap the LIBOR rate on portions of the amount outstanding under our revolving credit facility. If market interest rates averaged 1% more than actual rates in 2001, our interest expense, after considering the effects of interest rate swap agreements, would have increased and income before taxes would have decreased by approximately $4.1 million. Comparatively, if market interest rates averaged 1% more than actual rates in fiscal 2000, our interest expense, after considering the effects pg. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS of interest rate swap and cap agreements, would have increased and income before taxes would have decreased by approximately $4.7 million. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing costs and interest rate swap and cap agreements. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. FOREIGN CURRENCY We are exposed to changes in foreign currency rates with respect to our foreign currency-denominated operating revenues and expenses. We principally use forward contracts to limit exposure to fluctuations in Canadian foreign currency rates, our largest exposure. For fiscal 2001, a uniform 10% strengthening in the value of the dollar relative to the currency in which our sales are denominated would have resulted in an increase in gross profit of $0.5 million for fiscal 2001. Comparatively, for fiscal 2000, a uniform 10% strengthening in the value of the dollar relative to the currency in which our sales are denominated would have resulted in an increase in gross profit of $0.6 million for fiscal 2000. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effect of changes in exchange rates on the dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. COMMODITIES We sell recycled medium to various customers. The principal raw material used in the production of medium is old corrugated containers, or "OCC. "Medium prices and OCC costs fluctuate widely due to changing market forces. As a result, we make use of swap agreements to limit our exposure to falling selling prices and rising raw material costs of a portion of our recycled medium business. We estimate market risk as a hypothetical 10% decrease in selling prices or a 10% increase in raw material costs. Without the effect of our medium swaps, such a decrease would have resulted in lower sales of $3.1 million during fiscal 2001. Without the effect of our OCC swaps, such an increase would have resulted in higher costs of purchases of $0.3 million during fiscal 2001. In 2000, we estimated market risk as a hypothetical 10% decrease in selling prices or a 10% increase in raw material costs. Without the effect of our medium swaps, such a decrease would have resulted in lower sales of $2.9 million during fiscal 2000. Without the effect of our OCC swaps, such an increase would have resulted in higher costs of purchases of $0.9 million during fiscal 2000. We purchase and sell a variety of commodities that are not subject to derivative commodity instruments, including OCC, paperboard and recovered paper. Fluctuations in market prices of these commodities could have a material effect on our results of operations. Such fluctuations are not reflected in the results above. Liquidity and Capital Resources WORKING CAPITAL AND CAPITAL EXPENDITURES We have funded our working capital requirements and capital expenditures from net cash provided by operating activities, borrowings under term notes and bank credit facilities and proceeds received in connection with the issuance of industrial revenue bonds and debt and equity securities. During fiscal 2001, we sold $250 million of 8.20% notes due in 2011. The proceeds from the sale were used to repay borrowings outstanding under our revolving credit agreement. In conjunction with the issuance of these notes, we amended our revolving credit facility to reduce the aggregate borrowing availability to $300 million through fiscal 2005. At September 30, 2001, we had $8.0 million outstanding under our revolving credit facility. Cash and cash equivalents, $5.2 million at September 30, 2001, decreased from $5.4 million at September 30,2000. Net cash provided by operating activities for fiscal 2001 was $146.0 million compared to $102.4 million for fiscal 2000. This increase was primarily the result of increased earnings before depreciation and amortization and a positive change in operating assets and liabilities during fiscal 2001 over fiscal 2000. Net cash used for investing activities was $79.9 million for fiscal 2001 compared to $101.3 million for fiscal 2000 and consisted primarily of capital expenditures in both years. Net cash used for financing activities aggregated $66.6 million for fiscal 2001 and consisted primarily of net repayments of debt and quarterly dividend payments. Net cash provided by operating activities for fiscal 2000 was $102.4 million compared to $112.4 million for fiscal 1999. This decrease was primarily the result of decreased earnings before depreciation and amortization, non-cash impairment charges and a larger change Rock-Tenn 2001 Annual Report pg. 31 in operating assets and liabilities during fiscal 2000 than fiscal 1999. Net cash used for investing activities was $101.3 million for fiscal 2000 compared to $91.2 million for fiscal 1999 and consisted primarily of capital expenditures in both years. Net cash used for financing activities aggregated $0.1 million for fiscal 2000 and consisted primarily of purchases of common stock and quarterly dividend payments, offset by additional borrowings under our revolving credit facility. Net cash used for financing activities aggregated $22.8 million for fiscal 1999 and consisted primarily of repayments of debt and quarterly dividend payments. Our capital expenditures aggregated $72.6 million for fiscal 2001. We used these expenditures primarily for the purchase and upgrading of machinery and equipment. We currently estimate that our capital expenditures will aggregate approximately $70 million in fiscal 2002. We intend to use these expenditures for the purchase and upgrading of machinery and equipment and for building expansions and improvements. We believe that our financial position would support higher levels of capital expenditures, if justified by opportunities to increase revenues or reduce costs, and we continuously review new investment opportunities. Accordingly, it is possible that our capital expenditures in fiscal 2002 could be higher than currently anticipated. We anticipate that we will be able to fund our capital expenditures, interest payments, stock repurchases, dividends and working capital needs for the foreseeable future from cash generated from operations, borrowings under our revolving credit facility, proceeds from the issuance of debt or equity securities or other additional long-term debt financing. JOINT VENTURE On February 18, 2000, we formed a joint venture with Lafarge Corporation to produce gypsum paperboard liner for Lafarge's U.S. drywall manufacturing plants. The joint venture, Seven Hills Paperboard, LLC, owns and operates a paperboard machine located a tour Lynchburg, Virginia mill. We have contributed a portion of our existing Lynchburg assets valued at approximately $4 million to the venture and contributed cash of $16.8 million, which was used primarily to rebuild the paperboard machine. Lafarge owns 51% and we own 49% of the joint venture. During fiscal 2001,our share of the operating loss incurred at Seven Hills Paperboard amounted to $2.0 million. STOCK REPURCHASE PROGRAM In November 2000, the Executive Committee of the Board of Directors amended our stock repurchase plan to allow for the repurchase from time to time prior to July 31, 2003 of up to 2.1 million shares of common stock, including shares of Class A common stock, in open market transactions on the New York Stock Exchange or in private transactions, and shares of Class B common stock in private transactions, including repurchases pursuant to certain first offer rights contained in our Restated and Amended Articles of Incorporation. During fiscal 2001, we repurchased 0.3 million shares of Class A common stock, of which 4,300 shares were repurchased since the amendment. We repurchased 2.1 million and zero shares of Class A common stock during fiscal 2000 and 1999, respectively. We did not repurchase any shares of Class B common stock during fiscal 2001, 2000 or 1999. Expenditures for Environmental Compliance We are subject to various federal, state, local and foreign environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances. These laws and regulations include, among others, the Comprehensive Environmental Response, Compensation and Liability Act, which we refer to as CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the U.S. Environmental Protection Agency. In addition, some states in which we operate have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies. We do not believe that future compliance with these environmental laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. However, environmental laws and regulations are becoming increasingly stringent. Consequently, our compliance and remediation costs could increase materially. In addition, we cannot currently assess with certainty the impact that the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act will have on our operations or capital expenditure requirements. However, we believe that any such impact or capital expenditures will not have a material adverse effect on our results of operations, financial condition or cash flows. pg. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS We estimate that we will spend $1.0 to $2.0 million for capital expenditures during fiscal year 2002 in connection with matters relating to environmental compliance. Over the next twelve months, we will also need to upgrade or replace a boiler at one of our facilities in Texas to comply with new state air pollution control requirements. We estimate the cost for upgrading or replacing that boiler to be in the range of $0.3 million to $3.5 million. In the event we are not able to upgrade or replace the boiler prior to the new air pollution control requirements going into effect, we may have to temporarily suspend a portion of our operations at our Dallas, Texas facility. We do not believe that such a disruption, if it were to occur, would have a material adverse effect on our results of operations. In addition, we may need to modify or replace the coal-ored boilers at two of our facilities in order to operate cost effectively while complying with emissions regulations under the Clean Air Act. We estimate these improvements could cost from $4.0 to $9.0 million. If required, we anticipate those costs to be incurred within the next three years. On February 9, 1999, we received a letter from the Michigan Department of Environmental Quality, which we refer to as MDEQ, in which the MDEQ alleged that we were in violation of the Michigan Natural Resources and Environmental Protection Act, as well as the facility's wastewater discharge permit at one of our Michigan facilities. The letter alleged that we exceeded several numerical limitations for chemical parameters outlined in the wastewater permit and violated other wastewater discharge criteria. The MDEQ further alleged that we are liable for contamination contained on the facility property as well as for contributing contamination to the Kalamazoo River site. The letter requested that we commit, in the form of a binding agreement, to undertake the necessary and appropriate response activities and response actions to address contamination in both areas. We have entered into an administrative consent order pursuant to which improvements are being made to the facility's wastewater treatment system and we have paid a $75,000 settlement amount. We have also agreed to pay an additional $30,000 for past and future oversight costs incurred by the State of Michigan. This payment will be made in three equal installments over the next two years, the first of which has already been made. The cost of making upgrades to the wastewater treatment systems is estimated to be approximately $1.4 million, of which we have incurred $0.5 million as of September 30, 2001. Nothing contained in the order constitutes an admission of liability or any factual finding, allegation or legal conclusion on our part. The order was completed during the first quarter of fiscal 2001. To date, the MDEQ has not made any other demand regarding our alleged liability for contamination at the Kalamazoo River site. We have been identified as a potentially responsible party, which we refer to as a PRP, at eight active "superfund" sites pursuant to CERCLA or comparable state statutes. No remediation costs or allocations have been determined with respect to such sites other than costs that were not material to us. Based upon currently available information and the opinions of our environmental compliance managers and general counsel, although there can be no assurance, we believe that any liability we may have at any site will not have a material adverse effect on our results of operations, financial condition or cash flows. New Accounting Standards In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 is effective for fiscal years beginning after December 15, 2001. We expect to adopt SFAS 144 as of October 1, 2002 and are currently assessing the impact of the pronouncement on the consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations." This statement eliminates the pooling method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. We will adopt this accounting standard for business combinations initiated after June 30, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." This statement changes the accounting for goodwill from an amortization method to an impairment-only approach. During fiscal 2001, we incurred $7.8 million of goodwill amortization expense, net of taxes. We have elected to adopt this statement in the first quarter of fiscal 2002 and are currently evaluating the impact of the pronouncement on the consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement requires the fair value of derivatives to be recorded as assets Rock-Tenn 2001 Annual Report pg. 33 or liabilities. Gains or losses resulting from changes in the fair values of derivatives would be accounted for currently in earnings or comprehensive income depending on the purpose of the derivatives and whether they qualify for special hedge accounting treatment. SFAS 133 was adopted in the first quarter of fiscal 2001 and resulted in a $0.3 million charge, net of tax, from a cumulative effect of a change in accounting principle. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, "Revenue Recognition." This bulletin provides guidance on the recognition, presentation and disclosure of revenue in financial statements. This bulletin was adopted in fiscal 2001 and did not have a material impact on our consolidated financial statements. Forward-Looking Statements Statements herein regarding, among other things, estimated capital expenditures for fiscal 2002 and expected expenditures for environmental compliance, constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such statements are subject to certain risks and uncertainties that could cause actual amounts to differ materially from those projected. With respect to these forward-looking statements, management has made assumptions regarding, among other things, the amount and timing of expected capital expenditures, the estimated cost of compliance with environmental laws, the expected resolution of various pending environmental matters and competitive conditions in our businesses and general economic conditions. These forward-looking statements are subject to certain risks including, among others, that the amount of capital expenditures has been underestimated and that the impact on our results of those capital expenditures has been overestimated; the cost of compliance with environmental laws has been underestimated; and expected outcomes of various pending environmental matters are inaccurate. In addition, our performance in future periods is subject to other risks including, among others, decreases in demand for our products, increases in raw material costs, fluctuations in selling prices and adverse changes in general market and industry conditions. We believe these estimates are reasonable; however, undue reliance should not be placed on such estimates, which are based on current expectations. pg. 34 CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30, (In Thousands, Except Per Share Data) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------- Net sales $ 1,441,632 $ 1,463,288 $ 1,313,371 Cost of goods sold 1,144,801 1,174,837 1,019,214 - -------------------------------------------------------------------------------------------------------------- Gross profit 296,831 288,451 294,157 Selling, general and administrative expenses 180,280 177,961 170,779 Amortization of goodwill 8,569 9,069 9,410 Plant closing and other one-time costs 16,893 65,630 6,932 - -------------------------------------------------------------------------------------------------------------- Income from operations 91,089 35,791 107,036 Interest expense (35,042) (35,575) (31,179) Interest and other income 530 418 391 Loss from unconsolidated joint venture (2,004) -- -- Minority interest in income of consolidated subsidiary (2,439) (4,980) (5,995) - -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 52,134 (4,346) 70,253 Provision for income taxes (Note 7) 21,897 11,570 30,555 - -------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of a change in accounting principle 30,237 (15,916) 39,698 Cumulative effect of a change in accounting principle (net of $179 income taxes) 286 -- -- - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ 30,523 $ (15,916) $ 39,698 ============================================================================================================== Basic earnings (loss) per share (Note 1) $ 0.92 $ (0.46) $ 1.14 ============================================================================================================== Diluted earnings (loss) per share (Note 1) $ 0.91 $ (0.46) $ 1.13 ==============================================================================================================
See accompanying notes. Rock-Tenn 2001 Annual Report pg. 35 CONSOLIDATED BALANCE SHEETS
September 30, (In Thousands, Except Share and Per Share Data) 2001 2000 - ----------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 5,191 $ 5,449 Accounts receivable (net of allowances of $5,400 and $3,732) 157,782 156,155 Inventories (Note 1) 102,011 99,589 Other current assets 6,098 8,050 - ----------------------------------------------------------------------------------------------------------------- Total current assets 271,082 269,243 Property, plant and equipment, at cost (Note 1): Land and buildings 206,069 200,444 Machinery and equipment 902,769 855,714 Transportation equipment 11,526 13,222 Leasehold improvements 9,159 8,561 - ----------------------------------------------------------------------------------------------------------------- 1,129,523 1,077,941 Less accumulated depreciation and amortization (540,870) (485,403) - ----------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 588,653 592,538 Goodwill, net 259,660 268,526 Other assets 45,018 28,656 - ----------------------------------------------------------------------------------------------------------------- $ 1,164,413 $ 1,158,963 ================================================================================================================= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 79,596 $ 77,852 Accrued compensation and benefits 35,863 35,403 Current maturities of debt (Note 4) 97,152 20,328 Other current liabilities 46,636 26,792 - ----------------------------------------------------------------------------------------------------------------- Total current liabilities 259,247 160,375 Long-term debt due after one year (Note 4) 388,487 514,492 Adjustment for fair value hedge (Note 4) 8,603 -- - ----------------------------------------------------------------------------------------------------------------- Total long-term debt, less current maturities 397,090 514,492 Deferred income taxes (Note 7) 87,993 81,384 Other long-term items 17,323 16,409 Commitments and contingencies (Notes 6 and 10) Shareholders' equity (Note 3): Preferred stock, $.01 par value; 50,000,000 shares authorized; no shares outstanding -- -- Class A common stock, $.01 par value; 175,000,000 shares authorized; 22,968,317 and 22,031,024 outstanding at September 30, 2001 and 2000, respectively. Class B common stock, $.01 par value; 60,000,000 shares authorized; 10,601,346 and 11,352,739 outstanding at September 30, 2001 and 2000, respectively 335 334 Capital in excess of par value 130,640 127,682 Deferred compensation (1,421) -- Retained earnings 282,117 262,872 Accumulated other comprehensive loss (8,911) (4,585) - ----------------------------------------------------------------------------------------------------------------- Total shareholders' equity 402,760 386,303 - ----------------------------------------------------------------------------------------------------------------- $ 1,164,413 $ 1,158,963 =================================================================================================================
See accompanying notes. pg. 36 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Class A and Class B Other Common Stock Capital in Comprehensive (In Thousands, ------------------- Excess of Deferred Retained (Loss) Except Share and Per Share Data) Shares Amount Par Value Compensation Earnings Income Total - -------------------------------------------------------------------------------------------------------------------------- Balance at October 1, 1998 34,576,810 $ 346 $ 128,904 $ -- $ 274,039 $ (5,874) $ 397,415 Comprehensive income: Net income -- -- -- -- 39,698 -- 39,698 Foreign currency translation adjustments -- -- -- -- -- 2,353 2,353 ---------- Comprehensive income 42,051 Cash dividends - $.30 per share -- -- -- -- (10,450) -- (10,450) Issuance of common stock 380,772 4 3,144 -- -- -- 3,148 - -------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1999 34,957,582 350 132,048 -- 303,287 (3,521) 432,164 Comprehensive loss: Net loss -- -- -- -- (15,916) -- (15,916) Foreign currency translation adjustments -- -- -- -- -- (1,064) (1,064) ---------- Comprehensive loss (16,980) Cash dividends - $.30 per share -- -- -- -- (10,384) -- (10,384) Issuance of common stock 551,449 5 3,743 -- -- -- 3,748 Purchases of Class A common stock (2,125,268) (21) (8,109) -- (14,115) -- (22,245) - -------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2000 33,383,763 334 127,682 -- 262,872 (4,585) 386,303 Comprehensive income: Net income -- -- -- -- 30,523 -- 30,523 Foreign currency translation adjustments -- -- -- -- -- (3,587) (3,587) Net unrealized loss on derivative instruments -- -- -- -- -- (274) (274) Minimum pension liability -- -- -- -- -- (465) (465) ---------- Comprehensive income 26,197 Income tax benefit from exercise of stock options -- -- 60 -- -- -- 60 Shares granted under restricted stock plan 140,000 1 1,574 (1,575) -- -- -- Compensation expense under restricted stock plan -- -- -- 154 -- -- 154 Cash dividends - $.30 per share -- -- -- -- (10,007) -- (10,007) Issuance of common stock 320,200 3 2,374 -- -- -- 2,377 Purchases of Class A common stock (274,300) (3) (1,050) -- (1,271) -- (2,324) Balance at September 30, 2001 33,569,663 $ 335 $ 130,640 $ (1,421) $ 282,117 $ (8,911) $ 402,760
See accompanying notes. Rock-Tenn 2001 Annual Report pg. 37 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, (In Thousands) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Operating activities: Net income (loss) $ 30,523 $ (15,916) $ 39,698 Items in income (loss) not affecting cash: Depreciation and amortization 77,593 77,061 72,475 Deferred income taxes 6,609 316 3,383 Deferred compensation expense 154 -- -- (Gain) loss on disposal of plant and equipment and other, net (432) (517) 746 Minority interest in income of consolidated subsidiary 2,439 4,980 5,995 Impairment loss and other non-cash charges 6,443 49,700 -- Equity in loss from joint venture 2,004 -- -- Change in operating assets and liabilities: Accounts receivable (2,218) (17,374) (20,469) Inventories (3,565) (5,362) (6,102) Other assets 2,971 (2,151) (2,883) Accounts payable 1,976 11,690 20,180 Accrued liabilities 21,530 17 (607) - ---------------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 146,027 102,444 112,416 INVESTING ACTIVITIES: Capital expenditures (72,561) (94,640) (92,333) Cash contributed to joint venture (9,627) (7,133) -- Proceeds from sale of property, plant and equipment 1,034 2,209 1,127 Decrease (increase) in unexpended industrial revenue bond proceeds 1,264 (1,779) -- - ---------------------------------------------------------------------------------------------------------------------------- Cash used for investing activities (79,890) (101,343) (91,206) FINANCING ACTIVITIES: Proceeds from issuance of public bonds 250,000 -- -- Net (repayments) additions to revolving credit facilities (385,000) 32,147 (7,000) Additions to debt 120,540 5,454 3,034 Repayments of debt (34,720) (1,626) (5,527) Debt issuance costs (2,936) (1,811) (80) Sales of common stock 2,377 3,748 3,148 Purchases of common stock (2,324) (22,245) -- Cash dividends paid to shareholders (10,007) (10,384) (10,450) Distribution to minority interest (4,480) (5,425) (5,950) - ---------------------------------------------------------------------------------------------------------------------------- Cash used for financing activities (66,550) (142) (22,825) Effect of exchange rate changes on cash 155 (48) 384 - ---------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (258) 911 (1,231) Cash and cash equivalents at beginning of year 5,449 4,538 5,769 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 5,191 $ 5,449 $ 4,538 - ---------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes, net of refunds $ 7,138 $ 16,655 $ 28,899 Interest, net of amounts capitalized 31,676 36,228 31,190
See accompanying notes. pg 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Rock-Tenn Company ("the Company") manufactures and distributes folding cartons, solid fiber interior packaging, plastic packaging, corrugated containers, merchandising displays, laminated paperboard products, 100% recycled clay-coated and specialty paperboard and recycled corrugating medium primarily to nondurable goods producers. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables generally are due within 30 days. The Company serves a diverse customer base primarily in North America and, therefore, has limited exposure from credit loss to any particular customer or industry segment. CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. INVESTMENT IN CORPORATE JOINT VENTURE The Company uses the equity method to account for its 49% investment in Seven Hills Paperboard, LLC, a joint venture with Lafarge Corporation. Under the equity method, the investment is initially recorded at cost, then reduced by distributions and increased or decreased by the investor's proportionate share of the investee's net earnings or loss. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and the differences could be material. REVENUE RECOGNITION The Company generally recognizes revenue at the time of shipment. In limited circumstances, the Company ships goods on a consignment basis and recognizes revenue when title to the goods passes to the buyer. DERIVATIVES The Company enters into a variety of derivative transactions. Generally, the Company designates at inception that derivatives hedge risks associated with specific assets, liabilities or future commitments and monitors each derivative to determine if it remains an effective hedge. The effectiveness of the derivative as a hedge is based on a high correlation between changes in its value and changes in the value of the underlying hedged item. Ineffectiveness related to the Company's derivative transactions is not material. The Company includes in operations amounts received or paid when the underlying transaction settles. Derivatives are included in other long-term liabilities and other assets on the balance sheet. The Company does not enter into or hold derivatives for trading or speculative purposes. From time to time, the Company uses interest rate cap agreements and interest rate swap agreements to manage synthetically the interest rate characteristics of a portion of its outstanding debt and to limit the Company's exposure to rising interest rates. Amounts to be received or paid as a result of interest rate cap agreements and interest rate swap agreements are accrued and recognized as an adjustment to interest expense related to the designated debt. The cost of purchasing interest rate caps is amortized to interest expense ratably during the life of the agreement. Gains or losses on terminations of interest rate swap agreements are deferred and amortized as an adjustment to interest expense of the related debt instrument over the remaining term of the original contract life of terminated swap agreements. From time to time, the Company uses forward contracts to limit exposure to fluctuations in Canadian foreign currency rates with respect to its receivables denominated in Canadian dollars. The forward contracts are settled monthly and resulting gains or losses are recognized at the time of settlement. The Company uses commodity swap agreements to limit the Company's exposure to falling sales prices and rising raw material costs for a portion of its recycled corrugating medium production. Amounts to be received or paid as a result of these swap agreements are recognized in the period in which the related sale is made. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate fair market values. INVENTORIES Substantially all U.S. inventories are valued at the lower of cost or market, with cost determined on the last-in, first-out (LIFO) basis. All other inventories are valued at lower of cost or market, with cost determined using methods which approximate cost computed on a first-in, first-out (FIFO) basis. These other inventories represent approximately 12.8% and 13.6% of FIFO cost at September 30, 2001 and 2000, respectively. Rock-Tenn 2001 Annual Report pg 39 Inventories at September 30, 2001 and 2000 are as follows:
September 30, (In Thousands) 2001 2000 - ------------------------------------------------------------- Finished goods and work in process $ 79,357 $ 74,422 Raw materials 35,488 40,353 Supplies 11,631 12,159 - ------------------------------------------------------------- Inventories at FIFO cost 126,476 126,934 LIFO reserve (24,465) (27,345) - ------------------------------------------------------------- Net inventories $ 102,011 $ 99,589 - -------------------------------------------------------------
It is impracticable to segregate the LIFO reserve between raw materials, finished goods and work in process. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Cost includes major expenditures for improvements and replacements which extend useful lives or increase capacity. During fiscal 2001, 2000 and 1999,the Company capitalized interest of approximately $1,541,000, $1,097,000 and $931,000, respectively. For financial reporting purposes, depreciation and amortization are provided on both the declining balance and straight-line methods over the estimated useful lives of the assets as follows: BUILDINGS AND BUILDING IMPROVEMENTS 15-40 YEARS MACHINERY AND EQUIPMENT 3-20 YEARS TRANSPORTATION EQUIPMENT 3-8 YEARS LEASEHOLD IMPROVEMENTS TERM OF LEASE
Depreciation expense for fiscal 2001, 2000 and 1999 was approximately $67,020,000, $66,267,000 and $61,435,000, respectively. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share:
Year Ended September 30, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Numerator: Income (loss) before cumulative effect of a change in accounting principle $30,237,000 $(15,916,000) $39,698,000 Cumulative effect of a change in accounting principle, net of tax 286,000 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $30,523,000 $(15,916,000) $39,698,000 ============================================================================================================================ Denominator: Denominator for basic earnings (loss) per share - weighted average shares 33,297,123 34,523,827 34,801,541 Effect of dilutive stock options and restricted stock awards 132,082 -- 405,929 - ---------------------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings (loss) per share - weighted average shares and assumed conversions 33,429,205 34,523,827 35,207,470 ============================================================================================================================ Basic earnings (loss) per share Income (loss) before cumulative effect of a change in accounting principle $ 0.91 $ (0.46) $ 1.14 Cumulative effect of a change in accounting principle, net of tax 0.01 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) per share - basic $ 0.92 $ (0.46) $ 1.14 ============================================================================================================================ Diluted earnings (loss) per share Income (loss) before cumulative effect of a change in accounting principle $ 0.90 $ (0.46) $ 1.13 Cumulative effect of a change in accounting principle, net of tax 0.01 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) per share - diluted $ 0.91 $ (0.46) $ 1.13 ============================================================================================================================
pg 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Common stock equivalents were antidilutive in fiscal 2000 and, therefore, were excluded from the computation of weighted average shares used in computing diluted loss per share. GOODWILL AND OTHER INTANGIBLE ASSETS The Company has classified as goodwill the excess of the acquisition cost over the fair values of the net assets of businesses acquired. Goodwill is amortized on a straight-line basis over periods ranging from 20 to 40 years. Net goodwill as a percentage of total assets was 22.3% and 23.2% at September 30, 2001 and 2000, respectively. Net goodwill as a percentage of shareholders' equity was 64.5% and 69.5% at September 30, 2001 and 2000, respectively. Accumulated amortization relating to goodwill at September 30, 2001 and 2000 was $44,454,000 and $36,057,000, respectively. Other intangible assets primarily represent costs allocated to non-compete agreements, financing costs and patents. These assets are amortized on a straight-line basis over their estimated useful lives. Accumulated amortization relating to intangible assets, excluding goodwill, was approximately $8,405,000 and $6,483,000 at September 30, 2001 and 2000, respectively. ASSET IMPAIRMENT The Company generally accounts for long-lived asset impairment under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). This Statement requires that long-lived assets and certain identifiable intangibles to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset. If the sum of the estimated expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. Measurement of an impairment loss is based on the estimated fair value of the asset. Long-lived assets to be disposed of are generally recorded at the lower of their carrying amount or estimated fair value less cost to sell. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign operations are generally translated from the foreign currency at the rate of exchange in effect as of the balance sheet date. Earnings from foreign operations are indefinitely reinvested in the respective operations. Revenues and expenses are generally translated at average monthly exchange rates prevailing during the year. Resulting translation adjustments are reflected in shareholders' equity. NEW ACCOUNTING STANDARDS In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS 121. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company expects to adopt SFAS 144 as of October 1, 2002 and is currently assessing the impact of the pronouncement on the consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." This statement eliminates the pooling method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 141 will be adopted for business combinations initiated after June 30, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." This statement changes the accounting for goodwill from an amortization method to an impairment-only approach. During fiscal 2001, the Company incurred $7.8 million of goodwill amortization expense, net of taxes. The Company has elected to adopt this statement in the first quarter of fiscal 2002 and is currently evaluating the impact of the pronouncement on the consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement requires the fair value of derivatives to be recorded as assets or liabilities. Gains or losses resulting from changes in the fair values of derivatives would be accounted for currently in earnings or comprehensive income depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. SFAS 133 was adopted in the first quarter of fiscal 2001 and resulted in a $286,000 charge, net of tax, from a cumulative effect of a change in accounting principle. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, "Revenue Recognition." This bulletin provides guidance on the recognition, presentation and disclosure of revenue in financial statements. This bulletin was adopted in fiscal 2001 and did not have a material impact on the Company's consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts to conform with the current year presentation. Rock-Tenn 2001 Annual Report pg 41 NOTE 2 PLANT CLOSINGS, JOINT VENTURE AND OTHER MATTERS During fiscal 2001, the Company incurred plant closing and other costs related to announced facility closings. The cost of employee terminations is generally accrued at the time of notification to the employees. Certain other costs, such as moving and relocation costs, are expensed as incurred. These plant closing costs include the closing of a folding carton plant in Augusta, Georgia and an interior packaging plant in Eaton, Indiana. The closures resulted in the termination of approximately 210 employees. In connection with these closings, the Company incurred charges of $6,191,000 during fiscal 2001, which consisted mainly of asset impairment, severance, equipment relocation, disposal costs and related expenses. Payments of $792,000 were made in fiscal 2001. The remaining liability at September 30, 2001 is $1,474,000. Facilities closed during fiscal 2001 had combined revenues of $24,623,000, $36,943,000 and $39,359,000, for fiscal years 2001, 2000 and 1999, respectively. Operating losses incurred at the Augusta folding plant amounted to $288,000, $326,000 and $691,000 for fiscal 2001, 2000 and 1999, respectively. Operating income at the Eaton partition plant was $646,000, $1,909,000, and $2,675,000 for fiscal years 2001, 2000 and 1999, respectively. The Company has consolidated the operations of the Augusta folding plant and the Eaton interior packaging plant into other existing facilities. On February 18, 2000, the Company formed a joint venture with Lafarge Corporation to produce gypsum paperboard liner for Lafarge's U.S. drywall manufacturing plants. The joint venture, Seven Hills Paperboard, LLC, owns and operates a paperboard machine located at the Company's Lynchburg, Virginia mill. The Company has contributed a portion of its existing Lynchburg assets valued at approximately $4,000,000 to the venture and cash of $16,760,000, which was used primarily to rebuild the paperboard machine. Lafarge owns 51% and the Company owns 49% of the joint venture. During fiscal 2001, the Company's share of the operating loss incurred at Seven Hills Paperboard amounted to $2,004,000. During fiscal 2000, the Company closed a laminated paperboard products plant in Lynchburg, Virginia and folding carton plants in Chicago, Illinois, Norcross, Georgia and Madison, Wisconsin. The closures resulted in the termination of approximately 550 employees. In connection with these closings, the Company incurred charges of $61,130,000 during fiscal 2000, which consisted mainly of asset impairment, severance, equipment relocation, lease write-downs and other related expenses, including business interruption and other inefficiencies. Of the $61,130,000, $46,037,000 represented asset impairment charges related to the determination of material diminution in the value of assets, including goodwill of $25,432,000 (which is not deductible for tax purposes), relating to the Company's two folding carton plants that use web offset technology, as well as assets relating to the other closed facilities. The Company made payments of $2,380,000 and $12,593,000 in fiscal 2001 and fiscal 2000, respectively, and made an accrual adjustment of $597,000 to increase the liability during fiscal 2001. The remaining liability at September 30, 2001 is $717,000. Facilities closed during fiscal 2000 had combined revenues and operating losses of $72,037,000 and $5,587,000, respectively, in fiscal 2000 and $98,314,000 and $5,814,000, respectively, in fiscal 1999. The Company has consolidated the operations of these closed plants into other existing facilities. During fiscal 2000, the Company decided to remove certain equipment from service primarily in its laminated paperboard products division. As a result of this decision, the Company incurred impairment charges of $4,622,000 related to this equipment. During fiscal 1999,the Company closed a folding carton plant in Taylorsville, North Carolina, a laminated paperboard products operation in Otsego, Michigan and an uncoated paper mill serving its coverboard converting operations in Jersey City, New Jersey. The closures resulted in the termination of approximately 280 employees. In connection with these closings, the Company incurred charges of $6,357,000 during fiscal 1999, which consisted mainly of severance, equipment relocation, expected losses on the disposition of the facility and related expenses. The Company made payments of $310,000 and $4,134,000 in fiscal 2000 and 1999, respectively, incurred losses of $186,000 and $764,000 in connection with the disposal of inventory and other assets during fiscal 2000 and 1999, respectively, made an adjustment of $122,000 to reduce the liability during fiscal 2000 and reduced the carrying value of the Jersey City facility by $1,000,000 during fiscal 1999. The Company does not have any remaining liability at September 30, 2001. Facilities closed during fiscal 1999 had combined revenues and operating losses of $16,585,000 and $1,501,000, respectively, in fiscal 1999. pg 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 SHAREHOLDERS' EQUITY CAPITALIZATION The Company's capital stock consists of Class A common stock ("Class A Common") and Class B common stock ("Class B Common"). Holders of Class A Common have one vote per share and holders of Class B Common have ten votes per share. Holders of Class B Common are entitled to convert their shares into Class A Common at any time on a share-for-share basis, subject to certain rights of first refusal by the Company and its management committee. During fiscal 2001, 2000 and 1999, respectively, approximately 752,000, 285,000, and 213,000 Class B Common shares were converted to Class A Common shares. The Company also has authorized preferred stock, of which no shares have been issued. The terms and provisions of such shares will be determined by the Board of Directors upon any issuance of such shares. STOCK REPURCHASE PLAN In November 2000, the Executive Committee of the Board of Directors amended the Company's current stock repurchase plan to allow for the repurchase from time to time prior to July 31, 2003 of a maximum of 2,143,332 shares in aggregate of Class A Common or Class B Common. During fiscal 2001 the Company repurchased 274,300 shares of Class A Common of which 4,300 were purchased under this amended plan. The Company repurchased 2,125,268 and no shares of Class A Common during fiscal 2000 and 1999, respectively. STOCK OPTION PLANS The Company's 2000 Incentive Stock Plan, approved in January 2001, allows for the granting of options to certain key employees for the purchase of a maximum of 2,200,000 shares of Class A Common. Options which have been granted under this plan vest in increments over a period of up to three years and have ten-year terms. The Company's 1993 Stock Option Plan allows for the granting of options to certain key employees for the purchase of a maximum of 3,700,000 shares of Class A Common. Options which have been granted under this plan vest in increments over a period of up to three years and have ten-year terms. The Incentive Stock Option Plan, the 1987 Stock Option Plan and the 1989 Stock Option Plan provided for the granting of options to certain key employees for an aggregate of 4,320,000 shares of Class A Common and 1,440,000 shares of Class B Common. The Company will not grant any additional options under the Incentive Stock Option Plan, the 1987 Stock Option Plan or the 1989 Stock Option Plan. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, generally no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to September 30, 1995 under the fair value method of that Statement. The fair values for the options granted subsequent to September 30, 1995 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 2001, 2000 and 1999, respectively: risk-free interest rate of 3.5%, 5.9% and 4.8%, a dividend yield of 3.0% for fiscal 2001 and 2.0% for fiscal 2000 and 1999, volatility factor of the expected market price of the Company's common stock of 42.2%, 41.4% and 40.0%, and an expected life of the option of eight years for fiscal 2001 and ten years for fiscal 2000 and 1999. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair values estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair values of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options are amortized to expense over the options' vesting period. The Company's pro forma information follows:
(In Thousands, Except for Earnings Per Share Information) 2001 2000 1999 - ------------------------------------------------------------- Pro forma net income (loss) $27,028 $(19,609) $37,339 Pro forma earnings (loss) per share Basic 0.81 (0.57) 1.07 Diluted 0.81 (0.57) 1.06 - -------------------------------------------------------------
Rock-Tenn 2001 Annual Report pg 43 The table below summarizes the changes in all stock options during the periods indicated:
Class B Common Class A Common ------------------------------------- ----------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Range Price Shares Price Range Price - ---------------------------------------------------------------------------------------------------------------------- Options outstanding at October 1, 1998 202,219 $3.27-7.45 $ 5.49 2,250,440 $ 3.26-20.31 $ 14.19 Exercised or forfeited (36,300) $3.27-4.33 $ 3.60 (72,400) $ 3.26-20.31 $ 4.95 Granted -- -- -- 822,200 $11.44-15.19 $ 14.59 - ---------------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 1999 165,919 $4.33-7.45 $ 5.90 3,000,240 $ 4.32-20.31 $ 14.52 Exercised or forfeited (120,379) $4.33-7.45 $ 5.57 (486,560) $ 4.32-20.31 $ 9.83 Granted -- -- -- 1,003,600 $ 8.93-14.25 $ 9.19 - ---------------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 2000 45,540 $6.09-7.45 $ 6.78 3,517,280 $ 6.06-20.31 $ 13.65 Exercised or forfeited (6,600) $6.09-7.45 $ 6.77 (864,856) $ 6.06-20.31 $ 14.25 Granted -- -- -- 866,450 $ 0.00-11.90 $ 9.63 - ---------------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING AT SEPTEMBER 30, 2001 38,940 $6.09-7.45 $ 6.78 3,518,874 $ 0.00-20.31 $ 12.34 OPTIONS EXERCISABLE AT SEPTEMBER 30, 2001 38,940 $6.09-7.45 $ 6.78 1,873,903 $ 6.06-20.31 $ 14.29 OPTIONS AVAILABLE FOR FUTURE GRANT AT SEPTEMBER 30, 2001 -- -- -- 2,283,750 -- -- - ----------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning options outstanding and exercisable at September 30, 2001:
Class B Common Class A Common ---------------------------- -------------------------------------------------- Weighted Weighted Weighted Weighted Average Number Average Average Average Remaining Range of Outstanding Exercise Number Exercise Number Exercise Contractual Life Exercise Prices and Exercisable Price Outstanding Price Exercisable Price (Both Classes) - --------------------------------------------------------------------------------------------------------------------------- $ 6.06- 7.45 38,940 $ 6.78 93,060 $ 6.80 93,060 $ 6.80 0.9 $ 8.00- 8.94 -- -- 686,264 $ 8.91 211,226 $ 8.94 8.4 $10.25-11.90 -- -- 1,252,450 $11.20 361,417 $11.12 8.5 $14.25-16.59 -- -- 1,014,100 $14.96 735,200 $15.04 6.0 $18.30-20.31 -- -- 473,000 $19.43 473,000 $19.43 4.9 - --------------------------------------------------------------------------------------------------------------------------- 38,940 $ 6.78 3,518,874 $12.83 1,873,903 $14.29 7.0 ===========================================================================================================================
The estimated weighted average fair value of options granted during fiscal 2001, 2000 and 1999 with option prices equal to the market price on the date of grant was $4.21, $4.41, and $6.72, respectively. pg 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESTRICTED STOCK PLAN Pursuant to the Company's 2000 Incentive Stock Plan, the Company can award up to 500,000 shares of restricted Class A Common stock to employees. Sales of the stock awarded is restricted for two to five years from the date of grant, depending on vesting. Vesting of the stock occurs in increments of one-third beginning on the third anniversary of the date of grant. Accelerated vesting of a portion of the grant may occur based on the Company's performance. For the year ended September 30, 2001, the Company awarded 140,000 shares of Class A Common stock, which had a fair value at the date of grant of $1,575,000. Compensation under the plan is charged to earnings over the restriction period and amounted to $154,000 for the year. EMPLOYEE STOCK PURCHASE PLAN During fiscal 2001, the 1993 Employee Stock Purchase Plan was amended to increase by 1,000,000 the number of shares of Class A Common available for grant under the plan. Under the Amended and Restated 1993 Employee Stock Purchase Plan, 765,865 and 59,419 shares of Class A Common were available for purchase as of September 30, 2001 and 2000, respectively. In fiscal 2001, 2000 and 1999, approximately 294,000, 314,000 and 284,000 shares, respectively, were purchased by employees under this plan. NOTE 4 DEBT Debt at September 30, 2001 and 2000 consists of the following:
September 30, (In Thousands) 2001 2000 - -------------- --------- --------- 8.20% notes, due August 2011, net of unamortized discount of $672(a) $ 249,328 $ -- 7.25% notes, due August 2005, net of unamortized discount of $53 and $67(b) 99,947 99,933 Asset securitization facility(c) 88,600 -- Industrial revenue bonds, bearing interest at variable rates (3.70% at September 30, 2001), due through October 2036(d) 37,500 40,000 Revolving credit facility(e) 8,000 393,000 Other notes 2,264 1,887 --------- --------- 485,639 534,820 Less current maturities of debt 97,152 20,328 --------- --------- Long-term debt due after one year $ 388,487 $ 514,492 ========= =========
(a) In August 2001, the Company sold $250,000,000 in aggregate principal amount of its 8.20% notes due August 15, 2011 (the "2011 Notes"), the proceeds of which were used to repay borrowings outstanding under its revolving credit agreement. The 2011 Notes are not redeemable prior to maturity and are not subject to any sinking fund requirements. The 2011 Notes are unsubordinated, unsecured obligations. The indenture related to the 2011 Notes restricts the Company and its subsidiaries from incurring certain liens and entering into certain sale and leaseback transactions, subject to a number of exceptions. The 2011 Notes were issued at a discount of $682,500 which is being amortized over its term. Debt issuance costs of approximately $2,136,000 are also being amortized over its term. Giving effect to the amortization of the original issue discount and the debt issuance costs, the effective interest rate of the 2011 Notes is approximately 8.31%. (b) In August 1995, the Company sold $100,000,000 in aggregate principal amount of its 7.25% notes due August 1, 2005 (the "2005 Notes"). The 2005 Notes are not redeemable prior to maturity and are not subject to any sinking fund requirements. The 2005 Notes are unsubordinated, unsecured obligations. The indenture related to the 2005 Notes restricts the Company and its subsidiaries from incurring certain liens and entering into certain sale and lease back transactions, subject to a number of exceptions. Debt issuance costs of approximately $908,000 are being amortized over the term of the 2005 Notes. In May 1995, the Company entered into an interest rate adjustment transaction in order to effectively fix the interest rate on the 2005 Notes subsequently issued in August 1995. The costs associated with the interest rate adjustment transaction of $1,530,000 are being amortized over the term of the 2005 Notes. Giving effect to the amortization of the original issue discount, the debt issuance costs and the costs associated with the interest rate adjustment transaction, the effective interest rate on the 2005 Notes is approximately 7.51%. (c) In November 2000, the Company entered into a $125 million receivables-backed financing transaction (the "Receivables Financing Facility"), the proceeds of which were used to repay borrowings outstanding under its revolving credit agreement. A bank provides a back-up liquidity facility. The effective interest rate was 3.53% as of September 30, 2001. Both the Receivables Financing Facility and the back-up liquidity facility are 364-day vehicles. (d) Payments of principal and interest on these industrial revenue bonds are guaranteed by a letter of credit issued by a bank. Restrictions on the Company similar to those described in (e) below exist under the terms of the agreements. The bonds are remarketed periodically based on the interest rate period selected by the Company. In the event the bonds cannot be remarketed, the bank has agreed to extend long-term financing to the Company in an amount sufficient to retire the bonds. (e) The Company has a revolving credit facility, provided by a syndicate of banks, which provides aggregate borrowing availability of up to $300,000,000 through 2005. Borrowings outstanding under the facility bear interest based upon LIBOR plus an applicable margin. Annual facility fees range from .125% to .375% of the aggregate borrowing availability, based on the Company's consolidated funded debt to EBITDA ratio. The all-in rate was 4.81% and 8.04% at September 2001 and 2000, respectively. Under the agreements covering this loan, restrictions exist as to the maintenance of financial ratios, creation of additional Rock-Tenn 2001 Annual Report pg. 45 long-term and short-term debt, certain leasing arrangements, mergers, acquisitions, disposals and other matters. The Company is in compliance with such restrictions. In August 2001, the Company entered into two interest rate swap agreements to convert $100 million of the 2011 Notes fixed obligations to a floating rate. This floating rate is three-month LIBOR plus an average of 2.28%. In August 2001, the Company entered into an interest rate swap agreement to convert all of the fixed rate 2005 Notes to a floating rate. This floating rate is three-month LIBOR plus 2.035%. The fair value of the interest rate swap agreements was $8,603,000 at September 30, 2001. In May 1999, the Company entered into an interest rate swap agreement to effectively fix the LIBOR rate on $100,000,000 of variable rate borrowings at 5.84% per annum until May 2002. In January 2000, the Company terminated this swap agreement. The resulting gain of $2,136,170 is being amortized over the original contract life as a reduction of interest expense. In April 1998, the Company entered into an interest rate swap agreement to effectively fix the LIBOR rate on $100,000,000 of variable rate borrowings at 5.79% per annum until April 2005. In May 1999, the Company terminated this swap agreement. The resulting gain of $1,034,000 is being amortized over the original contract life as a reduction of interest expense. Unrealized gains on derivative instruments recorded in other comprehensive income related to interest rate swap terminations amounted to $1,201,000, net of tax, at September 30, 2001. The Company is exposed to counterparty credit risk for nonperformance and, in the unlikely event of nonperformance, to market risk for changes in interest rates. The Company manages exposure to counterparty credit risk through minimum credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. The Company does not anticipate nonperformance of the counterparties. As of September 30, 2001, the aggregate maturities of debt for the succeeding five years are as follows:
(In Thousands) - -------------- 2002 $ 97,152 2003 858 2004 286 2005 100,272 2006 6,032 Thereafter 281,039 ---------- Total debt $ 485,639 ==========
One of the Company's Canadian subsidiaries has a revolving credit facility with a Canadian bank. The facility provides borrowing availability of up to Canadian $2,000,000 and can be renewed on an annual basis. There are no facility fees related to this arrangement. As of September 30, 2001 and 2000, there were no amounts outstanding under this facility. NOTE 5 FINANCIAL INSTRUMENTS At September 30, 2001 and 2000, the fair market value of the 2005 Notes was approximately $101,546,000 and $97,550,000, respectively, based on quoted market prices. At September 30, 2001, the fair market value of the 2011 Notes was approximately $250,113,000 based on quoted market price. At September 30, 2001 and 2000, the carrying amount for variable rate long-term debt approximates fair market value since the interest rates on these instruments are reset periodically. The Company has swap agreements to limit its exposure to falling prices and rising costs for a portion of its recycled corrugating medium business. Some agreements hedge the selling prices on a total of 21,000 tons of recycled corrugating medium each quarter and expire during fiscal 2002 and fiscal 2003. Other agreements hedge the raw material costs on a total of 12,000 tons of old corrugated containers, or "OCC," each quarter and expire during fiscal 2002 and fiscal 2003. At September 30, 2001, the fair value of these swap agreements was a liability of $2,399,000. Unrealized losses on derivative instruments recorded in other comprehensive income related to the fair market value of commodity swaps outstanding amounted to $1,475,000, net of tax, at September 30, 2001. NOTE 6 LEASES AND OTHER AGREEMENTS The Company leases certain manufacturing and warehousing facilities and equipment (primarily transportation equipment) under various operating leases. Some leases contain escalation clauses and provisions for lease renewal. As of September 30, 2001, future minimum lease payments, including certain maintenance charges on transportation equipment, under all noncancelable leases, are as follows:
(In Thousands) - -------------- 2002 $ 8,096 2003 7,094 2004 4,932 2005 2,504 2006 1,782 Thereafter 5,946 ---------- Total future minimum lease payments $ 30,354 ==========
Rental expense for the years ended September 30, 2001, 2000 and 1999 was approximately $16,670,000, $16,157,000 and $13,685,000, respectively, including lease payments under cancelable leases. pg 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 INCOME TAXES The Company accounts for income taxes under the liability method which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The recognition of future tax benefits is required to the extent that realization of such benefits is more likely than not. The provisions for income taxes consist of the following components:
Year Ended September 30, (In Thousands) 2001 2000 1999 - -------------- -------- -------- -------- Current income taxes: Federal $ 12,470 $ 8,259 $ 23,824 State 1,196 1,228 2,383 Foreign 1,622 1,767 965 -------- -------- -------- Total current 15,288 11,254 27,172 -------- -------- -------- Deferred income taxes: Federal 5,861 96 2,791 State 503 8 239 Foreign 245 212 353 -------- -------- -------- Total deferred 6,609 316 3,383 -------- -------- -------- Provision for income taxes $ 21,897 $ 11,570 $ 30,555 ======== ======== ========
The differences between the statutory federal income tax rate and the Company's effective income tax rate are as follows:
Year Ended September 30, 2001 2000 1999 ----- ------- ----- Statutory federal tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.9 (1.0) 3.5 Non-deductible amortization and write-off of goodwill (See Note 2) 4.1 (283.3) 3.7 Other, net (primarily non-taxable items) -- (16.9) 1.3 ----- ------- ----- Effective tax rate 42.0% (266.2%) 43.5% ===== ======= =====
The tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities consist of the following:
September 30, (In Thousands) 2001 2000 - -------------- -------- -------- Deferred income tax assets: Accruals and allowances $ 8,723 $ 9,996 Other 2,498 1,790 -------- -------- Total 11,221 11,786 -------- -------- Deferred income tax liabilities: Property, plant and equipment 84,898 80,882 Deductible intangibles 3,146 2,822 Inventory and other 11,170 9,466 -------- -------- Total 99,214 93,170 -------- -------- Net deferred income tax liability $ 87,993 $ 81,384 ======== ========
The Company has not recorded any valuation allowances for deferred income tax assets. The components of the income (loss) before income taxes are:
Year Ended September 30, (In Thousands) 2001 2000 1999 - -------------- -------- -------- -------- United States $ 46,319 $(10,516) $ 66,173 Cumulative effect of a change in accounting principle (465) -- -- 45,854 (10,516) 66,173 -------- -------- -------- Foreign 6,280 6,170 4,080 -------- -------- -------- Income (loss) before income taxes $ 52,134 $ (4,346) $ 70,253 ======== ======== ========
Rock-Tenn 2001 Annual Report pg 47 NOTE 8 RETIREMENT PLANS The Company has a number of defined benefit pension plans covering essentially all employees who are not covered by certain collective bargaining agreements. The benefits are based on years of service and, for certain plans, compensation. The Company's practice is to fund amounts deductible for federal income tax purposes. In addition, under several labor contracts the Company makes payments based on hours worked into multi-employer pension plan trusts established for the benefit of certain collective bargaining employees. The Company's projected benefit obligation, fair value of assets and net periodic pension cost includes the following components:
Year Ended September 30, (In Thousands) 2001 2000 - -------------- --------- --------- Projected benefit obligation at beginning of year $ 175,093 $ 168,653 Service cost 6,044 6,358 Interest cost on projected benefit obligations 14,358 13,268 Amendments 1,933 163 Acquisitions (90) -- Actuarial loss (gain) 2,113 (6,433) Benefits paid (8,006) (6,916) --------- --------- Projected benefit obligation at end of year $ 191,445 $ 175,093 ========= ========= Fair value of assets at beginning of year $ 201,245 $ 209,871 Actual loss on plan assets (11,824) (2,332) Employer contribution 1,310 622 Benefits paid (8,006) (6,916) --------- --------- Fair value of assets at end of year $ 182,725 $ 201,245 ========= ========= Funded status $ (8,720) $ 26,152 Net unrecognized asset -- (201) Net unrecognized loss (gain) 6,741 (25,921) Unrecognized prior service cost (income) 174 (834) --------- --------- Net accrued pension cost included in consolidated balance sheets $ (1,805) $ (804) ========= =========
The amounts required to be recognized in the consolidated statements of operations are as follows:
Year Ended September 30, (In Thousands) 2001 2000 1999 - -------------- --------- --------- --------- Service cost $ 6,044 $ 6,358 $ 7,592 Interest cost on projected benefit obligations 14,358 13,268 12,487 Expected return on plan assets (17,822) (18,595) (17,169) Net amortization of the initial asset (198) (330) (378) Net amortization of loss (gain) (403) (1,867) (222) Net amortization of prior service cost (income) (54) (97) (105) Curtailment loss 386 -- -- --------- --------- --------- Total Company defined benefit plan expense (income) 2,311 (1,263) 2,205 Multi-employer plans for collective bargaining employees 255 254 239 --------- --------- --------- Net periodic pension cost (income) $ 2,566 $ (1,009) $ 2,444 ========= ========= =========
The discount rate used in determining the actuarial present value of the projected benefit obligations was 7.8%, 8.0% and 7.8% as of September 30, 2001, 2000 and 1999, respectively. The expected increase in compensation levels used in determining the actuarial present value of the projected benefit obligations was 4.0% as of September 30, 2001, 2000 and 1999. The expected long-term rate of return on assets used in determining pension expense was 9.0% for all years presented. The projected benefit obligations, accumulated benefit obligation and fair value of assets for underfunded plans was $35,770,000, $32,064,000, and $27,768,000, respectively, as of September 30, 2001. As a result, the Company recorded an intangible asset in the amount of $1,528,000 and made an adjustment to accumulated other comprehensive income of $465,000, net of tax. There were no underfunded plans as of September 30, 2000. pg. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company maintains an employee savings plan which permits participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company matches 50% of contributions up to a maximum of 6% of compensation as defined by the plan. During fiscal 2001, 2000 and 1999, the Company recorded matching expense, net of forfeitures, of $4,169,000, $3,357,000 and $3,982,000, respectively, related to the plan. The Company has a Supplemental Executive Retirement Plan ("SERP") which provides unfunded supplemental retirement benefits to certain executives of the Company. The SERP provides for incremental pension payments to partially offset the reduction in amounts that would have been payable from the Company's principal pension plan if it were not for limitations imposed by federal income tax regulations. Expense relating to the plan of $148,000, $161,000 and $137,000 was recorded for the years ended September 30, 2001, 2000 and 1999, respectively. Amounts accrued as of September 30, 2001 and 2000 related to the plan were $1,113,000 and $976,000, respectively. NOTE 9 RELATED PARTY TRANSACTIONS A director of the Company is the chairman and a significant shareholder of the insurance agency that brokers a portion of insurance for the Company. The insurance premiums paid by the Company may vary significantly from year to year with the claims arising during such years. For the years ended September 30, 2001, 2000 and 1999, payments were approximately $2,923,000, $2,565,000 and $4,458,000, respectively. NOTE 10 COMMITMENTS AND CONTINGENCIES CAPITAL ADDITIONS Estimated costs for completion of authorized capital additions under construction as of September 30, 2001 total approximately $10,000,000. ENVIRONMENTAL AND OTHER MATTERS The Company is subject to various federal, state, local and foreign environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances. These laws and regulations include, among others, the Comprehensive Environmental Response, Compensation and Liability Act, which the Company refers to as CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the U.S. Environmental Protection Agency. In addition, some states in which the Company operates have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies. The Company does not believe that future compliance with these environmental laws and regulations will have a material adverse effect on its results of operations, financial condition or cash flows. However, environmental laws and regulations are becoming increasingly stringent. Consequently, the Company's compliance and remediation costs could increase materially. In addition, the Company cannot currently assess with certainty the impact that the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act will have on its operations or capital expenditure requirements. However, the Company believes that any such impact or capital expenditures will not have a material adverse effect on its results of operations, financial condition or cash flows. On February 9, 1999, the Company received a letter from the Michigan Department of Environmental Quality, which the Company refers to as MDEQ, in which the MDEQ alleged that the Company was in violation of the Michigan Natural Resources and Environmental Protection Act, as well as the facility's wastewater discharge permit at one of the Company's Michigan facilities. The letter alleged that the Company exceeded several numerical limitations for chemical parameters outlined in the wastewater permit and violated other wastewater discharge criteria. The MDEQ further alleged that the Company is liable for contamination contained on the facility property as well as for contributing contamination to the Kalamazoo River site. The letter requested that the Company commit, in the form of a binding agreement, to undertake the necessary and appropriate response activities and Rock-Tenn 2001 Annual Report pg. 49 response actions to address contamination in both areas. The Company has entered into an administrative consent order pursuant to which improvements are being made to the facility's wastewater treatment system and the Company has paid a $75,000 settlement amount. The Company has also agreed to pay an additional $30,000 for past and future oversight costs incurred by the State of Michigan. This payment will be made in three equal installments over the next two years, the first of which has already been made. The cost of making upgrades to the wastewater treatment systems is estimated to be approximately $1,400,000. Nothing contained in the order constitutes an admission of liability or any factual finding, allegation or legal conclusion on the part of the Company. The order was completed during the first quarter of fiscal 2001. To date, the MDEQ has not made any other demand regarding our alleged liability for contamination at the Kalamazoo Riversite. The Company has been identified as a potentially responsible party, which it refers to as a PRP, at eight active "superfund" sites pursuant to CERCLA or comparable state statutes. No remediation costs or allocations have been determined with respect to such sites other than costs that were not material to the Company. Based upon currently available information and the opinions of the Company's environmental compliance managers and general counsel, although there can be no assurance, the Company believes that any liability it may have at any site will not have a material adverse effect on its results of operations, financial condition or cash flows. NOTE 11 SEGMENT INFORMATION The Company reports three business segments. The packaging products segment consists of facilities that produce folding cartons, interior packaging and thermoformed plastic products. The merchandising displays and corrugated packaging segment consists of facilities that produce displays and corrugated containers. The paperboard segment consists of facilities that manufacture 100% recycled clay-coated and specialty paperboard, corrugating medium and laminated paperboard products and that collect recovered paper. Certain operations included in the packaging products and paperboard segments are located in foreign countries and had operating income of $7,411,000, $7,179,000 and $5,620,000 for fiscal years ended September 30,2001,2000 and 1999, respectively. For fiscal 2001,foreign operations represented approximately 5.6%, 6.2% and 5.9% of total net sales to unaffiliated customers, total income from operations and total identifiable assets, respectively. For fiscal 2000,foreign operations represented approximately 5.1%, 19.7% and 5.9% of total net sales to unaffiliated customers, total income from operations and total identifiable assets, respectively. For fiscal 1999, foreign operations represented approximately 4.6%, 5.1% and 5.5% of total net sales to unaffiliated customers, total income from operations and total identifiable assets, respectively. As of September 30, 2001, 2000 and 1999,the Company had foreign long-lived assets of $34,578,000, $33,756,000 and $34,556,000, respectively. The Company evaluates performance and allocates resources based, in part, on profit or loss from operations before income taxes, interest and other items. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies. Intersegment sales are accounted for at prices that approximate market prices. Intercompany profit is eliminated at the consolidated level. Reported segment results have been restated for all years presented in order to conform to changes in internal reporting measures used by management. These changes reflect the following: (1) segment level adjustments to record inventory on the last-in, first-out, or "LIFO," method, (2) a corporate charge reallocation due to a change in methodology made to better focus on the drivers of certain corporate expenses, and (3) non-allocation of goodwill amortization expense in order to provide more comparative information given the impending adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." pg. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Following is a tabulation of business segment information for each of the past three fiscal years:
Years Ended September 30, (In Thousands) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- Net sales (aggregate): Packaging Products $ 806,107 $ 797,399 $ 749,850 Merchandising Displays and Corrugated Packaging 263,395 238,822 180,892 Paperboard 524,551 588,489 529,014 - ----------------------------------------------------------------------------------------------------- Total $ 1,594,053 $ 1,624,710 $ 1,459,756 ===================================================================================================== Less net sales (intersegment): Packaging Products $ 3,474 $ 5,294 $ 3,424 Merchandising Displays and Corrugated Packaging 5,615 5,334 4,338 Paperboard 143,332 150,794 138,623 - ----------------------------------------------------------------------------------------------------- Total $ 152,421 $ 161,422 $ 146,385 ===================================================================================================== Net sales (unaffiliated customers): Packaging Products $ 802,633 $ 792,105 $ 746,426 Merchandising Displays and Corrugated Packaging 257,780 233,488 176,554 Paperboard 381,219 437,695 390,391 - ----------------------------------------------------------------------------------------------------- Total $ 1,441,632 $ 1,463,288 $ 1,313,371 ===================================================================================================== Segment income: Packaging Products $ 48,074 $ 39,724 $ 48,641 Merchandising Displays and Corrugated Packaging 30,246 27,629 22,178 Paperboard 41,633 51,380 60,257 - ----------------------------------------------------------------------------------------------------- 119,953 118,733 131,076 Goodwill amortization (8,569) (9,069) (9,410) Plant closing and other costs (16,893) (65,630) (6,932) Other non-allocated expenses (5,406) (8,243) (7,698) Interest expense (35,042) (35,575) (31,179) Interest and other income 530 418 391 Minority interest in consolidated subsidiary (2,439) (4,980) (5,995) - ----------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 52,134 $ (4,346) $ 70,253 ===================================================================================================== Identifiable assets: Packaging Products $ 423,041 $ 429,422 $ 459,933 Merchandising Displays and Corrugated Packaging 132,122 130,126 107,267 Paperboard 582,364 585,985 585,138 Corporate 26,886 13,430 9,132 - ----------------------------------------------------------------------------------------------------- Total $ 1,164,413 $ 1,158,963 $ 1,161,470 ===================================================================================================== Depreciation and amortization (excluding goodwill): Packaging Products $ 28,819 $ 29,868 $ 27,841 Merchandising Displays and Corrugated Packaging 8,658 7,702 6,486 Paperboard 28,627 27,246 25,505 Corporate 2,920 3,176 3,233 - ----------------------------------------------------------------------------------------------------- Total $ 69,024 $ 67,992 $ 63,065 ===================================================================================================== Goodwill amortization: Packaging Products $ 1,138 $ 1,537 $ 1,878 Merchandising Displays and Corrugated Packaging 1,425 1,425 1,425 Paperboard 6,006 6,107 6,107 - ----------------------------------------------------------------------------------------------------- Total $ 8,569 $ 9,069 $ 9,410 Capital expenditures: Packaging Products $ 33,983 $ 48,094 $ 37,059 Merchandising Displays and Corrugated Packaging 10,097 14,238 11,544 Paperboard 26,784 29,815 40,473 Corporate 1,697 2,493 3,257 - ----------------------------------------------------------------------------------------------------- Total $ 72,561 $ 94,640 $ 92,333 =====================================================================================================
Rock-Tenn 2001 Annual Report pg. 51 NOTE 12 FINANCIAL RESULTS BY QUARTER (UNAUDITED) (In Thousands, Except Per Share Data)
First Second Third Fourth 2001 Quarter(a) Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------ Net sales $ 345,169 $ 367,410 $ 357,065 $ 371,988 Gross profit 65,970 74,010 76,557 80,294 Plant closing and other one-time costs 1,865 3,175 2,523 9,330 Income before cumulative effect of a change in accounting principle 4,505 7,318 9,120 9,294 Net income 4,791 7,318 9,120 9,294 Basic earnings per share 0.14 0.22 0.27 0.28 Diluted earnings per share 0.14 0.22 0.27 0.28 First Second Third Fourth 2000 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------ Net sales $ 346,821 $ 369,940 $ 370,545 $ 375,982 Gross profit 72,197 73,637 69,630 72,987 Plant closing and other one-time costs 2,474 52,725 4,876 5,555 Net income (loss) 8,610 (33,256) 2,605 6,125 Basic earnings (loss) per share 0.25 (0.96) 0.08 0.18 Diluted earnings (loss) per share 0.24 (0.96) 0.07 0.18 First Second Third Fourth 1999 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------ Net sales $ 311,442 $ 312,718 $ 330,477 $ 358,734 Gross profit 71,587 68,955 73,788 79,827 Plant closing and other one-time costs 2,053 1,085 2,763 1,031 Net income 8,758 8,806 9,920 12,214 Basic earnings per share 0.25 0.25 0.28 0.35 Diluted earnings per share 0.25 0.25 0.28 0.35
The interim earnings (loss) per common and common equivalent share amounts were computed as if each quarter was a discrete period. As a result, the sum of the basic and diluted earnings (loss) per share by quarter will not necessarily total the annual basic and diluted earnings (loss) per share. (a) Includes income of $286,000, net of tax, or $0.01 per diluted share, cumulative effect of a change in accounting principle from the adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. pg. 52 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Rock-Tenn Company We have audited the accompanying consolidated balance sheets of Rock-Tenn Company as of September 30, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rock-Tenn Company at September 30, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Atlanta, Georgia October 23, 2001 Rock-Tenn 2001 Annual Report pg. 53 MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR FINANCIAL INFORMATION Rock-Tenn Company The management of Rock-Tenn Company has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles in the United States. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the Annual Report and is responsible for its accuracy and consistency with the financial statements. Rock-Tenn Company has established and maintains a system of internal control to safeguard assets against loss or unauthorized use and to ensure the proper authorization and accounting for all transactions. This system includes appropriate reviews by the Company's internal audit department and management as well as written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. The Board of Directors, through its Audit Committee, is responsible for ensuring that both management and the independent auditors fulfill their respective responsibilities with regard to the financial statements. The Audit Committee, composed entirely of directors who are not officers or employees of the Company, meets periodically with both management and the independent auditors to assure that each is carrying out its responsibilities. The independent auditors and the Company's internal audit department have full and free access to the Audit Committee and meet with it, with and without management present, to discuss auditing and financial reporting matters. The Company's financial statements have been audited by Ernst & Young LLP, independent auditors. The opinion of the independent auditors, based upon their audits of the consolidated financial statements, is contained in this Annual Report. As part of its audit of the Company's financial statements, Ernst & Young LLP considered the Company's internal control structure in determining the nature, timing and extent of audit tests to be applied. Management has considered Ernst & Young LLP's recommendations concerning the Company's system of internal control and has taken actions that we believe are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of September 30, 2001, the Company's system of internal control is adequate to accomplish the objectives discussed herein. /s/ Steven C. Voorhees Steven C. Voorhees Executive Vice President and Chief Financial Officer pg. 54 BOARD OF DIRECTORS Stephen G. Anderson, M.D.(2) L.L. Gellerstedt III(3) James A. Rubright(1) Winston-Salem, North Carolina Chairman Chairman and Chief Executive Officer L.G. III Group Rock-Tenn Company J. Hyatt Brown(1) Atlanta, Georgia Norcross, Georgia Chairman and Chief Executive Officer Brown & Brown, Inc. John D. Hopkins(1)(3) Charles R. Sexton Daytona Beach, Florida Senior Vice President and General Counsel Principal Jefferson-Pilot Corporation Sexton-Talbert Products Bradley Currey Jr.(1) Greensboro, North Carolina Vero Beach, Florida Retired Chairman Rock-Tenn Company Lou Brown Jewell(3) John W. Spiegel(1)(2) Atlanta, Georgia Private Investor Vice Chairman and Atlanta, Georgia Chief Financial Officer Robert B. Currey SunTrust Banks, Inc. Chief Executive Officer James W. Johnson(3) Atlanta, Georgia Currey & Company, Inc. President Atlanta, Georgia McCranie Tractor Company (1) Executive Committee Unadilla, Georgia (2) Audit Committee G. Stephen Felker(2) (3) Compensation and Options Committee Chairman and Chief Executive Officer Avondale Mills, Inc. Monroe, Georgia OFFICERS James A. Rubright PACKAGING PRODUCTS SEGMENT PAPERBOARD SEGMENT Chairman and Chief Executive Officer Vincent J. D'Amelio David E. Dreibelbis Executive Vice President and Executive Vice President and Steven C. Voorhees General Manager General Manager Executive Vice President and Plastic Packaging Division Paperboard Group Chief Financial Officer Nicholas G. George Terry W. Durham Robert B. McIntosh Executive Vice President and Executive Vice President and Senior Vice President, General Manager General Manager General Counsel and Secretary Folding Carton Division Laminated Paperboard Products Division Thomas H. King Richard E. Steed Paul J. England Vice President of Finance and Control President and Chief Executive Officer Executive Vice President and RTS Packaging, LLC General Manager Jodi Littlestone Specialty Paperboard Division Vice President of Employee and MERCHANDISING DISPLAYS AND CORRUGATED Organizational Effectiveness PACKAGING SEGMENT Stephen P. Flanagan Russell M. Currey Executive Vice President and Larry S. Shutzberg Executive Vice President and General Manager Vice President of Information Systems General Manager Recycled Fiber Division Corrugated Packaging Division David T. Jones James K. Hansen Controller James L. Einstein Executive Vice President and Executive Vice President and General Manager Suzanne G. Smith General Manager Coated Paperboard Division Treasurer Alliance Division
EX-21 7 g73384ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ROCK-TENN COMPANY SUBSIDIARIES OF ROCK-TENN COMPANY
NAME JURISDICTION OF INCORPORATION ---- ----------------------------- 1. Rock-Tenn Company, Mill Division, Inc. Tennessee 2. Dominion Paperboard Products, Ltd. Quebec, Canada 3. Rock-Tenn Company of Texas Georgia 4. Rock-Tenn Converting Company Georgia 5. Rock-Tenn Company of Arkansas Georgia 6. Ling Industries, Inc. Quebec, Canada 7. Rock-Tenn Company of California, Inc. Delaware 8. Rock-Tenn Company of Illinois, Inc. Illinois 9. Concord Industries, Inc. Illinois 10. Waldorf Corporation Delaware 11. Wabash Corporation Delaware 12. Wabash Development, Inc. Delaware 13. Waldorf Realty, Inc. Delaware 14. Best Recycling, Inc. Iowa 15. RTS Packaging, LLC Delaware 16. Rock-Tenn Recycling Company Quebec, Canada 17. Rock-Tenn Partition Company Georgia 18. RTS Empaques S. de R.L. de C.V. Mexico 19. Waldorf Corporation of Minnesota Delaware 20. RTS Embalajes de Chile Limitada Santiago, Chile 21. Rock-Tenn Financial, Inc. North Carolina 22. Rock-Tenn Foreign Sales Corporation Barbados 23. Rock-Tenn Real Estate, LLC Georgia
EX-23 8 g73384ex23.txt REPORT AND CONSENT OF ERNST & YOUNG, LLP EXHIBIT 23 REPORT AND CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Rock-Tenn Company of our report dated October 23, 2001 included in the 2001 Annual Report to Shareholders of Rock-Tenn Company. Our audits also include the financial statement schedule of Rock-Tenn Company listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent (a) to the incorporation by reference in (i) the Registration Statement (Form S-8 No. 333-77237) pertaining to the Rock-Tenn Company 1993 Employee Stock Option Plan, the Rock-Tenn Company 1993 Stock Purchase Plan, the Rock-Tenn Company 1989 Stock Option Plan and the Rock-Tenn Company 1987 Stock Option Plan, (ii) the Registration Statement (Form S-8 No. 33-83304) pertaining to the Rock-Tenn Company 1993 Employee Stock Option Plan, the Rock-Tenn Company 1993 Employee Stock Purchase Plan, the Rock-Tenn Company Incentive Stock Option Plan, the Rock-Tenn Company 1989 Stock Option Plan, and the Rock-Tenn Company 1987 Stock Option Plan, (iii) the Registration Statement (Form S-3 No. 33-93934) of Rock-Tenn Company and Post-Effective Amendment No. 1 thereto pertaining to the shelf registration of debt securities, (iv) the Registration Statement (Form S-3 No. 333-62338) of Rock-Tenn Company pertaining to the registration of $300,000,000 of debt securities, and (v) the Registration Statement (Form S-8 No. 333-62346) pertaining to Amendment No. 1 to the Rock-Tenn Company 1993 Employee Stock Option Plan and the 2000 Incentive Stock Plan, of our report dated October 23, 2001, with respect to the consolidated financial statements incorporated herein by reference; and (b) to the use of our report dated November 9, 2001, with respect to the financial statements of the Rock-Tenn Company 1993 Employee Stock Purchase Plan filed as an Exhibit to this Annual Report (Form 10-K) for the year ended September 30, 2001. ERNST & YOUNG LLP Atlanta, Georgia December 18, 2001 EX-99.1 9 g73384ex99-1.txt AUDITED FINANCIAL STATEMENTS EXHIBIT 99.1 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors................................ 2 Statements of Financial Condition as of September 30, 2001 and 2000........................................................ 3 Statements of Changes in Plan Equity for the three years ended September 30, 2001.......................................... 4 Notes to Financial Statements................................. 5
REPORT OF INDEPENDENT AUDITORS Compensation and Options Committee of the Board of Directors Rock-Tenn Company We have audited the accompanying statements of financial condition of the Rock-Tenn Company 1993 Employee Stock Purchase Plan as of September 30, 2001 and 2000 and the related statements of changes in plan equity for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Rock-Tenn Company 1993 Employee Stock Purchase Plan at September 30, 2001 and 2000 and the changes in Plan equity for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Atlanta, Georgia November 9, 2001 2 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, ------------------------------ 2001 2000 ---------- ---------- Assets: Receivable from Rock-Tenn Company (Notes 1 and 2) ...................... $ 388,183 $ 287,645 ========== ========== Liabilities and equity: Obligations to purchase Rock-Tenn Company common stock (Notes 1 and 2) ........................................................ 388,183 287,645 Plan equity ............................................................ -- -- ---------- ---------- Total liabilities and equity ................................................ $ 388,183 $ 287,645 ========== ==========
See notes to financial statements 3 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF CHANGES IN PLAN EQUITY
YEARS ENDED SEPTEMBER 30, ------------- ------------- ------------- 2001 2000 1999 ------------- ------------- ------------- Participant contributions (net of refunds for 2001) ..... $ 2,398,240 $ 3,225,378 $ 3,464,190 Purchases of Rock-Tenn Company common stock (Note 1) ................................................ (2,388,286) (3,096,657) (3,381,882) Amounts refunded to Plan participants ................... (9,954) (128,721) (82,308) ------------- ------------- ------------- Plan equity at end of year .............................. $ -- $ -- $ -- ============= ============= =============
See notes to financial statements 4 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF THE PLAN: In 1993, the Board of Directors of Rock-Tenn Company (the "Company") adopted the Rock-Tenn Company 1993 Employee Stock Purchase Plan (the "Plan"). The Plan was effective beginning on January 1, 1994. On October 23, 1997, the Company's Board of Directors voted to amend and restate the Plan with an effective date of January 1, 1998, thereby increasing the number of shares reserved for purchase under the Plan to 1,320,000. The amended and restated Rock-Tenn Company 1993 Employee Stock Purchase Plan was approved by Rock-Tenn Company shareholders on January 22, 1998. Effective November 1, 2000, Amendment Number One to the Plan further increased the number of shares reserved for purchase under the Plan to 2,320,000. The Plan permits eligible employees to make regular, systematic purchases of the Company's Class A common stock directly from the Company through payroll deductions. Substantially all regular, full-time employees of the Company and its subsidiaries are eligible to participate in the Plan upon completion of at least two years of employment as defined by the Plan. Voluntary employee contributions are deducted from participants' compensation each pay period and are held for the participants' accounts. All funds held by the Company under the Plan are included in the general assets of the Company. On the first day of each of the four purchase periods (November 1, February 1, May 1 and August 1), participants in the Plan are granted an option to purchase shares of the Company's Class A common stock. On the last day of each purchase period (January 31, April 30, July 31 and October 31), the Company uses participant contributions, net of refunds, to purchase shares of the Company's Class A common stock for the participant. Contributions that exceed the plan provisions or the Internal Revenue Code limits are refunded to participants. The purchase price per share to the participant is equal to 85% of the market value, as defined, of the Company's Class A common stock on the first or last day of the purchase period, whichever amount is lower. For the purchase periods ending October 31, 2000, January 31, 2001, April 30, 2001 and July 31, 2001 there was a total of 293,554 shares of the Company's Class A common stock purchased for participants under the Plan. For the purchase periods ending October 31, 1999, January 31, 2000, April 30, 2000 and July 31, 2000, there was a total of 313,503 shares of the Company's Class A common stock purchased for participants under the Plan. For the purchase periods ending October 31, 1998, January 31, 1999, April 30, 1999 and July 31, 1999, there was a total of 284,080 shares of the Company's Class A common stock purchased for participants under the Plan. Stock certificates for all shares of the Company's Class A common stock purchased under the Plan are issued to participants at the end of each purchase period. Any participant may terminate contributions and withdraw from the Plan at any time. Even though there are no current intentions to do so, the Board of Directors can terminate the Plan at any time. Stock purchase transactions in process at the time of such termination cannot be modified or canceled without the written consent of the participants. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES: Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires Plan management to make estimates and assumptions that affect the reported amounts of Plan assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts 5 of changes in Plan equity during the reporting period. Actual results may differ from those estimates and the differences could be material. Plan Administration The Plan is administered by the Compensation and Options Committee of the Company's Board of Directors, which consists of four outside directors. Plan Expenses Administrative expenses of the Plan are paid by the Company. NOTE 3 -- FEDERAL INCOME TAXES: The Plan qualifies as an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code of 1986. Issuance of shares under this Plan are not intended to result in taxable income to participants in the Plan based on provisions in Section 423 of the Internal Revenue Code. 6 EX-99.2 10 g73384ex99-2.txt CAUTIONARY STATEMENT EXHIBIT 99.2 We, or our executive officers and directors on our behalf, may from time to time make "forward looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements include statements preceded by, followed by or that include the words "believes," "expects," "anticipates," "plans," "estimates," or similar expressions. These statements may be contained in reports and other documents that we file with the SEC or may be oral statements made by our executive officers and directors to the press, potential investors, securities analysts and others. These forward looking statements could involve, among other things, statements regarding the Company's intent, belief or expectation with respect to: - our results of operations and financial condition, - the consummation of acquisitions and financial transactions and their effect on our business, and - our plans and objectives for future operations and expansion. Any forward looking statements would be subject to risks and uncertainties that could cause actual results of operations, financial condition, acquisitions, financing transactions, operations, expansion and other events to differ materially from those expressed or implied in such forward looking statements. Any forward looking statements would be subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally and could be affected by changes in management's plans, such as delays or changes in anticipated capital expenditures or changes in our operations. These assumptions would be based on facts and conditions as they exist at the time the forward looking statements are made as well as predictions as to future facts and conditions. These future facts and conditions may be difficult for us to predict accurately and may involve the assessment of events beyond our control. We, or our executive officers and directors, have no duty under the Securities Exchange Act of 1934 to update any forward-looking statement. Further, our business is subject to a number of risks that would affect any such forward looking statements. These risks include, among other things, the following: - WE MAY FACE INCREASED COSTS AND REDUCED SUPPLY OF RAW MATERIALS Historically, the cost of recovered paper, virgin paperboard and containerboard, our principal raw materials, have fluctuated significantly due to market and industry conditions. Increasing demand for products packaged in 100% recycled paper and the shift by virgin paperboard manufacturers to the production of paperboard with some recycled paper content may increase demand for recovered paper. The increasing demand may result in cost increases. In recent years, the cost of natural gas, which we use in many of our manufacturing operations, including each of 12 of our paperboard mills, have also fluctuated significantly. There can be no assurance that we will be able to recoup any future increases in the cost of recovered paper or other raw materials or of natural gas or electric power through price increases for our products. Further, a reduction in supply of recovered paper, virgin paperboard and containerboard or other raw materials due to increased demand or other factors could have an adverse effect on our results of operations and financial condition. - WE MAY EXPERIENCE PRICING VARIABILITY The paperboard and converted products industries historically have experienced significant fluctuations in selling prices. Our inability to maintain the selling prices of products within these industries during periods of weak economic conditions may have a material adverse effect on our results of operations and financial condition. We are not able to predict with certainty market conditions or the selling prices for our products. - OUR EARNINGS ARE HIGHLY DEPENDENT ON VOLUMES Our operations generally have high fixed operating cost components and therefore our earnings are highly dependent on volumes, which tend to fluctuate. These fluctuations make it difficult to predict our results with any degree of certainty. - WE FACE INTENSE COMPETITION The packaging products and paperboard industries are highly competitive, and no single company dominates either industry. Our competitors include large, vertically integrated packaging products and paperboard companies and numerous smaller companies. In the folding carton and corrugated container markets, we compete with a significant number of national and regional packaging suppliers. In the fiber partitions, corrugated displays, thermoformed plastic products and laminated paperboard products markets, we compete with a smaller number of national, regional and local companies offering highly specialized products. We also compete with foreign companies in the book cover market. In the paperboard segment, we compete with integrated and non-integrated national, regional and local companies manufacturing various grades of paperboard. Our paperboard also competes with virgin paperboard. The primary competitive factors in the packaging products and paperboard industries are price, design, quality and service, with varying emphasis on these factors depending on the product line and customer preferences. We believe that we compete effectively with respect to each of these factors. However, to the extent any of our competitors becomes more successful with respect to any key competitive factor, our business could be materially adversely affected. The packaging products and recycled paperboard industries have undergone significant consolidation in recent years. We believe that current trends within these industries will result in further consolidation. Within the packaging products industry, larger corporate customers with an expanded geographic presence have tended in recent years to seek suppliers who can, because of their broad geographic presence, efficiently and economically supply all of the customers' packaging needs. In addition, during recent years, purchasers of recycled paperboard and packaging products have demanded higher quality products meeting stricter quality control requirements. These market trends could adversely affect our results of operations or, alternatively, favor our products depending on our competitive position in specific product lines. - WE MAY BE UNABLE TO COMPLETE AND FINANCE ACQUISITIONS We have completed several acquisitions during the past five fiscal years and may seek additional acquisition opportunities. There can be no assurance that we will be able successfully to identify suitable acquisition candidates, complete acquisitions, integrate acquired operations into our existing operations or expand into new markets. There can also be no assurance that future acquisitions will not have an adverse effect upon our operating results. This is particularly true in the fiscal quarters immediately following the completion of such acquisitions while the operations of the acquired business are being integrated into our operations. Once integrated, acquired operations may not achieve levels of revenues, profitability or productivity comparable with those achieved by our existing operations, or otherwise perform as expected. In addition, it is possible that, in connection with acquisitions, our capital expenditures could be higher than we anticipated and that expected benefits of such capital expenditures may not be realized. - WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL AND GOVERNMENTAL REGULATION We are subject to various Federal, state, local and foreign environmental laws and regulations, including those relating to the discharge, storage, handling and disposal of a variety of substances. We regularly make capital expenditures to maintain compliance with applicable environmental laws and regulations. However, environmental laws and regulations are becoming increasingly more stringent. Consequently, our compliance and remediation costs could increase materially. In addition, we cannot currently assess with certainty the impact that the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act will have on our operations or capital expenditure requirements. Further, we have been identified as a potentially responsible party at various "superfund" sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act or comparable state statutes. There can be no assurance that any liability we may incur in connection with these superfund sites will not be material to our results of operations, financial condition or cash flows. 2 - WE HAVE BEEN DEPENDENT ON CERTAIN CUSTOMERS Each of our divisions has certain key customers, the loss of which could have a material adverse effect on the division's sales and, depending on the significance of the division to our operations, our results of operations, financial condition or cash flows. - CHANGES IN ACCOUNTING PRACTICES COULD REQUIRE US TO CHANGE PREVIOUSLY REPORTED RESULTS OF OPERATIONS We understand that the SEC is evaluating existing practice regarding, among other things, accounting for restructuring charges, goodwill write-offs and other pro forma adjustments made in connection with recapitalizations and/or acquisition transactions and is concurrently developing guidance on how registrants should apply existing regulations. We believe that our previously reported financial information has been prepared in a manner that complies with published SEC regulations and is consistent with current practice. However, there can be no assurance that the SEC will not require modification or reformulation of our previously reported financial information. Any such modification or reformulation may be significant. 3 -----END PRIVACY-ENHANCED MESSAGE-----