-----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, J5pdqyxNE52xo723PbB8zwup+MmDp57GLDELGlUdSXbmSz4ValjO8QdQV4kStzr8 89PkqhYp+fCYzqE87KX9PA== 0000950144-97-013535.txt : 19971223 0000950144-97-013535.hdr.sgml : 19971223 ACCESSION NUMBER: 0000950144-97-013535 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971222 SROS: NYSE 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: SEC FILE NUMBER: 001-12613 FILM NUMBER: 97741794 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 ROCK TENN COMPANY 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 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 30071 NORCROSS, GEORGIA (Zip code) (Address of principal executive offices) 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 17, 1997 (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 $446,720,735. As of December 17, 1997, the registrant had 23,401,864 and 11,749,947 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, 1997 are incorporated by reference in Part II. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on January 22, 1998 are incorporated by reference in Parts III and IV. =============================================================================== 2 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.......................................... 8 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- 3 PART I ITEM 1. BUSINESS Unless the context otherwise requires, references herein to the Company are to the Company and its subsidiaries other than RTS Packaging, LLC. GENERAL Founded in 1936 as a folding carton manufacturer, the Company is a leading converter of recycled and virgin paperboard, a leading manufacturer of recycled clay-coated and uncoated paperboard and a producer of corrugating medium. The Company believes that it is the second largest manufacturer of folding cartons in North America and the largest U.S. producer of laminated paperboard products for the book cover and furniture markets. The Company operates 40 converting facilities, 10 paperboard mills, 14 paper recovery facilities and one distribution facility located in 21 states and Canada. In September 1997, the Company and Sonoco Products Company ("Sonoco") formed RTS Packaging, LLC ("RTS"), and the Company contributed to RTS eight fiber partition plants and one machine engineering facility in the U.S. and Sonoco contributed to RTS five fiber partition plants in the U.S. (one of which was subsequently closed) and one plant in Mexico. As a result, the Company believes that RTS is the largest producer of solid fiber partitions in North America. Under the terms of the agreement between the Company and Sonoco relating to RTS, the Company and Sonoco own 65% and 35%, respectively, of the outstanding interests in RTS. As a result of the consummation of this transaction, all of the Company's partition products business is conducted through RTS. RTS operates 13 solid fiber partition plants (one of which will be closed prior to December 31, 1997) in eight states and Mexico. PRODUCTS The Company operates in two industry segments: converted products and paperboard. Converted Products The Company primarily manufactures four lines of converted products: folding cartons, laminated paperboard products, corrugated products and plastic packaging products. RTS manufactures solid fiber partitions. Folding Cartons. The Company believes that it is the second largest producer of folding cartons in North America. The Company's folding cartons are used by customers to package frozen, dry and perishable food items, paper goods, hardware products, textile, automotive, apparel and other products. Folding cartons are manufactured by the Company from recycled or virgin paperboard, which is printed, coated, die-cut and glued in accordance with customer specifications. Finished cartons are then shipped to customers' plants where they are packed or sealed. The Company operates 22 folding carton plants and one distribution facility, and sales of folding cartons to unaffiliated customers accounted for 49.1%, 46.0% and 43.3% of the Company's net sales in fiscal 1997, 1996, and 1995, respectively. Laminated Paperboard Products. The Company manufactures a number of laminated paperboard products. The Company believes it is the largest U.S. producer of laminated paperboard products for the book cover and furniture markets and that it is recognized for its expertise in laminating recycled paperboard. The Company converts uncoated paperboard into specialty laminated paperboard products for use in book covers and binders, furniture, automotive components and other industrial products. The Company operates nine laminated paperboard products plants, and sales of laminated paperboard products to unaffiliated customers accounted for 11.6%, 14.1% and 14.2% of the Company's net sales in fiscal 1997, 1996 and 1995, respectively. -3- 4 Corrugated Products. The Company manufactures corrugated containers, point-of-purchase displays and corrugated sheet stock, offering a range of flute configurations and structural designs, which it markets primarily in the Southeastern U.S. The Company purchases linerboard and corrugating medium, which are fed simultaneously 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. The Company markets corrugated sheets to box manufacturers or converts it into corrugated products ranging from one-color protective cartons to graphically brilliant point-of-purchase containers and displays. The Company operates seven corrugated products plants, and sales of corrugated products to unaffiliated customers accounted for 10.4%, 12.8% and 10.5% of the Company's net sales in fiscal 1997, 1996 and 1995, respectively. Plastic Packaging Products. The Company manufactures thermoformed plastic converted products and extruded plastic roll stock for sale to the food service, industrial products, consumer products, healthcare and food processors markets. The Company uses contact heat and radiant heat thermoforming equipment to manufacture thermoformed products from plastic roll stock in a wide range of thicknesses, expanding the range of product applications. The Company also operates extruders to manufacture plastic roll stock in a wide range of colors. The Company uses 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. Partition Products. The Company believes that RTS is the largest manufacturer of solid fiber partitions in North America, which are marketed principally to glass container manufacturers. Fiber partitions are manufactured by RTS from 100% recycled uncoated paperboard. RTS manufactures solid fiber partitions in varying thicknesses to meet different structural requirements that are well-suited for high speed casing, uncasing and filling lines due to their precision die-cut construction. RTS is focused on developing high quality, value-added partition products for specific applications designed to meet customers' packaging needs. RTS operates 13 solid fiber partition plants (one of which will be closed prior to December 31, 1997), and the Company's sales of fiber partition products (which, from September 5, 1997 to September 30, 1997 included all sales of RTS) to unaffiliated customers accounted for 9.3%, 11.1% and 11.5% of the Company's net sales in fiscal 1997, 1996 and 1995, respectively. Paperboard The Company produces 100% recycled clay-coated, and uncoated paperboard and corrugating medium and operates ten paperboard mills, as well as 14 facilities that collect recovered paper. Recycled Paperboard. The Company is the largest U.S. manufacturer of 100% recycled paperboard (excluding linerboard, medium and paperboard used in the manufacture of gypsum wallboard), and it believes that it is the second largest producer of clay-coated recycled paperboard in the U.S. The Company markets its clay- coated and uncoated recycled paperboard to manufacturers of folding cartons, fiber partitions, laminated paperboard products and other paperboard products. The Company also manufactures recycled corrugating medium, which is marketed to corrugated sheet manufacturers. The Company operates ten paperboard mills, including one that produces clay-coated recycled paperboard and corrugating medium, and sales of recycled paperboard (including corrugating medium) to unaffiliated customers accounted for 13.4%, 9.6% and 13.2% of the Company's net sales in fiscal 1997, 1996 and 1995, respectively. Recycled Fiber. The Company operates 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. Certain of the Company's paper recovery facilities are located near the Company's paperboard mills to minimize freight costs and provide an additional source of supply of high quality recovered paper for the Company's operations. Recovered paper is the principal raw material used by the Company in the production of recycled paperboard. Collected paper is sorted and baled and then either transferred to the Company's paperboard mills for processing or sold principally to other U.S. manufacturers of recycled paperboard. -4- 5 SALES AND MARKETING The Company sold converted products and paperboard to over 5,000 and 1,000 customers, respectively, in fiscal 1997. None of the Company's customers accounted for more than 10% of the Company's net sales in fiscal 1997. The Company generally manufactures converted products and paperboard pursuant to customers' orders. Certain of the Company's converted products and paperboard are marketed to certain key customers, the loss of which could have an adverse effect on net income attributable to such converted products or paperboard segments and, depending on the significance of such product line to the Company's operations, the Company's results of operations. The Company believes that it has strong relationships with its customers. Each of the Company's converted product and paperboard lines are marketed through its own sales force that maintains direct sales relationships with its customers. Several converted product lines, including folding cartons and book covers, are also marketed through independent sales representatives and independent distributors, respectively. Sales personnel are under the supervision of 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. The Company's paperboard and laminated paperboard products sales personnel are generally paid a base salary, and its packaging products sales personnel are generally paid a base salary plus commissions. The Company's independent sales representatives are paid on a commission basis. COMPETITION The converted products and paperboard industries are highly competitive, and no single company is dominant. Management believes that the Company is the second largest manufacturer of folding cartons in North America, the largest U.S. manufacturer of 100% recycled paperboard (excluding linerboard, medium and paperboard used in the manufacture of gypsum wallboard), the largest U.S. producer of laminated paperboard products for the book cover and furniture markets and the second largest producer of clay-coated recycled paperboard in the U.S. In addition, the Company believes that RTS is the largest manufacturer of solid fiber partitions in North America. The Company's and RTS' competitors include large, vertically integrated converted products and paperboard companies and numerous smaller companies. The primary competitive factors in the converted products and paperboard industries are price, design, quality and service, with varying emphasis on these factors depending on the product line. The Company believes that it and RTS compete effectively with respect to each of these factors, but, to the extent that one or more of their respective competitors becomes more successful with respect to any key competitive factor, the Company's and RTS' businesses could be materially adversely affected. In addition, as demand for environmentally friendly packaging has increased, producers of virgin paperboard have begun to manufacture paperboard having some recycled paper content. Increasing acceptance of partially recycled paperboard by consumers as an environmentally friendly alternative to paperboard produced from 100% recovered paper could have an adverse effect on demand for the Company's paperboard. The converted products and recycled paperboard industries have undergone significant consolidation in recent years, and the Company believes that current trends within the converted products and paperboard industries will result in further consolidation. Within the converted products industry, larger corporate customers with expanded geographic presences 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 converted products have demanded higher quality products meeting stricter quality control requirements. The Company's results of operations could be adversely affected by these market trends. ENVIRONMENTAL REGULATION -5- 6 The Company and RTS are subject to various Federal, state, local, Canadian provincial, and Mexican 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 ("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 administered by the U.S. Environmental Protection Agency. In addition, states in which the Company and RTS 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. The Company's and RTS' operations also are governed by other Federal, state, local, Canadian provincial and Mexican laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations promulgated thereunder which, among other things, establish asbestos and noise standards and regulate the use of hazardous chemicals in the workplace. Although neither the Company nor RTS use asbestos in the manufacture of their products, some of their facilities contain asbestos. However, management believes such asbestos is properly contained and comprehensive operations and maintenance plans have been, or are in the process of being, implemented for those facilities where asbestos is present. The Company does not believe that future compliance with environmental and health and safety laws and regulations by the Company and RTS will have any material adverse effect on the Company's results of operations or financial condition. However, environmental, health and safety laws and regulations are becoming increasingly stringent. Consequently, unforeseen expenditures required to comply with such laws and regulations, including remediation costs, or unforeseen environmental liabilities could have a material adverse effect on the Company's financial condition or results of operations. In addition, the Company cannot with certainty assess at this time the impact upon its and RTS' operations or capital expenditure requirements of the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act. However, although there can be no assurance, the Company believes that any such impact or capital expenditures will not have a material adverse effect on the Company's financial condition or results of operations. The Company may choose to modify or replace the coal fired boilers at two of its facilities in order to operate cost effectively while complying with emissions regulations under the Clean Air Act. The Company estimates these improvements will cost approximately $3.0 million; however, the Company may spend more on these improvements to reduce its energy costs at such facilities. In addition, the Company estimates that it will spend an additional $0.5 million for capital expenditures during fiscal 1998 in connection with other matters relating to environmental compliance. The Company has been identified as a potentially responsible party ("PRP") at ten Superfund sites pursuant to CERCLA or comparable state statutes. Except with respect to the Muncie Racetrack site ("Muncie Site"), no remediation costs or allocations have been determined with respect to such sites. With respect to the Muncie Site, approximately $3.2 million has been spent to date by certain PRPs other than the Company in connection with soil remediation activities and studies. The Company was notified of its final allocation of liability of approximately $9,300 on September 23, 1996 for the surface contamination at the site. This amount represents 0.3% of the site remediation costs. The Company believes that no further soil remediation activities will be required. However, additional costs may be required in connection with the investigation and remediation of groundwater contamination, and the Company does not currently have sufficient information to estimate such costs. In addition, a water treatment lagoon at one of the Company's facilities is included with an adjacent former landfill owned by a third party that is being investigated as a CERCLA site for potential addition to the National Priority List ("NPL"). Based upon information currently available, the Company believes that it has no material liability at this site. However, there can be no assurance that such lagoon, together with the landfill, will not be added to the NPL as a Superfund site or that the Company will not be required to conduct some remediation in the future. -6- 7 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 the Company's financial condition or results of operations. On December 1, 1995, a suit was filed by a private party against, among others, the Company in the United States District Court for the Western District of Michigan alleging that the Company is jointly and severally liable under federal and state law for the release of certain hazardous materials at the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site. No specific amounts have been asserted by the plaintiff with respect to this matter, however, the eventual amounts could be material. The Company has responded to and denies any liability with respect to this matter and is vigorously defending against these claims. The Company cannot currently predict whether the plaintiff will prevail on its claims or the magnitude of any potential recovery, if any. EMPLOYEES At September 30, 1997, the Company had 8,415 employees (including employees of the Company leased by the Company to RTS), of whom 6,514 were hourly and 1,901 were salaried. Approximately 3,393 of the Company's hourly employees are covered by union collective bargaining agreements, which generally have three-year terms. The Company has not experienced any work stoppages in the past 10 years, and management believes that the Company's relations with its employees are good. -7- 8 ITEM 2. PROPERTIES The following table sets forth certain information with respect to the Company's paperboard mills:
Fiscal 1997 Production Location of Mill Capacity (in tons) Paperboard Produced ---------------- ------------------ ------------------- St. Paul, MN* ...............180,000 Recycled corrugating medium Battle Creek, MI.............128,000 Clay-coated recycled paperboard Dallas, TX...................160,000 Clay-coated and uncoated recycled paperboard Lynchburg, VA................140,000 Uncoated recycled paperboard St. Paul, MN*................145,000 Clay-coated recycled paperboard Chattanooga, TN..............122,000 Uncoated recycled paperboard Otsego, MI....................92,000 Uncoated recycled paperboard Sheldon Springs, VT (Missisquoi Mill)..........84,000 Clay-coated recycled paperboard Eaton, IN.....................60,000 Uncoated recycled paperboard Cincinnati, OH................53,000 Uncoated recycled paperboard Stroudsburg, PA...............51,000 Clay-coated recycled paperboard
----------------- * Comprises one paperboard mill. In addition to the paperboard mills set forth above, the Company also operates 40 converting facilities, 14 paper recovery facilities and one distribution facility in 18 states (mainly in the Southwestern, Southeastern, Midwestern and Northeastern U.S.) and Canada. Of the Company's facilities, the Company owns 57 and leases 8. The Company's principal executive offices are located in Norcross, Georgia, in buildings owned by the Company. The Company believes that its existing production capacity is adequate to service existing demand for the Company's products. The Company considers its plants and equipment to be in good condition. ITEM 3. LEGAL PROCEEDINGS The Company is a party to litigation incidental to its business from time to time. The Company is not currently a party to any litigation that management believes, if determined adversely to the Company, would have a material adverse effect on the Company's results of operations or financial condition. For additional information regarding litigation to which the Company is a party, which information is incorporated into this item by reference, see "Item 1 - Business - Environmental Regulation." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -8- 9 ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
Name Age Positions Held ---- --- -------------- Bradley Currey, Jr............................ 67 Chairman of the Board, Chief Executive Officer and Director Jay Shuster................................... 43 President, Chief Operating Officer and Director Edward E. Bowns............................... 54 Executive Vice President and General Manager of Industrial Products Group* David E. Dreibelbis........................... 45 Executive Vice President and General Manager of the Mill Group* David C. Nicholson............................ 43 Senior Vice President, Chief Financial Officer and Secretary Russell M. Currey............................. 36 Senior Vice President of Marketing and Planning Paul England.................................. 42 Executive Vice President and General Manager of the Uncoated Paperboard Division Nicholas G. George............................ 47 Executive Vice President and General Manager of the Folding Carton Division James K. Hansen............................... 59 Executive Vice President and General Manager of the Coated Paperboard Division R. Evan Hardin................................ 35 Treasurer John H. Morrison.............................. 54 Executive Vice President and General Manager of the Corrugated Packaging and Display Division Paul G. Saari................................. 42 Vice President of Finance John D. Skelton II............................ 43 Executive Vice President and General Manager of the Plastic Packaging Division Alford L. Smith............................... 56 Executive Vice President and General Manager of Laminated Paperboard Products Division Richard E. Steed.............................. 46 President and Chief Executive Officer of RTS
- ------------------------------------------------------------- * The Mill Group consists of the Recycled Fiber, Uncoated Paperboard and Coated Paperboard Divisions and the Industrial Products Group consists of the Laminated Paperboard Products, Plastic Packaging and Corrugated Packaging and Display Divisions and RTS. Bradley Currey, Jr. has served as Chief Executive Officer of the Company since January 1989 and Chairman of the Board since July 1993. Mr. Currey served as President of the Company from 1978 until October 1995. He has been a director of the Company since 1967. Mr. Currey joined the Company in 1976 and prior to that time was Executive Vice President and a director of Trust Company Bank of Georgia (currently SunTrust Bank, Atlanta). Mr. Currey is also a director of Genuine Parts Co., an auto parts wholesaler, and Poe & Brown, Inc., an insurance agency. Mr. Currey is the father of Russell M. Currey and brother of Robert B. Currey, a director of the Company. -9- 10 Jay Shuster has served as President of the Company since October 1995 and Chief Operating Officer of the Company since June 1991. Mr. Shuster served as an Executive Vice President of the Company from June 1991 until October 1995. Mr. Shuster was elected a director of the Company in January 1992. From January 1989 until June 1991, Mr. Shuster was Executive Vice President and General Manager of the Consumer Packaging Group. Mr. Shuster served as Executive Vice President and General Manager of the Folding Carton Division from December 1986 until January 1989. Mr. Shuster joined the Company in May 1979. Edward E. Bowns has served as Executive Vice President and General Manager of the Industrial Products Group since November 1990. From February 1986 until November 1990, Mr. Bowns served as Executive Vice President and General Manager of the Partition Division. Mr. Bowns joined the Company in October 1980. David E. Dreibelbis has served as Executive Vice President and General Manager of the Mill Group since September 1992. From July 1985 until September 1992, Mr. Dreibelbis was Executive Vice President and General Manager of the Recycled Fiber Division. Mr. Dreibelbis joined the Company in April 1979. David C. Nicholson has served as Senior Vice President of the Company since September 1994 and as Chief Financial Officer and Secretary of the Company since December 1986. Mr. Nicholson served as Vice President of the Company from December 1986 to September 1994. Mr. Nicholson joined the Company in November 1983 and has served in various other capacities, including Treasurer from December 1986 until January 1988, Controller and Director of Mergers and Acquisitions. Russell M. Currey has served as Senior Vice President of Marketing and Planning since December 1994. Mr. Currey served as Executive Vice President and General Manager of the Recycled Fiber Division from September 1992 until December 1994. From February 1990 until September 1992, Mr. Currey served as Manager of Strategic Development for the Mill Group. From July 1986 until February 1990, he was General Manager of one of the Company's recycled fiber plants. Mr. Currey joined the Company in July 1983. Mr. Currey is the son of Bradley Currey, Jr. and the nephew of Robert B. Currey, a director of the Company. Paul England has served as Executive Vice President and General Manager of the Uncoated Paperboard Division since September 1997. Mr. England served as Executive Vice President and General Manager of the 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 the Company's paperboard mills. Mr. England joined the Company in September 1989. Nicholas G. George has served as Executive Vice President and General Manager of the Folding Carton Division since June 1991. From January 1991 until June 1991 he was Vice President and General Sales Manager of the Folding Carton Division. From July 1986 until January 1991, he was Vice President of Folding Sales, Western Area. Mr. George joined the Company in May 1980. James K. Hansen has served as Executive Vice President and General Manager of the Coated Paperboard Division since September 1997. Mr. Hansen served as Executive Vice President and General Manager of the Mill Division from May 1990 until September 1997. From 1984 until May 1990, he was General Manager of one of the Company's paperboard mills. Mr. Hansen joined the Company in April 1979. R. Evan Hardin has served as Treasurer of the Company since September 1994. Mr. Hardin joined the Company in March 1988 and has served in various other capacities, including Assistant Treasurer and Financial Analyst. -10- 11 John H. Morrison has served as Executive Vice President and General Manager of the Corrugated Packaging and Display Division since March 1986. From 1967 until March 1986, Mr. Morrison was employed by Union Camp Corporation, serving in various capacities, including General Manager of a corrugated manufacturing plant. Paul G. Saari has served as Vice President Finance of the Company since July 1994 and as Assistant Secretary of the Company since January 1988. From February 1988 to July 1994 he served as Treasurer of the Company and from June 1987 until February 1988, Mr. Saari served as Controller of the Company. Mr. Saari joined the Company in August 1984. John D. Skelton II has served as Executive Vice President and General Manager of the Plastic Packaging Division since December 1991. From January 1991 until December 1991, he served as Vice President of Folding Carton Sales, Western Area. From 1981 until 1991, Mr. Skelton served as General Manager of several of the Company's plants. Mr. Skelton joined the Company in July 1976. Alford L. Smith has served as Executive Vice President and General Manager of the Laminated Paperboard Products Division since December 1988. From January 1988 until December 1988, he was Vice President of Sales of the Laminated Paperboard Products Division. Mr. Smith joined the Company in March 1987. 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 the Partition Division. From December 1986 until December 1991, Mr. Steed served as Executive Vice President and General Manager of the Plastic Packaging Division. Mr. Steed joined the Company in December 1975. All executive officers of the Company are elected annually by and serve at the discretion of either the Board of Directors, or the Chairman of the Board or the President, of the Company. Mr. Steed is elected annually and serves at the discretion of the Managing Board of RTS. -11- 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The dividend and market price information under the heading "Financial and Operating Highlights" on page 2, and the shareholder information under the heading "Shareholder Information -- Common Stock" on page 50, of the Annual Report to Shareholders for the year ended September 30, 1997 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, 1993 through 1997 on page 17 of the Annual Report to Shareholders for the year ended September 30, 1997 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 18 through 27 of the Annual Report to Shareholders for the year ended September 30, 1997 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Registrant and its subsidiaries included in the Annual Report to Shareholders for the year ended September 30, 1997 are incorporated herein by reference: Consolidated Statements of Income for the years ended September 30, 1997, 1996 and 1995. Consolidated Balance Sheets as of September 30, 1997 and 1996. Consolidated Statements of Shareholders' Equity for the years ended September 30, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. The information in Note 11, "Financial Results by Quarter (Unaudited)" on page 46 of the Annual Report to Shareholders for the year ended September 30, 1997 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. -12- 13 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 2001," "Nominee for Election -- Term Expiring 1999," "Incumbent Directors - Term Expiring 2000" and "Incumbent Directors - Term Expiring 1999" in the Proxy Statement for the Annual Meeting of Shareholders to be held January 22, 1998 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 "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 22, 1998 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" and "Pension Plan Table" and the section entitled "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement for the Annual Meeting of Shareholders to be held January 22, 1998 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 22, 1998 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 January 22, 1998 is incorporated herein by reference. -13- 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements of Rock-Tenn Company and its consolidated subsidiaries and the Report of the Independent Auditors, included in the Registrant's Annual Report to Shareholders for the year ended September 30, 1997 are incorporated by reference in Part II, Item 8: Report of Independent Auditors. Consolidated Statements of Income for the years ended September 30, 1997, 1996 and 1995. Consolidated Balance Sheets as of September 30, 1997 and 1996. Consolidated Statements of Shareholders' Equity for the years ended September 30, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. 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 ------- 2.1 -- Asset Acquisition Agreement by and between Rock-Tenn Converting Company, a wholly owned subsidiary of the Registrant, and Alliance Display and Packaging Company dated January 31, 1995 (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K executed as of February 6, 1995). 2.2 -- Stock Purchase Agreement, dated January 21, 1997 between Rock-Tenn Company and the Shareholders of Wabash Corporation (incorporated by reference to the Registrant's Current Report on Form 8-K/A dated January 21, 1997). 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).
-14- 15 3.2 -- Articles of Amendment to the Registrant's Restated and Amended Articles of Incorporation (incorporated by reference to Exhibit 2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0- 23340). 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 January 21, 1997, by and among Rock-Tenn Company, SunTrust Bank, Atlanta and the other banks and lending institutions party to such Credit Agreement from time to time. 4.2 -- First Amendment to Credit Agreement dated February 20, 1997, by and among Rock- Tenn Company, SunTrust Bank, Atlanta, in its capacity as a Lender, and SunTrust Bank, Atlanta, in its capacity as agent for the Lenders. 4.3 -- Second Amendment to Credit Agreement dated June 6, 1997, by and among Rock-Tenn Company, the Lenders under the Credit Agreement and SunTrust Bank, Atlanta. 4.4 -- Agreement to Provide Other Debt Instruments. 10.1 -- ISO Stock Option Plan (incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 10.2 -- Rock-Tenn Company 1987 Stock Option Plan (incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 10.3 -- 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). 10.4 -- 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). 10.5 -- Rock-Tenn Company Key Employee Incentive Bonus Plan as amended on October 27, 1994 (incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1994, Commission File No. 0-23340). 10.6 -- Rock-Tenn Company Supplemental Executive Retirement Plan Effective as of October 1, 1994 (incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1994, Commission File No. 0- 23340). 10.7 -- Demand Promissory Note for $18,500,000, dated January 31, 1995, between the Registrant and Alliance Display and Packaging Company (incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0-23340). 10.8 -- Joint Venture Agreement, dated September 5, 1997 between Rock-Tenn Company, Rock-Tenn Partition Company, Sonoco Products Company and Sonoco Partitions, Inc. 10.9 -- Contribution Agreement, dated as of September 5, 1997 by and among Rock-Tenn Company, Rock-Tenn Partition Company and RTS Packaging, LLC.
-15- 16 10.10 -- Amended and Restated Operating Agreement of RTS Packaging, LLC, dated as of September 5, 1997 between Rock-Tenn Partition Company and Sonoco Partitions, Inc. 10.11 -- Consulting Agreement, dated January 21, 1997, between Eugene U. Frey and the Company. 11 -- Statement re: Computation of Earnings Per Share. 12 -- Statement re: Computation of Ratio of Earnings to Fixed Changes. 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. 27 -- Financial Data Schedule. 99 -- Audited Financial Statements for the Rock-Tenn Company 1993 Employee Stock Purchase Plan for the years ended September 30, 1997, 1996 and 1995. (B) REPORTS ON FORM 8-K Not applicable. (C) SEE ITEM 14(A)(3) AND SEPARATE EXHIBIT INDEX ATTACHED HERETO. (D) NOT APPLICABLE.
-16- 17 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 By: /s/ BRADLEY CURREY, JR. -------------------------- Bradley Currey, Jr. Chairman of the Board and Chief Executive Officer Date: December 17, 1997 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/ BRADLEY CURREY, JR. Principal Executive Officer and December 19, 1997 - ------------------------------ Director, Chairman of the Bradley Currey, Jr. Board and Chief Executive Officer /s/ DAVID C. NICHOLSON Principal Financial and December 19, 1997 - ------------------------------ Accounting Officer, Senior David C. Nicholson Vice President, Chief Financial Officer and Secretary /s/ STEPHEN G. ANDERSON Director December 19, 1997 - ------------------------------ Stephen G. Anderson /s/ J. HYATT BROWN Director December 19, 1997 - ------------------------------ J. Hyatt Brown /s/ MARY LOUISE MORRIS BROWN Director December 19, 1997 - ------------------------------ Mary Louise Morris Brown /s/ ROBERT B. CURREY Director December 19, 1997 - ------------------------------ Robert B. Currey
-17- 18 /s/ EUGENE U. FREY Director December 19, 1997 - -------------------------------- Eugene U. Frey /s/ JOHN D. HOPKINS Director December 19, 1997 - -------------------------------- John D. Hopkins /s/ JAMES W. JOHNSON Director December 19, 1997 - -------------------------------- James W. Johnson /s/ RANDOLPH SEXTON Director December 19, 1997 - -------------------------------- Randolph Sexton /s/ JAY SHUSTER Director December 19, 1997 - -------------------------------- Jay Shuster /s/ JOHN W. SPIEGEL Director December 19, 1997 - -------------------------------- John W. Spiegel /s/ LAWRENCE L. GELLERSTEDT, JR. Director December 19, 1997 - -------------------------------- Lawrence L. Gellerstedt, Jr.
-18- 19 INDEX TO EXHIBITS
Exhibit Sequentially Number Description of Exhibits Numbered Page - ------ ----------------------- ------------- 2.1 -- Asset Acquisition Agreement by and between Rock-Tenn Converting Company, a wholly owned subsidiary of the Registrant, and Alliance Display and Packaging Company dated January 31, 1995 (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K executed as of February 6, 1995). 2.2 -- Stock Purchase Agreement, dated January 21, 1997 between Rock-Tenn Company and the Shareholders of Wabash Corporation (incorporated by reference to the Registrant's Current Report on Form 8-K/A dated January 21, 1997). 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 2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0-23340). 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 January 21, 1997, by and among Rock- Tenn Company, SunTrust Bank, Atlanta and the other banks and lending institutions party to such Credit Agreement from time to time. 4.2 -- First Amendment to Credit Agreement dated February 20, 1997, by and among Rock-Tenn Company, SunTrust Bank, Atlanta, in its capacity as a Lender, and SunTrust Bank, Atlanta, in its capacity as agent for the Lenders. 4.3 -- Second Amendment to Credit Agreement dated June 6, 1997, by and among Rock-Tenn Company, the Lenders under the Credit Agreement and SunTrust Bank, Atlanta. 4.4 -- Agreement to Provide Other Debt Instruments. 10.1 -- ISO Stock Option Plan (incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, File No. 33-73312).
-19- 20
Exhibit Sequentially Number Description of Exhibits Numbered Page - ------ ----------------------- ------------- 10.2 -- Rock-Tenn Company 1987 Stock Option Plan (incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 10.3 -- 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). 10.4 -- 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). 10.5 -- Rock-Tenn Company Key Employee Incentive Bonus Plan as amended on October 27, 1994 (incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1994, Commission File No. 0-23340). 10.6 -- Rock-Tenn Company Supplemental Executive Retirement Plan Effective as of October 1, 1994 (incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1994, Commission File No. 0-23340). 10.7 -- Demand Promissory Note for $18,500,000, dated January 31, 1995, between the Registrant and Alliance Display and Packaging Company (incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0-23340). 10.8 -- Joint Venture Agreement, dated September 5, 1997 between Rock-Tenn Company, Rock-Tenn Partition Company, Sonoco Products Company and Sonoco Partitions, Inc. 10.9 -- Contribution Agreement, dated as of September 5, 1997 by and among Rock-Tenn Company, Rock-Tenn Partition Company and RTS Packaging, LLC. 10.10 -- Amended and Restated Operating Agreement of RTS Packaging, LLC, dated as of September 5, 1997 between Rock- Tenn Partition Company and Sonoco Partitions, Inc. 10.11 -- Consulting Agreement, dated January 21, 1997, between Eugene U. Frey and the Company. 11 -- Statement re: Computation of Earnings Per Share. 12 -- Statements re: Computation of Ratio of Earnings to Fixed Charges
-20- 21
Exhibit Sequentially Number Description of Exhibits Numbered Page - ------ ----------------------- ------------- 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. 27 -- Financial Data Schedule, (for SEC use only). 99 -- Financial Statements for the Rock-Tenn Company 1993 Employee Stock Purchase Plan for the years ended September 30, 1997, 1996 and 1995.
-21- 22 ROCK-TENN COMPANY SCHEDULE II SEPTEMBER 30, 1997 (IN THOUSANDS)
Balance At Charged To Balance At Beginning of Costs and End of Description Period Expenses Other Deductions Period ----------- ------------ ---------- ----- ---------- ----------- YEAR ENDED SEPTEMBER 30, 1997: Allowance for Doubtful Accounts $3,094 $ 188 $ 589(1) $ 239(2) $3,632 Reserve for Facility Closures and Consolidation 640 3,009 7,536(3) 3,531(4) 7,654 YEAR ENDED SEPTEMBER 30, 1996: Allowance for Doubtful Accounts $2,144 $1,522 --- $ 572(2) $3,094 Reserve for Facility Closures and Consolidation --- 1,312 --- 672(4) 640 YEAR ENDED SEPTEMBER 30, 1995: Allowance for Doubtful Accounts $1,361 $1,790 $2,209(5) $3,216(2) $2,144 - -----------------------------
(1) Reserve recorded in connection with Waldorf acquisition (2) Uncollectible accounts written off, net of recoveries (3) Reserve recorded in connection with Waldorf and Davey acquisitions and the formation of RTS Packaging, LLC (4) Amounts paid relating to facility closures and consolidation (5) Reserves recorded in connection with Olympic and Alliance acquisitions -22- EX-4.1 2 CREDIT AGREEMENT 1/21/97 ROCK TENN /SUNTRUST 1 EXHIBIT 4.1 ========================================================== CREDIT AGREEMENT dated as of January 21, 1997 among ROCK-TENN COMPANY, THE LENDERS LISTED HEREIN, and SUNTRUST BANK, ATLANTA as Agent ========================================================== 2 CONTENTS ARTICLE 1. DEFINITIONS; CONSTRUCTION ...................................... 1 Section 1.1. Definitions .............................................. 1 Section 1.2. Accounting Terms and Determination ....................... 19 Section 1.3. Other Definitional Terms ................................. 19 Section 1.4. Exhibits and Schedules ................................... 19 ARTICLE 2. REVOLVING LOANS; COMPETITIVE BID LOANS ......................... 20 Section 2.1. Commitment; Use of Proceeds .............................. 20 Section 2.2. Revolving Credit Notes; Repayment of Principal ........... 20 Section 2.3. Reduction of Revolving Credit and Swing Line Commitments; Mandatory Prepayment......................... 21 Section 2.4. Change In Control of the Borrower ........................ 22 Section 2.5. Extension of Commitments ................................. 22 Section 2.6. Competitive Bid Loans .................................... 23 Section 2.7. Competitive Bid Notes; Repayment of Principal ............ 26 Section 2.8. Limitation on the Amount of Bid Loans .................... 26 Section 2.9. Pro Rata Payments ........................................ 26 ARTICLE 3. SWING LINE FACILITY ............................................ 28 Section 3.1. Swing Line Facility; Use of Proceeds ..................... 28 Section 3.2. Swing Line Note; Repayment of Principal .................. 29 Section 3.3. Voluntary Reduction of Swing Line Commitment ............. 29 Section 3.4. Refunding Swing Line Loans with Proceeds of Mandatory Revolving Loans................................. 29 ARTICLE 4. GENERAL LOAN TERMS ............................................. 31 Section 4.1. Funding Notices .......................................... 31 Section 4.2. Disbursement of Funds .................................... 33 Section 4.3. Interest ................................................. 34 Section 4.4. Interest Periods; Maximum Number of Borrowings ........... 36 Section 4.5. Fees ..................................................... 37 Section 4.6. Effective Date for Adjustment to Facility Fee Percentage and Applicable Margin.......................... 38 Section 4.7. Voluntary Prepayments of Borrowings ...................... 38 Section 4.8. Manner of Payment, Calculation of Interest, Taxes ........ 39 Section 4.9. Interest Rate Not Ascertainable, etc ..................... 42 Section 4.10. Illegality ............................................... 43 Section 4.11. Increased Costs .......................................... 43 Section 4.12. Lending Offices .......................................... 45
- i - 3 Section 4.13. Funding Losses ......................................... 45 Section 4.14. Assumptions Concerning Funding of Eurodollar and Competitive Bid Rate Advances....................... 46 Section 4.15. Apportionment of Payments .............................. 46 Section 4.16. Sharing of Payments, Etc ............................... 47 Section 4.17. Capital Adequacy ....................................... 47 Section 4.18. Limitation on Certain Payment Obligations .............. 48 ARTICLE 5. CONDITIONS TO BORROWINGS ....................................... 49 Section 5.1. Conditions Precedent to Initial Loans................... 49 Section 5.2. Conditions to All Loans. ............................... 51 ARTICLE 6. REPRESENTATIONS AND WARRANTIES ................................. 52 Section 6.1. Corporate Existence; Compliance with Law. .............. 52 Section 6.2. Corporate Power; Authorization. ........................ 52 Section 6.3. Enforceable Obligations. ............................... 52 Section 6.4. No Legal Bar. .......................................... 53 Section 6.5. No Material Litigation. ................................ 53 Section 6.6. Investment Company Act, Etc. ........................... 53 Section 6.7. Margin Regulations. .................................... 53 Section 6.8. Compliance With Environmental Laws. .................... 53 Section 6.9. Insurance. ............................................. 54 Section 6.10. No Default. ............................................ 54 Section 6.11. No Burdensome Restrictions. ............................ 54 Section 6.12. Taxes. ................................................. 55 Section 6.13. Subsidiaries. .......................................... 55 Section 6.14. Financial Statements. .................................. 55 Section 6.15. ERISA. ................................................. 56 Section 6.16. Patents, Trademarks, Licenses, Etc. .................... 57 Section 6.17. Ownership of Property; Liens. .......................... 57 Section 6.18. Indebtedness. .......................................... 57 Section 6.19. Financial Condition. ................................... 58 Section 6.20. Labor Matters. ......................................... 58 Section 6.21. Payment or Dividend Restrictions. ...................... 58 Section 6.22. Disclosure. ............................................ 59 ARTICLE 7. AFFIRMATIVE COVENANTS .......................................... 60 Section 7.1. Corporate Existence, Etc. ............................... 60 Section 7.2. Compliance with Laws, Etc. .............................. 60 Section 7.3. Payment of Taxes and Claims, Etc. ....................... 60 Section 7.4. Keeping of Books. ....................................... 60 Section 7.5. Visitation, Inspection, Etc. ............................ 61 Section 7.6. Insurance; Maintenance of Properties. ................... 61
- ii - 4 Section 7.7. Financial Reports. ..................................... 61 Section 7.8. Notices Under Certain Other Indebtedness. .............. 63 Section 7.9. Notice of Litigation. .................................. 63 Section 7.10. Subsidiary Guarantees. ................................. 64 ARTICLE 8. NEGATIVE COVENANTS .............................................. 65 Section 8.1. Financial Requirements. ................................ 65 Section 8.2. Liens. ................................................. 65 Section 8.3. Limitations on Funded Debt of Restricted Subsidiaries... 67 Section 8.4. Merger and Sale of Assets. ............................. 67 Section 8.5. Transactions with Affiliates. .......................... 69 Section 8.6. Nature of Business. .................................... 69 Section 8.7. Regulations G, T, U and X. ............................. 69 Section 8.8. ERISA Compliance. ...................................... 69 Section 8.9. Limitations on Subsidiaries which are not Restricted Subsidiaries................................. 69 ARTICLE 9. EVENTS OF DEFAULT............................................... 71 Section 9.1. Payments ............................................... 71 Section 9.2. Covenants Without Notice ............................... 71 Section 9.3. Other Covenants ........................................ 71 Section 9.4. Representations ........................................ 71 Section 9.5. Non-Payments of Other Indebtedness ..................... 71 Section 9.6. Defaults Under Other Agreements ........................ 72 Section 9.7. Bankruptcy ............................................. 72 Section 9.8. ERISA .................................................. 72 Section 9.9. Money Judgment ......................................... 73 Section 9.10. Default Under Other Credit Documents ................... 74 ARTICLE 10. THE AGENT...................................................... 75 Section 10.1. Appointment of Agent ................................... 75 Section 10.2. Authorization of Agent with Respect to the Security Documents. .................................... 75 Section 10.3. Nature of Duties of Agent .............................. 76 Section 10.4. Lack of Reliance on the Agent .......................... 76 Section 10.5. Certain Rights of the Agent ............................ 76 Section 10.6. Reliance by Agent ...................................... 77 Section 10.7. Indemnification of Agent ............................... 77 Section 10.8. The Agent in its Individual Capacity ................... 77 Section 10.9. Holders of Notes ....................................... 78 Section 10.10. Successor Agent ........................................ 78
- iii - 5 ARTICLE 11. MISCELLANEOUS...................................................... 79 Section 11.1. Notices ................................................... 79 Section 11.2. Amendments, Etc ........................................... 79 Section 11.3. No Waiver; Remedies Cumulative ............................ 79 Section 11.4. Payment of Expenses, Etc .................................. 80 Section 11.5. Right of Setoff ........................................... 82 Section 11.6. Benefit of Agreement; Assignments and Participations....... 82 Section 11.7. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial....................................... 85 Section 11.8. Independent Nature of Lenders' Rights ..................... 85 Section 11.9. Counterparts .............................................. 85 Section 11.10. Effectiveness; Survival.................................... 86 Section 11.11. Severability............................................... 86 Section 11.12. Independence of Covenants.................................. 86 Section 11.13. Change in Accounting Principles, Fiscal Year or Tax Laws... 86 Section 11.14. Headings Descriptive; Entire Agreement..................... 87 Section 11.15. Disclosure of Confidential Information..................... 87 Section 11.16. Interest................................................... 88
- iv - 6 SCHEDULES Schedule 6.1. Organization and Ownership of Subsidiaries Schedule 6.5. Certain Pending and Threatened Litigation Schedule 6.8. Environmental Compliance Schedule 6.8. Environmental Notices Schedule 6.8. Environmental Permits Schedule 6.11. Burdensome Restrictions Schedule 6.13 Subsidiaries Schedule 6.15 ERISA Matters Schedule 6.16. Patent, Trademark, License, and Other Intellectual Property Matters Schedule 6.17. Ownership of Properties Schedule 6.18. Indebtedness; Liens Schedule 6.20. Labor Matters Schedule 6.21. Dividend Restrictions TABLE OF EXHIBITS Exhibit A Form of Revolving Credit Note Exhibit B Form of Competitive Bid Note Exhibit C Form of Swing Line Note Exhibit D Form of Compliance Certificate Exhibit E Form of Competitive Bid Request Exhibit F Form of Notice of Competitive Bid Request Exhibit G Form of Competitive Bid Exhibit H Form of Competitive Bid Accept/Reject Letter Exhibit I Closing Certificate Exhibit J-1 Form of Opinion of Corporate Counsel Exhibit J-2 Form of Opinion of King & Spalding Exhibit K Form of Assignment and Acceptance Agreement Exhibit L Form of Contribution Agreement Exhibit M Form of Subsidiary Guarantee -v- 7 Table of Definitions Acquired Company, 1 Adjusted LIBO Rate, 1 Advance, 2 Affiliate, 2 Agent, 1, 2 Agreement, 2 Applicable Commitment Percentage, 2 Applicable Margin, 3 Applicable Percentages, 38 Assignment and Acceptance, 3 Available Revolving Credit Commitment, 3 Bankruptcy Code, 3 Base Rate, 3 Base Rate Advance, 3 Borrower, 1, 3 Borrowing, 4 Business Day, 4 Calculation Date, 38 Capital Assets, 4 Capital Lease, 4 Capital Lease Obligation, 4 Change in Control, 4 Change in Control Provision, 4 Closing Date, 5 Commitment, 5 Competitive Bid, 5 Competitive Bid Accept/Reject Letter, 5 Competitive Bid Facility, 5 Competitive Bid Loan, 5 Competitive Bid Note, 5 Competitive Bid Rate, 5 Competitive Bid Rate Advance, 5 Competitive Bid Request, 5 Consenting Lenders, 22 Consolidated Companies, 6 Consolidated Funded Debt, 6 Consolidated Net Income, 6 Consolidated Net Income Available For Fixed Charges, 6 Consolidated Net Loss, 6 Consolidated Net Worth, 6 Continuing Lenders, 23 Contractual Obligation, 6 Contribution Agreement, 7 Cost of Funds Advance, 7 Cost of Funds Rate, 7 Credit Documents, 7 Default, 7 Dollar, 7 -vi- 8 EBITDA, 7 Environmental Laws, 7 Equity Offering, 8 ERISA, 8 ERISA Affiliate, 8 Eurodollar Advance, 8 Event of Default, 8 Executive Officer, 8 Existing Date, 22 Existing Swing Line Lender, 28 Facilities, 8 Facility, 8 Facility Fee, 8, 37 Facility Fee Percentage, 9 Federal Funds Rate, 9 Fee Letter, 9 Financial Officer, 9 Financial Report, 9 Fixed Charges, 10 Funded Debt, 10 GAAP, 10 Guaranty, 10 Hazardous Substances, 10 Income Taxes, 11 Indebtedness, 11 Indebtedness for Borrowed Money, 11 Interest Expense, 12 Interest Period, 12 Interest Rate Contract, 12 Lender, 12 Lenders, 1, 12 Lending Office, 12 LIBOR, 12 Lien, 13 Loans, 13 Margin Regulations, 13 Material, 13 Materially Adverse Effect, 13 Maturity Date, 13 Moody's, 13 Multiemployer Plan, 13 Net Sale Proceeds, 13 New Lender, 23 New Swing Line Lender, 28 Non-Consenting Lenders, 22 Notes, 14 Notice of Borrowing, 14 Notice of Conversion/Continuation, 14 Notice of Conversion/Continuation of Swing Line Loans, 14 Notice of Swing Line Loan, 14 Obligations, 14 -vii- 9 Payment Office, 14 PBGC, 14 Person, 14 Plan, 14 Prior Agreements, 15 Purchase Agreement, 15 Purchase Money Indebtedness, 15 Rating Agency, 15 Reduction, 21 Refunded Swing Line Loans, 30 Regulation D, 15 Required Lenders, 15 Requirement of Law, 15 Restricted Investment, 15 Restricted Subsidiary, 16 Reuters Screen, 16 Revolving Credit Commitment, 16 Revolving Credit Notes, 17 Revolving Loans, 17 Security Documents, 17 Sonoco Joint Venture, 17 Standard & Poor's, 17 Subsidiary, 17 Subsidiary Guarantee, 17 Subsidiary Guarantor, 17 SunTrust, 1 Swing Line Commitment, 17 Swing Line Facility, 18 Swing Line Lender, 18 Swing Line Lender Replacement Date, 28 Swing Line Loans, 18 Swing Line Note, 18 Tax Code, 18 Taxes, 18 Telerate, 18 Total Capitalization, 18 Total Commitments, 18 Type, 18 U.S. Dollar, 7 Unrestricted Subsidiary, 18 Voting Stock, 19 Waldorf Credit Agreement, 19 Waldorf Debt, 67 Waldorf Indenture, 19 -viii- 10 CREDIT AGREEMENT THIS CREDIT AGREEMENT made and entered into as of January 21, 1997, by and among ROCK-TENN COMPANY, a Georgia corporation (the "Borrower"), SUNTRUST BANK, ATLANTA a banking corporation organized under the laws of the State of Georgia ("SunTrust"), the other banks and lending institutions listed on the signature pages hereof, and any assignees of SunTrust or such other banks and lending institutions which become "Lenders" as provided herein (SunTrust, and such other banks, lending institutions, and assignees referred to collectively herein as the "Lenders"), and SUNTRUST BANK, ATLANTA in its capacity as agent for the Lenders (together with any successor agent for such Lenders as may be appointed from time to time pursuant to Article 10. hereof) (the "Agent"); W I T N E S S E T H: WHEREAS, the Borrower has requested that the Lenders make a revolving credit facility and swing line facility available to the Borrower in an amount not to exceed $400,000,000 at any one time outstanding the proceeds of which are to be used for the repayment of certain existing indebtedness of Borrower, for financing the acquisition of Wabash Corporation, a Delaware corporation (the "Acquired Company"), for working capital and for other general corporate purposes; WHEREAS, the Lenders have agreed to make such a credit facility available to the Borrower on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, Borrower, the Lenders and the Agent agree, upon the terms and subject to the conditions set forth herein as follows: ARTICLE 1. DEFINITIONS; CONSTRUCTION SECTION 1.1. DEFINITIONS. In addition to the other terms defined herein, the following terms used herein shall have the meanings herein specified (to be equally applicable to both the singular and plural forms of the terms defined): "Adjusted LIBO Rate" shall mean, with respect to each Interest Period for a Eurodollar Advance, the rate obtained by dividing (A) LIBOR for such Interest Period by (B) a percentage equal to 1 minus the then stated maximum rate (stated as a decimal) of all reserves requirements (including, without limitation, any marginal, emergency, 11 supplemental, special or other reserves) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D (or against any successor category of liabilities as defined in Regulation D). "Advance" shall mean any principal amount advanced and remaining outstanding at any time under (i) the Revolving Loans, which Advances shall be made or outstanding as Base Rate Advances or Eurodollar Advances, as the case may be, (ii) the Swing Line Loans, which Advances shall be made or outstanding as Base Rate Advances, Cost of Funds Advances or Eurodollar Advances, as the case may be, or (iii) the Competitive Bid Loans, which Advances shall be made or outstanding as Competitive Bid Rate Advances. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by, or under common control with, such Person, whether through the ownership of voting securities, by contract or otherwise, excluding the Borrower and its Restricted Subsidiaries. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by", and "under common control with") as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person. "Agent" shall mean SunTrust Bank, Atlanta, a Georgia banking corporation, and any successor agent appointed pursuant to Section 10.10. hereof. "Agreement" shall mean this Credit Agreement, as hereafter amended, restated, supplemented or otherwise modified from time to time. "Applicable Commitment Percentage" shall mean, for each Lender, a fraction, the numerator of which shall be the then amount of such Lender's Commitment and the denominator of which shall be the aggregate amount of the Commitments of all the Lenders, which Applicable Commitment Percentage for each Lender as of the Closing Date is as set forth on the signature pages hereof under the caption "Applicable Commitment Percentage". -2- 12 "Applicable Margin" shall mean the per annum rates set forth across from the Ratio of Consolidated Funded Debt to Total Capitalization as calculated as of the end of the preceding fiscal quarter determined by reference to the table set forth below. Any changes to the Applicable Margin will be effective as of the date specified in Section 4.6..
Ratio of Consolidated Funded Applicable Margin Debt to Total Capitalization >55% .500% >50% but <55% .425% - >45% but <50% .325% - >35% but <45% .275% - >25% but <35% .225% - <25% .175% -
"Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and another financial institution in accordance with the terms of this Agreement and substantially in the form of Exhibit K. "Available Revolving Credit Commitment shall mean at any time the excess, if any, of the Total Commitments over (i) all outstanding Revolving Loans, (ii) all outstanding Competitive Bid Rate Advances, and (iii) all outstanding Swing Line Loans. "Bankruptcy Code" shall mean the Bankruptcy Code of 1978, as amended and in effect from time to time (11 U.S.C. Section 101 et seq.) and any successor statute. "Base Rate Advance" shall mean an Advance made or outstanding as a Swing Line Loan or Revolving Loan, bearing interest based on the Base Rate. "Base Rate" shall mean (with any change in the Base Rate to be effective as of the date of change of either of the following rates) the higher of (i) the rate which the Agent publicly announces from time to time as its prime lending rate, as in effect from time to time, and (ii) the Federal Funds Rate, as in effect from time to time, plus one-half of one percent (0.50%) per annum. The Agent's prime lending rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to customers; the Agent may make commercial loans or other loans at rates of interest at, above or below the Agent's prime lending rate. "Borrower" shall mean Rock-Tenn Company, a Georgia corporation, its succes- -3- 13 sors and permitted assigns. "Borrowing" shall mean the incurrence by Borrower under any Facility of Advances of one Type concurrently having the same Interest Period or the continuation or conversion of an existing Borrowing or Borrowings in whole or in part. "Business Day" shall mean any day excluding Saturday, Sunday and any other day on which banks are required or authorized to close in Atlanta, Georgia and, if the applicable Business Day relates to Eurodollar Advances, excluding any day on which trading is not carried on by and between banks in deposits of the applicable currency in the applicable interbank Eurocurrency market. "Capital Assets" shall mean, collectively, for any Person, all fixed assets, whether tangible or intangible. "Capital Lease Obligation" shall mean, with respect to any Capital Lease, the amount of the obligation of the lessee thereunder which would, in accordance with GAAP, appear on a balance sheet of such lessee in respect of such Capital Lease. "Capital Lease" shall mean, as applied to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on a balance sheet of such Person, other than, in the case of Borrower or any of its Restricted Subsidiaries, any such lease under which Borrower or a wholly-owned Restricted Subsidiary of Borrower is the lessor. "Change in Control" shall mean, as applied to the Borrower, that, during any period of twelve (12) consecutive calendar months (i) more than fifty percent (50%) of the members of the Board of Directors of the Borrower who were members on the first day of such period shall have resigned or been removed or replaced, other than as a result of death, disability, or change in personal circumstances, or (ii) any Person or "Group" (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, but excluding (A) any employee benefit or stock ownership plans of the Borrower, and (B) members of the Board of Directors and executive officers of the Borrower as of the date of this Agreement, members of the immediate families of such members and executive officers, and family trusts and partnerships established by or for the benefit of any of the foregoing individuals) shall have acquired more than fifty percent (50%) of the combined voting power of all classes of common stock of the Borrower, except that the Borrower's purchase of its common stock outstanding on the date hereof which results in one or more of the Borrower's shareholders of record as of the date of this Agreement controlling more than fifty percent (50%) of the combined voting power of all classes of the common stock of the Borrower shall not constitute an acquisition hereunder. -4- 14 "Change in Control Provision" shall mean any term or provision contained in any indenture, debenture, note, or other agreement or document evidencing or governing Indebtedness of Borrower evidencing debt or a commitment to extend credit in excess of $10,000,000 which requires, or permits the holder(s) of such Indebtedness of Borrower to require that such Indebtedness of Borrower be redeemed, repurchased, defeased, prepaid or repaid, either in whole or in part, or the maturity of such Indebtedness of Borrower to be accelerated in any respect, as a result of a change in ownership of the capital stock of Borrower or voting rights with respect thereto. "Closing Date" shall mean January 21, 1997 or such later date on which the initial Loans are made and the conditions set forth in Section 5.1. and 5.2. are satisfied or waived. "Commitment" shall mean, for any Lender at any time, any of its Revolving Credit Commitment, or in the case of the Swing Line Lender, the Swing Line Commitment, as the context may indicate. "Competitive Bid Accept/Reject Letter" shall mean a notification made by the Borrower pursuant to Section 2.6. substantially in the form of Exhibit H. "Competitive Bid Facility" shall mean the facility established pursuant to Section 2.6. "Competitive Bid Loan" shall mean a Loan made up of Advances by all of those Lenders whose Competitive Bids have been accepted by the Borrower pursuant to the same Competitive Bid Request under the bidding procedure described in Section 2.6. for the same Interest Period and interest rate (with the understanding that two Competitive Bid Loans may be made pursuant to a single Competitive Bid Request). "Competitive Bid Note" shall mean a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit B hereto, evidencing the indebtedness of the Borrower to such Lender with respect to outstanding Competitive Bid Rate Advances made by such Lender pursuant to this Agreement, either as originally executed or as it may be from time to time supplemented, modified, amended, renewed or extended. "Competitive Bid Rate Advance" shall mean an Advance made by a Lender to the Borrower pursuant to the bidding procedure described in Section 2.6. "Competitive Bid Rate" shall mean, as to any Competitive Bid made by a Lender pursuant to Section 2.6., the fixed rate of interest per annum offered by the Lender making the Competitive Bid for the relevant Interest Period. "Competitive Bid Request" shall mean a request made by the Borrower pursuant -5- 15 to Section 2.6. substantially in the form of Exhibit E. "Competitive Bid" shall mean an offer by a Lender to make a Competitive Bid Loan pursuant to Section 2.6. "Consolidated Companies" shall mean, collectively, Borrower and all of its Restricted Subsidiaries. "Consolidated Funded Debt" shall mean the Funded Debt of the Borrower and its Restricted Subsidiaries on a consolidated basis. "Consolidated Net Income" shall mean the net income of the Borrower and its Restricted Subsidiaries on a consolidated basis as defined according to GAAP after excluding (to the extent included in net income) the sum of (i) any net loss or any undistributed net income of any non-majority owned Subsidiary, (ii) the net income or loss of any Restricted Subsidiary for any period prior to the date it became a Restricted Subsidiary, (iii) the gain or loss (net of any tax effect) resulting from the sale of any Capital Assets other than in the ordinary course of business of the Borrower and its Restricted Subsidiaries, and (iv) other extraordinary items, as defined by GAAP, of the Borrower and its Restricted Subsidiaries. "Consolidated Net Income Available For Fixed Charges" shall mean the sum of (i) Consolidated Net Income (or Consolidated Net Loss, as the case may be), (ii) the provision for Income Taxes of the Borrower and its Restricted Subsidiaries, and (iii) Fixed Charges. "Consolidated Net Loss" shall mean the net losses of the Borrower and its Restricted Subsidiaries on a consolidated basis as defined according to GAAP after excluding (to the extent included in net income) the sum of (i) any net loss or any undistributed net income of any non-majority owned Subsidiary (ii) the net income or loss of any Restricted Subsidiary for any period prior to the date it became a Restricted Subsidiary, (iii) the gain or loss (net of any tax effect) resulting from the sale of any Capital Assets other than in the ordinary course of business of the Borrower and its Restricted Subsidiaries, and (iv) other extraordinary items, as defined by GAAP, of the Borrower and its Restricted Subsidiaries. "Consolidated Net Worth" shall mean the stockholders' equity of the Borrower and its Restricted Subsidiaries minus Restricted Investments but only to the extent the Restricted Investments exceed in the aggregate ten percent (10%) of stockholders' equity. For purposes of this definition, stockholders' equity shall be determined on a consolidated basis in accordance with GAAP, as applied on a consistent basis by the Borrower in the calculation of such amounts in the Borrower's most recent Financial Reports. -6- 16 "Contractual Obligation" of any Person shall mean any provision of any security issued by such Person or of any agreement, instrument or undertaking under which such Person is obligated or by which it or any of the property owned by it is bound. "Contribution Agreement" shall mean a Contribution Agreement substantially in the form of Exhibit "L" executed and delivered by one or more Subsidiary Guarantors in favor of the Agent, for the ratable benefit of the Lenders, together with all amendments and supplements thereto. "Cost of Funds Advance" shall mean any Advance hereunder that bears interest based on the Cost of Funds Rate provided, that, such Advances must have an Interest Period of not more than thirty (30) days. "Cost of Funds Rate" shall mean a rate of interest that the Swing Line Lender may quote from time to time in accordance with Section 3.1. hereof that the Swing Line Lender determines in its sole and absolute discretion is the cost incurred by the Swing Line Lender in obtaining the funds to make an Advance hereunder. "Credit Documents" shall mean, collectively, this Agreement, the Notes, the Fee Letter, the Subsidiary Guarantees, the Contribution Agreement, the Security Documents and all other instruments, documents, certificates, agreements and writings executed in connection herewith. "Default" shall mean any event or condition the occurrence of which constitutes or would, with the lapse of time or the giving of notice, or both, constitute an Event of Default. "Dollar" and "U.S. Dollar" and the sign "$" shall mean lawful money of the United States of America. "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, and (iii) depreciation and amortization expense of the Borrower and its Restricted Subsidiaries determined in accordance with GAAP, in each case for the applicable fiscal period, and (b) cash distributions of earnings of Unrestricted Subsidiaries made to a Consolidated Company. "Environmental Laws" shall mean all federal, state, local and foreign statutes and codes or regulations, rules or ordinances issued, promulgated, or approved thereunder, now or hereafter in effect (including, without limitation, those with respect to asbestos or asbestos containing material or exposure to asbestos or asbestos containing material), relating to pollution or protection of the environment and relating to public health and -7- 17 safety, relating to (i) emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial toxic or hazardous constituents, substances or wastes, including without limitation, any Hazardous Substance, petroleum including crude oil or any fraction thereof, any petroleum product or other waste, chemicals or substances regulated by any Environmental Law into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), or (ii) the manufacture, processing, distribution, use, generation, treatment, storage, disposal, transport or handling of any Hazardous Substance, petroleum including crude oil or any fraction thereof, any petroleum product or other waste, chemicals or substances regulated by any Environmental Law, and (iii) underground storage tanks and related piping, and emissions, discharges and releases or threatened releases therefrom. Such Environmental Laws to include, without limitation (i) the Clean Air Act (42 U.S.C. Section 7401 et seq.), (ii) the Clean Water Act (33 U.S.C. Section 1251 et seq.), (iii) the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), (iv) the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), (v) the Comprehensive Environmental Response Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act (42 U.S.C. Section 9601 et seq.), and (vi) all applicable national and local laws or regulations with respect to environmental control. "Equity Offering" means an underwritten public offering of any capital stock of the Borrower, or any debt security convertible into or exchangeable for capital stock of the Borrower, or any debt security issued with a warrant or other instrument conferring upon its owner the right to purchase capital stock of the Borrower, in each case pursuant to an effective registration statement filed with the Securities and Exchange Commission in accordance with the Securities Act of 1933, as amended. "ERISA Affiliate" shall mean, with respect to any Person, each trade or business (whether or not incorporated) which is a member of a group of which that Person is a member and which is under common control within the meaning of the regulations promulgated under Section 414 of the Tax Code. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended and in effect from time to time. "Eurodollar Advance" shall mean an Advance made or outstanding as a Revolving Loan or a Swing Line Loan, as the case may be, bearing interest based on the Adjusted LIBO Rate. "Event of Default" shall have the meaning provided in Article 9. "Executive Officer" shall mean with respect to any Person, the Chief Executive Officer, President, Vice Presidents (if elected by the Board of Directors of such Person), Chief Financial Officer, Treasurer, Secretary and any Person holding comparable offices -8- 18 or duties (if elected by the Board of Directors of such Person). "Facility Fee" shall have the meaning ascribed to it in Section 4.5.(a). "Facility" or "Facilities" shall mean the Revolving Credit Commitments, the Swing Line Facility, or the Competitive Bid Facility, as the context may indicate. "Facility Fee Percentage" shall mean the per annum rates set forth across from the Ratio of Consolidated Funded Debt to Total Capitalization as calculated as of the end of the preceding fiscal quarter determined by reference to the table set forth below. Any changes to the Facility Fee Percentage will be effective as of the date specified in Section 4.6.
Ratio of Consolidated Facility Fee Funded Debt to Total Percentage Capitalization >55% .250% >50% but <55% .200% - >45% but <50% .150% - >35% but <45% .125% - >25% but <35% .100% - <25% .075% -
"Federal Funds Rate" shall mean with respect to any Base Rate Advance, a fluctuating interest rate per annum equal for each day during which such Advance is outstanding to the weighted average of the rates on overnight Federal funds transactions with member banks of the Federal Reserve System arranged by Federal funds brokers, as set forth for each day on Page 4833 of the Telerate at 9:00 a.m. (Atlanta, Georgia time) or if such reporting service is unavailable, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of Atlanta, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent. "Fee Letter"" means that certain letter agreement dated December 6, 1996 between the Borrower and the Agent relating to certain fees from time to time payable by the Borrower to the Agent, together with all amendments and supplements thereto. -9- 19 "Financial Officer" means with respect to the Borrower, any of the Chief Financial Officer, Vice President of Finance, and Treasurer. "Financial Report" means at a specified date, the most recent financial statements of the Borrower and its Restricted Subsidiaries delivered pursuant to Section 7.7. of this Agreement. "Fixed Charges" shall mean the sum of (i) Interest Expense of the Borrower and its Restricted Subsidiaries, (ii) 100% of lease expense of the Borrower and its Restricted Subsidiaries (excluding expenses incurred in respect of Capital Leases) determined in accordance with GAAP, and (iii) preferred stock dividends, if any, of the Borrower and its Restricted Subsidiaries excluding, however, any portion of such dividend paid to the Borrower or a Restricted Subsidiary. "Funded Debt" shall mean, with respect to any Person, without duplication and excluding in the case of the Borrower and its Restricted Subsidiaries intercorporate obligations solely among the Borrower and its Restricted Subsidiaries, all (i) Indebtedness for Borrowed Money of such Person, (ii) Capital Lease Obligations of such Person, and (iii) all obligations under direct or indirect Guaranties in respect of obligations of others of the kinds referred to in clauses (i) and (ii) above; provided, however, that "Funded Debt" shall not include any obligations of the Borrower or its Restricted Subsidiaries with respect to (w) undrawn commercial letters of credit used in the ordinary course of business, (x) currency exchange agreements, (y) Interest Rate Contracts or (z) any Indebtedness deemed to be extinguished under GAAP but for which the Borrower or such Subsidiary remains legally liable. "GAAP" shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Guaranty" shall mean any contractual obligation, contingent or otherwise, of a Person with respect to any Indebtedness or other obligation or liability of another Person, including without limitation, any such Indebtedness, obligation or liability directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable, including contractual obligations (contingent or otherwise) arising through any agreement to purchase, repurchase, or otherwise acquire such Indebtedness, obligation or liability or any security therefor, or any agreement to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, or other financial condition, -10- 20 or to make any payment other than for value received. The amount of any Guaranty shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which guaranty is made or, if not so stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Hazardous Substances" shall have the meaning assigned to that term in the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Acts of 1986. "Income Taxes" shall have the meaning given such term by GAAP. "Indebtedness" of any Person shall mean, without duplication (i) all obligations of such Person which in accordance with GAAP would be shown on the balance sheet of such Person as a liability (including, without limitation, obligations for borrowed money and for the deferred purchase price of property or services, and obligations evidenced by bonds, debentures, notes or other similar instruments); (ii) all Capital Lease Obligations; (iii) all Guaranties of such Person (including the stated amount of undrawn letters of credit); and (iv) Indebtedness of others secured by any Lien upon property owned by such Person, whether or not assumed. Notwithstanding the foregoing, in determining the Indebtedness of any Person, (x) there shall be included all obligations of such Person of the character referred to in clauses (i) through (iv) above deemed to be extinguished under GAAP but for which such Person remains legally liable and (y) any deferred obligations of such Person to make payments on any agreement not to compete which was entered into by such Person in connection with the acquisition of any business shall be reduced by the effective federal and state corporate tax rate applicable to such Person in order to recognize the deductibility of such payments and the resulting reduction of the cash actually expended by the Person to satisfy such obligation. "Indebtedness for Borrowed Money" shall mean, with respect to any Person and without duplication: (a) Indebtedness for money borrowed, including all revolving and term Indebtedness and all other lines of credit; and (b) Indebtedness which (i) is represented by a note payable or drafts accepted, that represent extensions of credit; (ii) constitutes obligations evidenced by bonds, debentures, notes or similar instruments; or (iii) constitutes Purchase Money Indebtedness, conditional sales -11- 21 contracts, title retention debt instruments or other similar instruments upon which interest charges are customarily paid or that are issued or assumed as full or partial payment for property; and (c) Indebtedness that constitutes a Capital Lease Obligation; and (d) all reimbursement obligations under any acceptances or any letters of credit issued in support of Indebtedness of the character described in clauses (a) through (c) above; and (e) all Indebtedness of others of the character described in clauses (a) through (d) above, but only to the extent that such Indebtedness is subject to a Guaranty of such Person. "Interest Expense" shall mean interest expense of the Borrower and its Restricted Subsidiaries determined on a consolidated basis, according to GAAP. "Interest Period" shall mean (i) as to any Eurodollar Advances, the interest period selected by the Borrower pursuant to Section 4.4.(a) hereof, (ii) as to any Competitive Bid Rate Advances, the interest period requested by the Borrower and agreed to by the participating Lenders pursuant to Section 2.6. hereof in conformity with Section 4.4.(b) hereof; and (iii) as to any Cost of Funds Advances, the interest period requested by the Borrower and agreed to by the Swing Line Lender pursuant to Section 3.1. hereof in conformity with Section 4.4.(c) hereof. "Interest Rate Contract" shall mean all interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance and other agreements and arrangements designed to provide protection against fluctuations in interest rates, in each case as the same may be from time to time amended, restated, renewed, supplemented or otherwise modified. "Lender" or "Lenders" shall mean SunTrust, the other banks and lending institutions listed on the signature pages hereof, including, without limitation, the Swing Line Lender, and each assignee thereof, if any, pursuant to Section 11.6.(c), together with their corporate successors. "Lending Office" shall mean for each Lender, the office such Lender may designate in writing from time to time to Borrower and the Agent with respect to each Type of Loan. "LIBOR" shall mean, for any Interest Period, with respect to Eurodollar Advances the offered rate for deposits in U.S. Dollars, for a period comparable to the Interest Period and in an amount comparable to the Agent's portion of such Advances, appearing on the -12- 22 Reuters Screen LIBO Page as of 11:00 A.M. (London, England time) on the day that is two Business Days prior to the first day of the Interest Period. If two or more of such rates appear on the Reuters Screen LIBO Page, the rate for that Interest Period shall be the arithmetic mean of such rates. If the foregoing rate is unavailable from the Reuters Screen for any reason, then such rate shall be determined by the Agent from Telerate Page 3750 or, if such rate is also unavailable on such service, then on any other interest rate reporting service of recognized standing designated in writing by the Agent to Borrower and the other Lenders; in any such case rounded, if necessary, to the next higher 1/100 of 1.0%, if the rate is not such a multiple. "Lien" means any security interest, mortgage, pledge, lien, claim, charge, encumbrance, title retention agreement, lessor's interest under a Capital Lease or analogous instrument, in, of or on any property. "Loans" shall mean, collectively, the Revolving Loans, the Swing Line Loans, and the Competitive Bid Loans. "Margin Regulations" shall mean Regulation G, Regulation T, Regulation U and Regulation X of the Board of Governors of the Federal Reserve System, as the same may be in effect from time to time. "Material" (or words derived therefrom) as used in this Agreement, means the measure of a matter of significance which shall be determined as being an amount equal to the greater of (i) Ten Million Dollars ($10,000,000) or (ii) five percent (5%) of the Consolidated Net Worth. "Materially Adverse Effect" shall mean any Material adverse change in (i) the business, operations, financial condition or assets of the Consolidated Companies, taken as a whole, (ii) the ability of Borrower to perform its obligations under this Agreement, or (iii) the ability of the Consolidated Companies (taken as a whole) to perform their respective obligations, if any, under the Credit Documents. "Maturity Date" shall mean the earlier of (i) January 21, 2002, and (ii) the date on which all amounts outstanding under this Agreement have been declared or have automatically become due and payable pursuant to the provisions of Article 9.; provided, however, that the date listed in subsection (i) above may be extended as provided in Section 2.5. "Moody's" shall mean Moody's Investors Services, Inc. and each of its successors. "Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3) of ERISA. "Net Sale Proceeds" means the aggregate cash proceeds received by any -13- 23 Consolidated Company in respect of any Equity Offering (including, without limitation, any cash received upon the sale or other disposition of any noncash consideration received in any Equity Offering), net of the direct costs relating to such Equity Offering (including, without limitation, legal, accounting and investment banking fees, printing, sales and distribution costs and expenses, and sales commissions), taxes paid or payable as a result thereof. "Notes" shall mean, collectively, the Revolving Credit Notes, the Swing Line Note and the Competitive Bid Notes. "Notice of Borrowing" shall have the meaning provided in Section 4.1.(a)(i). "Notice of Conversion/Continuation of Swing Line Loans" shall have the meaning provided in Section 4.1.(b)(ii). "Notice of Conversion/Continuation" shall have the meaning provided in Section 4.1.(b)(i). "Notice of Swing Line Loan" shall have the meaning provided in Section 4.1.(a)(ii). "Obligations" shall mean all amounts owing to the Agent or any Lender pursuant to the terms of this Agreement or any other Credit Document, including, without limitation, all Loans (including all principal and interest payments due thereunder), fees, expenses, indemnification and reimbursement payments, indebtedness, liabilities, and obligations of the Consolidated Companies, direct or indirect, absolute or contingent, liquidated or unliquidated, now existing or hereafter arising, together with all renewals, extensions, modifications or refinancings thereof. "Payment Office" shall mean with respect to payments of principal, interest, fees or other amounts relating to the Revolving Loans, the Swing Line Loans, the Competitive Bid Loans and all other Obligations, the office specified as the "Payment Office" for the Agent and in the case of the Swing Line Loans, the Swing Line Lender, on the signature page of the Agent and the Swing Line Lender, or such other location as to which the Agent or the Swing Line Lender shall have given written notice to the Borrower. "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor thereto. "Person" shall mean any individual, partnership, firm, corporation, association, joint venture, trust, limited liability company, limited liability partnership, or other entity, or any government or political subdivision or agency, department or instrumentality thereof. -14- 24 "Plan" shall mean any "employee benefit plan" (as defined in Section 3(3) of ERISA), including, but not limited to, any defined benefit pension plan, profit sharing plan, money purchase pension plan, savings or thrift plan, stock bonus plan, employee stock ownership plan, Multiemployer Plan, or any plan, fund, program, arrangement or practice providing for medical (including post-retirement medical), hospitalization, accident, sickness, disability, or life insurance benefits. "Prior Agreements" shall mean, collectively, (i) that certain Revolving Credit Agreement dated as of January 15, 1995 by and between the Borrower and SunTrust and (ii) that certain Revolving Credit Agreement dated as of January 15, 1995 by and between the Borrower and Wachovia Bank of Georgia, N.A. "Purchase Agreement" means that certain Stock Purchase Agreement by and among Borrower and the shareholders of the Acquired Company, dated as of January 21, 1997, as it may be amended on or prior to the Closing Date in accordance with Section 5.1(h) hereof. "Purchase Money Indebtedness" shall mean Indebtedness incurred or assumed for the purpose of financing all or any part of the acquisition cost of any property (excluding trade payables incurred in the ordinary course of business) and any refinancing thereof, in each case entered into in compliance with this Agreement. "Rating Agency" shall mean either Moody's or Standard & Poor's. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System, as the same may be in effect from time to time. "Required Lenders" shall mean at any time, the Lenders holding at least 66 2/3% of the amount of the Total Commitments, whether or not advanced or, following the termination of all of the Commitments, the Lenders holding at least 66 2/3% of the aggregate outstanding Advances at such time. "Requirement of Law" for any Person shall mean any law, treaty, rule or regulation, or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Restricted Investment" means all investments (in cash or by delivery of property) made, directly or indirectly in any Person, whether by acquisition of shares of capital stock, indebtedness or other obligations or securities or by loan, advance, guaranty, capital contribution or otherwise (including, without limitation, the net actual liability of such Person under an Interest Rate Contract not entered into in respect of outstanding Funded Debt of such Person); provided, however, that Restricted Investments shall not -15- 25 mean or include: (i) investments in property to be used or consumed in the ordinary course of business, (ii) investments by the Borrower or its Restricted Subsidiaries in and to Restricted Subsidiaries, including any investment in a corporation which, after giving effect to such investment, will immediately become a Restricted Subsidiary, (iii) investments in commercial paper or other short-term security maturing in 270 days or less from the date of issuance, which at the time of acquisition by the Borrower or its Subsidiary, is accorded the rating of A-2 or better by Standard & Poor's or P-2 or better by Moody's, (iv) investments in direct obligations of the United States of America or any agency or instrumentality of the United States of America, the payment or guarantee of which constitutes a full faith and credit obligation of the United States of America, in either case maturing in three years or less from the date of acquisition thereof, (v) loans or advances in the usual and ordinary course of business to officers, directors and employees for expenses (including moving expenses related to a transfer) incidental to carrying on the business of the Borrower or any Restricted Subsidiary, (vi) receivables arising from the sale of goods and services in the ordinary course of business of the Borrower and its Restricted Subsidiaries, (vii) municipal bonds maturing in three (3) years or less from the date of acquisition thereof and accorded either a long-term or short-term rating no lower than the highest rating category by Standard & Poor's or Moody's, (viii) variable rate preferred stock issued by United States or United Kingdom corporations which are accorded a rating no lower than the third highest rating category by Standard & Poor's or Moody's, (ix) variable rate demand obligations, tax-free preferred stock of United States corporations and other tax exempt investments which mature in three (3) years or less or have variable rate features and are accorded a rating no lower than the third highest rating category by Standard & Poor's or Moody's, (x) certificates of deposit of or drafts accepted by a commercial bank (a) that is organized under the laws of the United States of America or any state thereof, and (b) whose long-term unsecured debt obligations (or the long-term debt obligations of the bank holding company owning all of the capital stock of such bank) shall be rated A2 or better by Moody's or A or better by Standard & Poor's, and (c) that has capital, surplus and undivided profits aggregating in excess of $100,000,000, and (xi) the initial investments made by the Borrower and its Subsidiaries in the Sonoco Joint Venture through the contribution of those assets forming a part of their solid fiber partition business. "Restricted Subsidiary" means (i) any Subsidiary of the Borrower identified as such on Schedule I hereto, (ii) the Acquired Company and any Subsidiaries it owns at the time of the closing of the transaction evidenced by this Agreement, and (iii) any Subsidiary of the Borrower created or acquired after the date of this Agreement other than a Subsidiary which, at the option of the Borrower, is designated in writing by the Borrower to the Agent as being an Unrestricted Subsidiary. "Reuters Screen" shall mean, when used in connection with any designated page and LIBOR, the display page so designated on the Reuter Monitor Money Rates Service -16- 26 (or such other page as may replace that page on that service for the purpose of displaying rates comparable to LIBOR). "Revolving Credit Commitment" shall mean, at any time for any Lender, the amount of such commitment set forth opposite such Lender's name on the signature pages hereof, as the same may be increased or decreased from time to time as a result of any reduction thereof pursuant to Section 2.3., any assignment thereof pursuant to Section 11.6., or any amendment thereof pursuant to Section 11.2. "Revolving Credit Notes" shall mean, collectively, the promissory notes evidencing the Revolving Loans in the form attached hereto as Exhibit A, either as originally executed or as hereafter amended, modified or supplemented. "Revolving Loans" shall mean, collectively, the revolving loans made to the Borrower by the Lenders pursuant to Section 2.1. "Security Documents" shall mean, collectively, each guaranty agreement, mortgage, deed of trust, security agreement, pledge agreement, or other security or collateral document, if any, guaranteeing or securing the Obligations, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Sonoco Joint Venture" shall mean the Delaware limited liability company to be formed by the Subsidiaries of the Borrower and Sonoco Products Company, respectively, to engage in the solid fiber partition business previously conducted separately by the Borrower and Sonoco Products Company. "Standard & Poor's" shall mean Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. and its successors. "Subsidiary" shall mean, with respect to any Person, any corporation or other entity (including, without limitation, limited liability companies, partnerships, joint ventures, limited liability companies, and associations) regardless of its jurisdiction of organization or formation, at least a majority of the total combined voting power of all classes of Voting Stock or other ownership interests of which shall, at the time as of which any determination is being made, be owned by such Person, either directly or indirectly through one or more other Subsidiaries. "Subsidiary Guarantee" shall mean a Subsidiary Guarantee substantially in the form of Exhibit "M" executed and delivered by one or more Subsidiary Guarantors in favor of the Agent, for the ratable benefit of the Lenders, together with all amendments and supplements thereto. "Subsidiary Guarantor" shall mean a Restricted Subsidiary which will execute a Subsidiary Guarantee pursuant to Section 7.10. -17- 27 "Swing Line Commitment" shall mean, at any time for the Swing Line Lender, an amount equal to the Swing Line Commitment set forth on the signature page of the Swing Line Lender, as the same may be increased or decreased from time to time as a result of any assignment thereof pursuant to Section 11.6., or any amendment thereof pursuant to Section 11.2. The Swing Line Commitment shall be part of, subsumed within, and not in addition to the Revolving Credit Commitment of the Swing Line Lender until such Revolving Credit Commitment is reduced to or below $90,000,000, at which time the Swing Line Commitment shall become an independent Commitment hereunder in the amount specified in the preceding sentence. "Swing Line Facility" shall mean, at any time, the Swing Line Commitment, which amount shall not exceed $20,000,000. "Swing Line Lender" shall mean SunTrust and any successor or assignee thereof. "Swing Line Loans" shall mean, collectively, loans made by the Swing Line Lender to the Borrower pursuant to the Swing Line Facility. "Swing Line Note" shall mean a promissory note of the Borrower payable to the order of the Swing Line Lender, in substantially the form of Exhibit C hereto, evidencing the maximum aggregate principal indebtedness of the Borrower to such Swing Line Lender with respect to the Swing Line Commitment, either as originally executed or as it may be from time to time supplemented, modified, amended, renewed or extended. "Tax Code" shall mean the Internal Revenue Code of 1986, as amended and in effect from time to time. "Taxes" shall mean any present or future taxes, levies, imposts, duties, fees, assessments, deductions, withholdings or other charges of whatever nature, including without limitation, income, receipts, excise, property, sales, transfer, license, payroll, withholding, social security and franchise taxes now or hereafter imposed or levied by the United States, or any state, local or foreign government or by any department, agency or other political subdivision or taxing authority thereof or therein and all interest, penalties, additions to tax and similar liabilities with respect thereto. "Telerate" shall mean, when used in connection with any designated page and LIBOR or the Federal Funds Rate, the display page so designated on the Dow Jones Telerate Service (or such other page as may replace that page on that service for the purpose of displaying rates comparable to LIBOR or the Federal Funds Rate). "Total Capitalization" shall mean for the Borrower and its Restricted Subsidiaries on a consolidated basis, the sum of their: (i) Funded Debt and (ii) Consolidated Net Worth. -18- 28 "Total Commitments" shall mean the sum of the Revolving Credit Commitments of all Lenders. "Type" of Borrowing shall mean a Borrowing consisting of Base Rate Advances, Eurodollar Advances, Competitive Bid Rate Advances, or Cost of Funds Advances. "Unrestricted Subsidiary" shall mean any Subsidiary of the Borrower that is not a Restricted Subsidiary. "Voting Stock" shall mean stock of a corporation of a class or classes having general voting power under ordinary circumstances to elect a majority of the board of directors, managers or trustees of such corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by the reason of the happening of any contingency). "Waldorf Credit Agreement" shall mean that certain Credit Agreement dated as of July 5, 1995 among Waldorf Corporation, the banks party thereto and The Chase Manhattan Bank, as administrative agent, as amended and supplemented from time to time. "Waldorf Indenture" shall mean the agreement pursuant to which the Waldorf Debt is issued. SECTION 1.2. ACCOUNTING TERMS AND DETERMINATION. Unless otherwise defined or specified herein, all accounting terms shall be construed herein, all accounting determinations hereunder shall be made, all financial statements required to be delivered hereunder shall be prepared, and all financial records shall be maintained, in accordance with GAAP. In the event of a change in GAAP that is applicable to the Borrower and its Subsidiaries, compliance with the financial covenants contained herein shall continue to be determined in accordance with GAAP as in effect prior to such change; provided, however, that the Borrower and the Required Lenders will thereafter negotiate in good faith to revise such covenants to the extent necessary to conform such covenants to GAAP as then in effect. SECTION 1.3. OTHER DEFINITIONAL TERMS. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Article, Section, Schedule, Exhibit and like references are to this Agreement unless otherwise specified. -19- 29 SECTION 1.4. EXHIBITS AND SCHEDULES. All Exhibits and Schedules attached hereto are by reference made a part hereof. -20- 30 ARTICLE 2. REVOLVING LOANS; COMPETITIVE BID LOANS SECTION 2.1. COMMITMENT; USE OF PROCEEDS. (a) Subject to and upon the terms and conditions herein set forth, each Lender severally agrees to make to Borrower from time to time on and after the Closing Date, but prior to the Maturity Date, Revolving Loans; provided that, immediately after each such Revolving Loan is made, (i) the aggregate principal amount of all Advances comprising Revolving Loans made by such Lender shall not exceed such Lender's Revolving Credit Commitment, and (ii) the aggregate principal amount of all outstanding Revolving Loans plus the aggregate principal amount of all Competitive Bid Rate Advances plus the aggregate principal amount of all outstanding Swing Line Loans, shall not exceed the Total Commitments. (b) Each Revolving Loan shall, at the option of Borrower, be made or continued as, or converted into, part of one or more Borrowings that shall consist entirely of Base Rate Advances or Eurodollar Advances. The aggregate principal amount of each Borrowing of Revolving Loans comprised of Eurodollar Advances shall be not less than $5,000,000 or a greater integral multiple of $1,000,000, and the aggregate principal amount of each Borrowing of Revolving Loans comprised of Base Rate Advances shall be not less than $1,000,000 or a greater integral multiple of $100,000. (c) The proceeds of Revolving Loans shall be used solely for the following purposes: (i) Initially, to repay the Indebtedness outstanding pursuant to the Prior Agreements on the Closing Date; and (ii) All other amounts shall be used by the Borrower and its Subsidiaries for acquisitions, capital expenditures and as working capital and for other general corporate purposes. SECTION 2.2. REVOLVING CREDIT NOTES; REPAYMENT OF PRINCIPAL. (a) The Borrower's obligations to pay the principal of, and interest on, the Revolving Loans to each Lender shall be evidenced by the records of the Agent and such Lender and by the Revolving Credit Note payable to such Lender (or the assignor of such Lender) completed in conformity with this Agreement. (b) All Borrowings outstanding under the Revolving Credit Commitments shall be due and payable in full on the Maturity Date. -21- 31 SECTION 2.3. REDUCTION OF REVOLVING CREDIT AND SWING LINE COMMITMENTS; MANDATORY PREPAYMENT. (a) Upon at least three (3) Business Days' prior telephonic notice (promptly confirmed in writing) to the Agent, Borrower shall have the right, without premium or penalty, to terminate the Revolving Credit Commitments, in part or in whole, provided that any partial termination of the Revolving Credit Commitments pursuant to this Section 2.3. shall be in an amount of at least $1,000,000 and integral multiples of $1,000,000. (b) The Revolving Credit Commitments shall be automatically and permanently reduced in connection with the consummation of any Equity Offering by an amount equal to the lesser of (i) 100% of the Net Sale Proceeds received by the Borrower in respect of any Equity Offering and (ii) an amount necessary to reduce the Total Commitments to $300,000,000 (the "Reduction"). (c) Any reduction of Revolving Credit Commitments pursuant to subsections (a) and (b) of this Section 2.3. shall apply to proportionately, automatically and permanently reduce the Revolving Credit Commitments of each of the Lenders based upon each Lender's Applicable Commitment Percentage. (d) If at any time the aggregate outstanding Competitive Bid Loans, Revolving Loans and, so long as the Swing Line Commitment is part of the Swing Line Lender's Revolving Credit Commitment, Swing Line Loans exceed the Total Commitments, the Borrower shall immediately cause an amount equal to such excess to be applied as follows in the order of priority indicated: First, so long as the Swing Line Commitment is part of the Swing Line Lender's Revolving Credit Commitment, to the prepayment of outstanding Swing Line Loans; Second, to the prepayment of outstanding Revolving Loans; and Third, to the prepayment of outstanding Competitive Bid Loans, such prepayment to be applied to such Loans as designated by the Borrower and, in the event the Borrower fails to designate a Loan, to such Loans with the earliest maturity dates, based upon the remaining terms of their respective Interest Periods, and with respect to Loans with the same Interest Period, pro rata to the Lenders extending such Loans. Any prepayment of Swing Line Loans, Revolving Loans and Competitive Bid Loans pursuant to this Section 2.3. shall be made, insofar as is possible, in such a way as to avoid any funding losses pursuant to Section 4.13. -22- 32 SECTION 2.4. CHANGE IN CONTROL OF THE BORROWER. If (i) any Change in Control occurs hereunder or (ii) any event or condition shall occur or exist which, pursuant to the terms of any Change in Control Provision (other than a Change in Control Provision in the Waldorf Indenture and the Waldorf Credit Agreement) requires or permits the holder(s) of the Indebtedness subject to such Change in Control Provision to require that such Indebtedness be redeemed, repurchased, defeased, prepaid or repaid, in whole or in part, or the maturity of such Indebtedness to be accelerated, then, upon the occurrence of the events described in (i) or (ii) above, the Borrower shall provide notice of the occurrence thereof to the Agent and the Lenders promptly after such occurrence and, on the ninetieth (90th) day after such occurrence, unless the Lenders shall have elected otherwise (such election to be made in their sole and absolute discretion), there shall be an automatic reduction of the Revolving Credit Commitments and the Swing Line Commitments and the Borrower shall repay in full all outstanding Loans, together with all accrued and unpaid interest thereon and Facility Fees due hereunder, and all other amounts owing to the Lenders hereunder. SECTION 2.5. EXTENSION OF COMMITMENTS. (a) The Borrower may, by written notice to the Agent (which shall promptly deliver a copy to each of the Lenders), given not more than sixty (60) days nor less than thirty (30) days prior to any anniversary of the Closing Date while the Revolving Credit Commitments are in effect, request that the Lenders extend the then scheduled Maturity Date (the "Existing Date") for an additional one-year period. Each Lender shall, by notice to the Borrower and the Agent given within fifteen (15) Business Days after the Borrower gives such notice, advise the Borrower and the Agent whether or not such Lender consents to the extension request (and any Lender which does not respond during such 15-Business-Day period shall be deemed to have advised the Borrower that it will not agree to such extension). (b) In the event that, on the 15th Business Day after Borrower gives the notice described in subsection (a) above, not all of the Lenders shall have agreed to extend their Revolving Credit Commitments, the Borrower shall notify each of the consenting Lenders ("Consenting Lenders") of the amount of the Revolving Credit Commitments of the non-extending Lenders ("Non-Consenting Lenders") and each of such Consenting Lenders shall, by notice to the Borrower and the Agent given within ten (10) Business Days after receipt of such notice, advise the Agent and Borrower whether or not such Lender wishes to purchase all or a portion of the Revolving Credit Commitments of the Non-Consenting Lenders (and any Lender which does not respond during such 10-Business-Day period shall be deemed to have rejected such offer). In the event that more than one Consenting Lender agrees to purchase all or a portion of such Revolving Credit -23- 33 Commitments, the Borrower and the Agent shall allocate such Revolving Credit Commitments among such Consenting Lenders so as to preserve, to the extent possible, the relative pro rata shares of the Consenting Lenders of the Revolving Credit Commitments prior to such extension request. If Consenting Lenders do not elect to assume all of the Revolving Credit Commitments of the Non-Consenting Lenders, the Borrower shall have the right to arrange for one or more banks or other lending institutions (any such bank or lending institution being called a "New Lender"), to purchase the Revolving Credit Commitment of any Non-Consenting Lender. Each Non-Consenting Lender shall assign its Revolving Credit Commitment and the Loans outstanding hereunder to the Consenting Lender or New Lender purchasing such Revolving Credit Commitment in accordance with Section 11.6., in return for payment in full of all principal, interest and other amounts owing to such Non-Consenting Lender hereunder, on or before the Existing Date and, as of the effective date of such assignment, shall no longer be a party hereto, provided that each New Lender shall be subject to the approval of the Agent (which approval shall not be unreasonably withheld). If (and only if) Lenders (including New Lenders) holding Revolving Credit Commitments representing at least 60% of the aggregate Revolving Credit Commitments on the date of such extension request shall have agreed in accordance with the terms hereof to such extension (the "Continuing Lenders"), then (i) the Maturity Date shall be extended for one additional year from the Existing Date and (ii) the Commitment of any Non-Consenting Lender which has not been assigned to a Consenting Lender or a New Lender shall terminate (with the result that the amount of the Total Commitments shall be decreased by the amount of such Revolving Credit Commitment), and all Loans of such Non-Consenting Lender shall become due and payable, together with all interest accrued thereon and all other amounts owed to such Non-Consenting Lender hereunder, on the Existing Date applicable to such Lender without giving effect to any extension of the Maturity Date. (c) The effective date of any extension of the Maturity Date shall be the date on which 60% of the Continuing Lenders have agreed to such extension in accordance with the terms of Section 2.5(b). (d) The extension by the Swing Line Lender of its Revolving Credit Commitment pursuant to this Section 2.5. shall automatically extend the Swing Line Commitment. SECTION 2.6. COMPETITIVE BID LOANS (a) In addition to making Revolving Loans pursuant to the Revolving Credit Commitments pursuant to Section 2.1. above, the Lenders may, in their sole discretion and at the request of the Borrower, make Competitive Bid Rate Advances to the Borrower in an amount not to exceed the Available Revolving Credit Commitment. (b) In order to request Competitive Bids, the Borrower shall telecopy to the -24- 34 Agent a duly completed Competitive Bid Request in the form of Exhibit E attached hereto (which may request not more than two Competitive Bids), to be received by the Agent not later than 10:00 a.m. (Atlanta, Georgia) time, four (4) Business Days prior to the proposed Competitive Bid Loan or Loans. A Competitive Bid Request that does not conform substantially to the format of Exhibit E may be rejected in the Agent's sole discretion, and the Agent shall notify the Borrower of such rejection by telecopy not later than 12:00 noon (Atlanta, Georgia time) on the date of receipt. Such request shall in each case refer to this Agreement and specify (i) the date of such Borrowing or Borrowings (which shall be a Business Day) and (ii) the aggregate principal amount thereof which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000, and (iii) the Interest Period requested with respect thereto. Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, the Agent shall invite by telecopy (substantially in the form set forth in Exhibit F attached hereto) the Lenders to bid, subject to the terms and conditions of this Agreement, to make Competitive Bid Rate Advances pursuant to the Competitive Bid Request. (c) Each Lender may, in its sole discretion, make one or more Competitive Bids (but not more than two) to the Borrower responsive to a Competitive Bid Request. Each Competitive Bid by a Lender must be received by the Agent via telecopy, substantially in the form of Exhibit G attached hereto, not later than 11:00 a.m. (Atlanta, Georgia time) on the Business Day of the proposed Competitive Bid Loan. Multiple bids (not to exceed two per Lender) will be accepted by the Agent. Competitive Bids that do not conform substantially to the format of Exhibit G may be rejected by the Agent acting in consultation with the Borrower, and the Agent shall notify the Lender making such nonconforming bid of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and specify (i) the principal amount (which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000) of the Competitive Bid Rate Advance or Advances that the Lender is willing to make to the Borrower, (ii) the Competitive Bid Rate or Rates at which the Lender is prepared to make the Competitive Bid Rate Advance or Advances, and (iii) the Interest Period and the last day thereof. If any Lender shall elect not to make a Competitive Bid, such Lender shall so notify the Agent via telecopy by the time specified above for submitting a Competitive Bid; provided, however, that failure by any Lender to give such notice shall not cause such Lender to be obligated to make any Competitive Bid Rate Advance as part of such Competitive Bid Loan. A Competitive Bid submitted by a Lender pursuant to this paragraph (c) shall be irrevocable (absent manifest error). (d) The Agent shall promptly notify the Borrower by telecopy of all the Competitive Bids made, the Competitive Bid Rate and the principal amount of each Competitive Bid Rate Advance in respect of which a Competitive Bid was made and the identity of the Lender that made each bid. The Agent shall send a copy of all Competitive Bids to the Borrower for its records as soon as practicable after completion -25- 35 of the bidding process set forth in this Section 2.6. (e) The Borrower may, in its sole and absolute discretion, subject only to the provisions of this paragraph (e), accept or reject any Competitive Bid referred to in paragraph (d) above. The Borrower shall notify the Agent by telephone, confirmed by telecopy in the form of a Competitive Bid Accept/Reject Letter, whether and to what extent it has decided to accept or reject any of or all the bids referred to in paragraph (d) above not later than 12:30 p.m. (Atlanta, Georgia time) on the Business Day of the proposed Competitive Bid Loan; provided, however, that (i) the failure by the Borrower to give such notice shall be deemed to be a rejection of all the bids referred to in paragraph (d) above, (ii) the Borrower shall not accept a bid made at a particular Competitive Bid Rate if the Borrower has decided to reject a bid made at a lower Competitive Bid Rate with respect to the same requested Advance, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the Competitive Bid Request, (iv) if the Borrower shall accept a bid or bids made at a particular Competitive Bid Rate but the amount of such bid or bids shall cause the total amount of bids to be accepted by the Borrower to exceed the amount specified in the Competitive Bid Request, then the Borrower shall accept a portion of such bid or bids in an amount equal to the amount specified in the Competitive Bid Request less the amount of all other Competitive Bids accepted with respect to such Competitive Bid Request, which acceptance, in the case of multiple bids at the same Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such bid at such Competitive Bid Rate, and (v) except pursuant to clause (iv) above, no bid shall be accepted for a Competitive Bid Loan unless such Competitive Bid Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further, however, that if a Competitive Bid Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Bid Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner which shall be in the discretion of the Borrower. A notice given by the Borrower pursuant to this paragraph (e) shall be irrevocable. (f) The Agent shall promptly notify each bidding Lender whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate) by telecopy sent by the Agent, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Bid Loan in respect of which its bid has been accepted. (g) A Competitive Bid Request shall not be made within five (5) Business Days after the date of any previous Competitive Bid Request. (h) If the Agent shall elect to submit a Competitive Bid in its capacity as a -26- 36 Lender, it shall submit such bid directly to the Borrower one half of an hour earlier than the time at which the other Lenders are required to submit their bids to the Agent pursuant to paragraph (c) above. (i) Each Lender participating in any Competitive Bid Loan shall make its Competitive Bid Rate Advance available to the Agent on the date specified in the Bid Request at the time and in the manner and subject to the provisions specified in Section 4.2.. (j) The proceeds of each of the Competitive Bid Loans shall be used by the Borrower and its Subsidiaries for acquisitions, capital expenditures and as working capital and for other general corporate purposes. SECTION 2.7. COMPETITIVE BID NOTES; REPAYMENT OF PRINCIPAL. (a) The Borrower's obligations to pay the principal of, and interest on, the Competitive Bid Loans to each Lender shall be evidenced by the records of the Agent and such Lender and by the Competitive Bid Note payable to such Lender (or the assignor of such Lender) completed in conformity with this Agreement. (b) A Competitive Bid Loan shall be due and payable in full on the earlier of (i) the expiration of the applicable Interest Period or (ii) the Maturity Date. SECTION 2.8. LIMITATION ON THE AMOUNT OF BID LOANS. The aggregate outstanding principal amount of all Revolving Loans, all Swing Line Loans and all Competitive Bid Loans at any time shall not exceed the Total Commitments at such time. SECTION 2.9. PRO RATA PAYMENTS. Except as otherwise provided herein, (a) each payment on account of the principal of and interest on the Revolving Loans and fees (other than the fees payable under the Fee Letter, which shall be retained by the Agent) described in this Agreement shall be made to the Agent for the account of the Lenders pro rata based on their Applicable Commitment Percentages, (b) each payment on account of principal of and interest on a Competitive Bid Loan shall be made to the Agent for the account of the Lender making such Competitive Bid Loan, (c) all payments to be made by the Borrower for the account of each of the Lenders on account of principal, interest and fees, shall be made without set-off or counterclaim, and (d) the Agent will promptly distribute payments received by it to the Lenders. If a payment is received by the Agent before 10:00 a.m., Atlanta, Georgia time on a Business Day, the Agent shall distribute each Lender's share of the payment to such Lender before 2:00 p.m., Atlanta, Georgia time on the same day; or if a payment is received by the Agent after 10:00 a.m. Atlanta, Georgia time on a Business -27- 37 Day or is received on a day other than a Business Day, the Agent shall distribute each Lender's share of the payment to such Lender before 2:00 p.m., Atlanta, Georgia time on the next Business Day. If, for any reason, the Agent makes any distribution to any Lender prior to receiving the corresponding payment from the Borrower, and the Borrower's payment is not received by the Agent within three Business Days after payment by the Agent to the Lender, the Lender will, upon written request from the Agent, return the payment to the Agent with interest at the interest rate per annum for overnight borrowing by the Agent from the Federal Reserve Bank for the period commencing on the date the Lender received such payment and ending on, but excluding, the date of its repayment to the Agent. If the Agent advises any Lender of any miscalculation of the amount of such Lender's share that has resulted in an excess payment to such Lender, promptly upon request by the Agent such Lender shall return the excess amount to the Agent with interest calculated as set forth above. Similarly, if a Lender advises the Agent of any miscalculation that has resulted in an insufficient payment to such Lender, promptly upon written request by such Lender the Agent shall pay the additional amount to such Lender with interest calculated as set forth above. In the event the Agent is required to return any amount of principal, interest or fees or other sums received by the Agent after the Agent has paid over to any Lender its share of such amount, such Lender shall, promptly upon demand by the Agent, return to the Agent such share, together with applicable interest on such share. -28- 38 ARTICLE 3. SWING LINE FACILITY SECTION 3.1. SWING LINE FACILITY; USE OF PROCEEDS. (a) Subject to and upon the terms and conditions herein set forth, the Swing Line Lender, from on and after the Closing Date, but prior to the Maturity Date, hereby agrees to make available to the Borrower from time to time, Swing Line Loans which shall not exceed in aggregate principal amount at any time outstanding the Swing Line Commitment. (b) Amount and Terms of Swing Line Loans. Each Swing Line Loan shall, at the option of Borrower, be made or continued as, or converted into, Base Rate Advances, Eurodollar Advances or, to the extent available, Cost of Funds Advances. The aggregate principal amount of each Swing Line Loan comprised of Eurodollar Advances shall be not less than $500,000 or a greater integral multiple of $100,000, and the aggregate principal amount of each Swing Line Loan comprised of Base Rate Advances or Cost of Funds Advances shall be not less than $500,000 or greater integral multiples of $100,000. (c) Use of Proceeds. The proceeds of Swing Line Loans shall be used by the Borrower and its Subsidiaries for acquisitions, capital expenditures and as working capital and for other general corporate purposes. (d) Notification of Availability of Cost of Funds Advance and Cost of Funds Rate. The Swing Line Lender shall have no obligation to make a Cost of Funds Advance. If the Swing Line Lender elects to make a Cost of Funds Advance, it shall notify the Borrower thereof and of the Cost of Funds Rate being offered prior to 11:00 a.m. (Atlanta time) on the Business Day of such requested Advance. If the Borrower does not notify the Swing Line Lender of its acceptance of such Cost of Funds Advance prior to 12:00 noon (Atlanta time) on the date of such requested Advance, the Borrower will be deemed to have rejected the same. (e) Swing Line Lender. If the existing Swing Line Lender (the "Existing Swing Line Lender") is unable or unwilling to make Cost of Funds Advances to the Borrower, the Borrower may, upon the satisfaction of the following conditions, designate a new Swing Line Lender to replace the Existing Swing Line Lender: (i) the Borrower shall provide written notice to the Agent and the Lenders, including the Existing Swing Line Lender, of its intention to proceed under this paragraph (e), which notice shall include (i) the identity of the lending institution selected by the Borrower to be the new Swing Line Lender (the "New Swing Line Lender") and (ii) the date upon which the Borrower intends to effect the replacement of the Existing Swing Line Lender (the "Swing Line Lender Replacement Date"); and -29- 39 (ii) the Borrower shall, on or prior to the Swing Line Lender Replacement Date, repay in full all outstanding Swing Line Loans, together with all accrued and unpaid interest thereon, and all other amounts owing to the Existing Swing Line Lender hereunder relating to its Swing Line Loans. Upon the satisfaction of the foregoing conditions and upon the consummation of the amendment to this Agreement referred to in the next sentence, (x) the Swing Line Commitment shall terminate as to the Existing Swing Line Lender; (y) the Existing Swing Line Lender shall cancel the outstanding Swing Line Note and return it to the Borrower and (z) the New Swing Line Lender shall replace and become vested with all the rights, powers, privileges and duties of the existing Swing Line Lender under this Agreement. Before the new Swing Line Commitment can become effective, it will be necessary to amend the provisions of this Agreement relating to the relationship of the Swing Line Commitment to the Revolving Credit Commitment of the Existing Swing Line Lender as well as Sections 2.3. and 2.4. The Lenders and the Borrower covenant and agree to negotiate such amendment in good faith. SECTION 3.2. SWING LINE NOTE; REPAYMENT OF PRINCIPAL. (a) The Borrower's obligations to pay the principal of, and interest on, the Swing Line Loans to the Swing Line Lender shall be evidenced by the records of the Swing Line Lender and by the Swing Line Note payable to the Swing Line Lender in the amount of the Swing Line Facility. (b) All Borrowings outstanding under the Swing Line Note shall be due and payable in full on the earlier of (i) the expiration of the applicable Interest Period or (ii) on the Maturity Date. SECTION 3.3. VOLUNTARY REDUCTION OF SWING LINE COMMITMENT Upon at least three (3) Business Days' prior telephonic notice (promptly confirmed in writing) to SunTrust and the Agent, Borrower shall have the right, without premium or penalty, to terminate the unutilized portion of the Swing Line Commitment, in part or in whole, provided that any partial termination pursuant to this Section 3.3. shall be in an amount of at least $1,000,000 and integral multiples of $100,000. SECTION 3.4. REFUNDING SWING LINE LOANS WITH PROCEEDS OF MANDATORY REVOLVING LOANS. If (i) any Swing Line Loan shall be outstanding upon the occurrence of an Event of Default, or (ii) after giving effect to any request for a Swing Line Loan or a Revolving Loan, the aggregate principal amount of the Revolving Loans and Swing Line Loans outstanding to the Swing Line Lender would exceed the Swing Line Lender's Revolving -30- 40 Credit Commitment, then each Lender hereby agrees, upon request from the Swing Line Lender, to make a Revolving Loan (which shall be initially funded as a Base Rate Advance) in an amount equal to such Lender's Applicable Commitment Percentage of the outstanding principal amount of the Swing Line Loans (the "Refunded Swing Line Loans") outstanding on the date such notice is given. On or before 11:00 a.m. (local time for the Agent) on the first Business Day following receipt by each Lender of a request to make Revolving Loans as provided in the preceding sentence, each such Lender (other than the Swing Line Lender) shall deposit in an account specified by the Agent to the Lenders from time to time the amount so requested in same day funds, whereupon such funds shall be immediately delivered to the Swing Line Lender (and not the Borrower) and applied to repay the Refunded Swing Line Loans. On the day such Revolving Loans are made, the Swing Line Lender's pro rata share of the Refunded Swing Line Loans shall be deemed to be paid with the proceeds of the Revolving Loans made by the Swing Line Lender. Upon the making of any Revolving Loan pursuant to this clause, the amount so funded shall become due under such Lender's Revolving Credit Note and shall no longer be owed under the Swing Line Note. Each Lender's obligation to make the Revolving Loans referred to in this clause shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever; (ii) the occurrence or continuance of any Default or Event of Default; (iii) any adverse change in the condition (financial or otherwise) of the Borrower or any other Consolidated Company; (iv) the acceleration or maturity of any Loans or the termination of the Revolving Credit Commitments after the making of any Swing Line Loan; (v) any breach of this Agreement by the Borrower or any other Lender; or (vi) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. -31- 41 ARTICLE 4. GENERAL LOAN TERMS SECTION 4.1. FUNDING NOTICES. (a) (i) Whenever Borrower desires to make a Borrowing of Revolving Loans with respect to the Revolving Credit Commitments (other than one resulting from a conversion or continuation pursuant to Section 4.1.(b)), it shall give the Agent prior written notice (or telephonic notice promptly confirmed in writing) of such Borrowing (a "Notice of Borrowing"), such Notice of Borrowing to be given at Agent's Payment Office (x) prior to 11:00 A.M. (local time for the Agent) on the Business Day which is the requested date of such Borrowing in the case of Base Rate Advances, and (y) prior to 12:00 noon (local time for the Agent) three Business Days prior to the requested date of such Borrowing in the case of Eurodollar Advances. Notices received after 12:00 noon shall be deemed received on the next Business Day. Each Notice of Borrowing shall be irrevocable and shall specify the aggregate principal amount of the Borrowing, the date of Borrowing (which shall be a Business Day), and whether the Borrowing is to consist of Base Rate Advances or Eurodollar Advances and (in the case of Eurodollar Advances) the Interest Period to be applicable thereto. (ii) Whenever Borrower desires to obtain a Swing Line Loan under the Swing Line Facility (other than one resulting from a conversion or continuation pursuant to Section 4.1.(b)), it shall give the Swing Line Lender prior written notice (or telephonic notice promptly confirmed in writing) of such Swing Line Loan (a "Notice of Swing Line Loan"), such Notice of Swing Line Loan to be given at its Payment Office (x) prior to 12:00 Noon (local time for the Swing Line Lender) on the Business Day which is the requested date of such Swing Line Loan in the case of Base Rate Advances, (y) prior to 10:00 a.m. (local time for the Swing Line Lender) on the Business Day which is the requested date of such Swing Line Loan in the case of Cost of Funds Advances, and (y) prior to 12:00 noon (local time for the Swing Line Lender) two Business Days prior to the requested date of such Swing Line Loan in the case of Eurodollar Advances. Notices received after 12:00 noon shall be deemed received on the next Business Day. Each Notice of Swing Line Loan shall be irrevocable and shall specify the aggregate principal amount of the Swing Line Loan, the date of Swing Line Loan (which shall be a Business Day), and whether the Swing Line Loan is to consist of Base Rate Advances, Cost of Funds Advances or Eurodollar Advances and (in the case of Eurodollar Advances and Cost of Funds Advances) the Interest Period to be applicable thereto. (iii) Whenever Borrower desires to receive Competitive Bids, it shall follow the procedure set forth in Section 2.6. (b) (i) Whenever Borrower desires to convert all or a portion of an outstanding Borrowing under the Revolving Credit Commitments consisting of Base Rate Advances into a Borrowing consisting of Eurodollar Advances, or to continue -32- 42 outstanding a Borrowing consisting of Eurodollar Advances for a new Interest Period, it shall give the Agent at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each such Borrowing to be converted into or continued as Eurodollar Advances. Such notice (a "Notice of Conversion/Continuation") shall be given prior to 12:00 noon (local time for the Agent) on the date specified at the Payment Office of the Agent. Each such Notice of Conversion/Continuation shall be irrevocable and shall specify the aggregate principal amount of the Advances to be converted or continued, the date of such conversion or continuation and the Interest Period to be applicable thereto. If, upon the expiration of any Interest Period in respect of any Borrowing consisting of Eurodollar Advances, Borrower shall have failed to deliver the Notice of Conversion/Continuation, Borrower shall be deemed to have elected to convert or continue such Borrowing to a Borrowing consisting of Base Rate Advances. So long as any Executive Officer of Borrower has knowledge that any Default or Event of Default shall have occurred and be continuing, no Borrowing may be converted into or continued as (upon expiration of the current Interest Period) Eurodollar Advances unless the Agent and each of the Lenders shall have otherwise consented in writing. No conversion of any Borrowing of Eurodollar Advances shall be permitted except on the last day of the Interest Period in respect thereof. (ii) Whenever Borrower desires to convert all or a portion of an outstanding Swing Line Loan consisting of Base Rate Advances into a Swing Line Loan consisting of Eurodollar Advances or Cost of Funds Advances, or to continue outstanding a Swing Line Loan consisting of Eurodollar Advances or Cost of Funds Advances for a new Interest Period, it shall give the Swing Line Lender prior written notice (or telephonic notice promptly confirmed in writing) of each such Swing Line Loan to be converted into or continued as Eurodollar Advances or Cost of Funds Advances, such notice to be given at least two Business Days in advance thereof, in the case of Eurodollar Advances, or on the same day, in the case of Cost of Funds Advances. Such notice (a "Notice of Conversion/Continuation of Swing Line Loans") shall be given prior to 12:00 noon in the case of Eurodollar Advances, or 10:00 a.m. in the case of Cost of Funds Advances (local time for the Swing Line Lender) on the date specified at the Payment Office of the Swing Line Lender. Each such Notice of Conversion/Continuation of Swing Line Loans shall be irrevocable and shall specify the aggregate principal amount of the Advances to be converted or continued, the date of such conversion or continuation and the Interest Period to be applicable thereto. If, upon the expiration of any Interest Period in respect of any Swing Line Loan consisting of Eurodollar Advances or Cost of Funds Advances, Borrower shall have failed to deliver the Notice of Conversion/Continuation of Swing Line Loans, Borrower shall be deemed to have elected to convert or continue such Swing Line Loan to a Swing Line Loan consisting of Base Rate Advances. So long as any Executive Officer of Borrower has knowledge that any Default or Event of Default shall have occurred and be continuing, no Swing Line Loan may be converted into or continued as (upon expiration of the current Interest -33- 43 Period) Eurodollar Advances or Cost of Funds Advances unless the Swing Line Lender shall have otherwise consented in writing. No continuation or conversion of any Swing Line Loan of Eurodollar Advances or Cost of Funds Advances shall be permitted except on the last day of the Interest Period in respect thereof. (c) Without in any way limiting Borrower's obligation to confirm in writing any telephonic notice, the Agent and the Swing Line Lender may act without liability upon the basis of telephonic notice believed by the Agent or the Swing Line Lender, as the case may be, in good faith to be from Borrower prior to receipt of written confirmation. In each such case, Borrower hereby waives the right to dispute the Agent's or the Swing Line Lender's, as the case may be, record of the terms of such telephonic notice. (d) The Agent shall promptly (and in any event by the same time on the next succeeding Business Day as such notice is received) give each Lender notice by telephone (confirmed in writing) or by telex, telecopy or facsimile transmission of the matters covered by the notices given to the Agent pursuant to this Section 4.1. with respect to the Revolving Credit Commitments. SECTION 4.2. DISBURSEMENT OF FUNDS. (a) No later than 12:00 noon (local time for the Agent) in the case of a Borrowing consisting of Eurodollar Advances and no later than 2:00 p.m. (local time for the Agent) in the case of a Borrowing consisting of Base Rate Advances on the date of each Borrowing pursuant to the Revolving Credit Commitments (other than one resulting from a conversion or continuation pursuant to Section 4.1.(b)(i)), each Lender will make available its Applicable Commitment Percentage of the amount of such Borrowing in immediately available funds at the Payment Office of the Agent. The Agent will make available to Borrower the aggregate of the amounts (if any) so made available by the Lenders to the Agent in a timely manner by crediting such amounts to Borrower's demand deposit account maintained with the Agent or at Borrower's option, by effecting a wire transfer of such amounts to Borrower's account specified by the Borrower, by the close of business on such Business Day. In the event that the Lenders do not make such amounts available to the Agent by the time prescribed above, but such amount is received later that day, such amount may be credited to Borrower in the manner described in the preceding sentence on the next Business Day (with interest on such amount to begin accruing hereunder on such next Business Day). (b) No later than 2:00 p.m. (local time for the Swing Line Lender) on the date of each Swing Line Loan, the Swing Line Lender shall make available to Borrower the requested Swing Line Loan by crediting such amounts to Borrower's demand deposit account maintained with the Agent or at Borrower's option, by effecting a wire transfer of such amounts to Borrower's account specified by the Borrower, by the close of business -34- 44 on such Business Day. (c) No later than 3:00 p.m. (local time for the Agent) on the date of each Competitive Bid Loan, each Lender participating in such Competitive Bid Loan will make available its pro rata share of the amount of such Competitive Bid Loan in immediately available funds at the Payment Office of the Agent. The Agent will make available to Borrower the aggregate of the amounts (if any) so made available by the Lenders to the Agent in a timely manner by crediting such amount to Borrower's demand deposit account maintained with the Agent or at the Borrower's option by effecting a wire transfer of such amounts to Borrower's account specified by the Borrower by the close of business on such Business Day. In the event that Lenders do not make such amounts available to the Agent by the time prescribed above but such amount is received later that day, such amount may be credited to the Borrower in the manner described in the preceding sentence on the next Business Day (with interest on such amount to begin accruing hereunder on such next Business Day). (d) Unless the Agent shall have been notified by any Lender prior to the date of a Borrowing that such Lender does not intend to make available to the Agent such Lender's portion of the Borrowing to be made on such date, the Agent may assume that such Lender has made such amount available to the Agent on such date and the Agent may make available to Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Lender on the date of Borrowing, the Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest at the Federal Funds Rate. If such Lender does not pay such corresponding amount forthwith upon the Agent's demand therefor, the Agent shall promptly notify Borrower, and Borrower shall immediately pay such corresponding amount to the Agent together with interest at the rate specified for the Borrowing which includes such amount paid and any amounts due under Section 4.13. hereof. Nothing in this subsection shall be deemed to relieve any Lender from its obligation to fund its Commitments hereunder or to prejudice any rights which Borrower may have against any Lender as a result of any default by such Lender hereunder. (e) All Borrowings under the Revolving Credit Commitments shall be loaned by the Lenders on the basis of their Applicable Commitment Percentage on the date of such Borrowing. No Lender shall be responsible for any default by any other Lender in its obligations hereunder, and each Lender shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Lender to fund its Commitment hereunder. SECTION 4.3. INTEREST. (a) Borrower agrees to pay interest in respect of all unpaid principal amounts of the Revolving Loans from the respective dates such principal amounts were advanced -35- 45 to maturity (whether by acceleration, notice of prepayment or otherwise) at rates per annum equal to the applicable rates indicated below: (i) For Base Rate Advances--The Base Rate in effect from time to time; and (ii) For Eurodollar Advances--The relevant Adjusted LIBO Rate plus the Applicable Margin. (b) Borrower agrees to pay interest in respect of all unpaid principal amounts of the Swing Line Loans made to Borrower from the respective dates such principal amounts were advanced to maturity (whether by acceleration, notice of prepayment or otherwise) at rates per annum equal to the applicable rates indicated below: (i) For Base Rate Advances--The Base Rate in effect on each day that the Swing Line Loan is outstanding; (ii) For Eurodollar Advances--The relevant Adjusted LIBO Rate plus the Applicable Margin; and (iii) For Cost of Funds Advances--The relevant Cost of Funds Rate plus the Applicable Margin. (c) Borrower agrees to pay interest in respect of all unpaid principal amounts of the Competitive Bid Loans made to Borrower from the respective dates such principal amounts were advanced to maturity (whether by acceleration, notice of prepayment or otherwise) at the Competitive Bid Rate or Rates agreed to by the Borrower and the Lender(s) participating therein for each Competitive Bid Loan. (d) Overdue principal and, to the extent not prohibited by applicable law, overdue interest, in respect of the Revolving Loans, Swing Line Loans and Competitive Bid Loans, and all other overdue amounts owing hereunder, shall bear interest from each date that such amounts are overdue: (i) in the case of overdue principal and interest with respect to all Loans outstanding as Eurodollar Advances, at the greater of (A) the rate otherwise applicable for the then-current Interest Period plus an additional two percent (2.0%) per annum or (B) the rate in effect for Base Rate Advances plus an additional two percent (2.0%) per annum; and (ii) in the case of overdue principal and interest with respect to all other Loans outstanding as Base Rate Advances, or Cost of Funds Advances or Competitive Bid Rate Advances, and all other -36- 46 Obligations hereunder (other than Loans), at a rate equal to the Base Rate plus an additional two percent (2.0%) per annum. (e) Interest on each Loan shall accrue from and including the date of such Loan to but excluding the date of any repayment thereof; provided that, if a Loan is repaid on the same day made, one day's interest shall be paid on such Loan. Interest on all outstanding Base Rate Advances shall be payable quarterly in arrears on the last day of each calendar quarter, commencing on March 31, 1997. Interest on all outstanding Eurodollar Advances and Competitive Bid Rate Advances shall be payable on the last day of each Interest Period applicable thereto, and, in the case of Eurodollar Advances and Competitive Bid Rate Advances having an Interest Period in excess of three months, on each three month anniversary of the initial date of such Interest Period. Interest on all outstanding Cost of Funds Advances shall be payable monthly in arrears on the last day of each Interest Period applicable thereto. Interest on all Loans shall be payable on any conversion of any Advances comprising such Loans into Advances of another Type (other than in connection with the conversion from a Base Rate Loan), prepayment (on the amount prepaid), at maturity (whether by acceleration, notice of prepayment or otherwise) and, after maturity, on demand. (f) The Agent shall promptly notify the Borrower and the other Lenders by telephone (confirmed in writing) or in writing, upon determining the Adjusted LIBO Rate for any Interest Period. Any such determination shall, absent manifest error, be final, conclusive and binding for all purposes. SECTION 4.4. INTEREST PERIODS; MAXIMUM NUMBER OF BORROWINGS. (a) In connection with the making or continuation of, or conversion into, each Borrowing of Eurodollar Advances, Borrower shall select an Interest Period to be applicable to such Eurodollar Advances, which Interest Period shall be either a 1, 2, 3 or 6 month period. (b) In connection with the submission of each Competitive Bid Request, the Borrower may select an Interest Period to be applicable to such Competitive Bid Loan not to exceed 24 months. (c) In connection with the submission of each request for a Cost of Funds Advance, the Borrower may select an Interest Period to be applicable to such Cost of Funds Advance not to exceed 30 days. (d) Notwithstanding paragraphs (a), (b) and (c) of this Section 4.4.: (i) The initial Interest Period for any Borrowing of Eurodollar Advances, Cost of Funds Advances or Competitive Bid Rate -37- 47 Advances shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing consisting of Base Rate Advances) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; (ii) If any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period in respect of Eurodollar Advances would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iii) Any Interest Period in respect of Eurodollar Advances which begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall, subject to part (iv) below, expire on the last Business Day of such calendar month; and (iv) No Interest Period with respect to the Loans shall extend beyond the Maturity Date. (e) At no time shall the combined number of Borrowings outstanding under Articles 2. and 3. exceed eight (8); provided that, for the purpose of determining the number of Borrowings outstanding and the minimum amount for Borrowings resulting from conversions or continuations, all Swing Line Loans comprised of Base Rate Advances shall be considered as one Borrowing, all Swing Line Loans comprised of Cost of Funds Advances shall be considered as one Borrowing, and all Revolving Loans comprised of Base Rate Advances shall be considered as one Borrowing; further provided that, at no time shall more than two (2) Swing Line Loans consisting of Eurodollar Advances be outstanding. SECTION 4.5. FEES. (a) Borrower shall pay to the Agent, for the ratable benefit of each Lender based upon its respective Applicable Commitment Percentage of the Total Commitments, a facility fee (the "Facility Fee") for the period commencing on the Closing Date to and including the Maturity Date, payable quarterly in arrears on the last day of each calendar quarter, commencing on March 31, 1997, and on the Maturity Date, equal to the Facility Fee Percentage multiplied by the average daily amount of the Revolving Credit Commitments, whether or not utilized. -38- 48 (b) Borrower shall pay to the Agent the amounts and on the dates agreed to in the Fee Letter. SECTION 4.6. EFFECTIVE DATE FOR ADJUSTMENT TO FACILITY FEE PERCENTAGE AND APPLICABLE MARGIN. The Facility Fee Percentage and Applicable Margin (collectively "Applicable Percentages" shall be determined and adjusted quarterly on the date by which the Borrower is required to provide the officer's certificate in accordance with the provisions of Section 7.7.(d) (each a "Calculation Date"); provided, however that (i) the initial Applicable Percentages shall assume that the Ratio of Consolidated Funded Debt to Total Capitalization shall be 60% and shall remain at such level until the first Calculation Date subsequent to December 31, 1996, and, thereafter, such level shall be determined by the then current Ratio of Consolidated Funded Debt to Total Capitalization, and (ii) if the Borrower fails to provide the officer's certificate to the Agent by each Calculation Date, the Applicable Percentages from such Calculation Date shall be based on maximum percentage until such time as an appropriate officer's certificate is provided, whereupon the level shall be determined by the then current Ratio of Consolidated Funded Debt to Total Capitalization. Except as set forth above, each Applicable Percentage shall be effective from one Calculation Date until the next Calculation Date. SECTION 4.7. VOLUNTARY PREPAYMENTS OF BORROWINGS. (a) Borrower may, at its option, prepay Borrowings consisting of Base Rate Advances at any time in whole, or from time to time in part, in amounts aggregating $1,000,000 or any greater integral multiple of $100,000, by paying the principal amount to be prepaid together with interest accrued and unpaid thereon to the date of prepayment. Borrowings consisting of Eurodollar Advances or Competitive Bid Rate Advances may be prepaid, at Borrower's option, in whole, or from time to time in part, in amounts aggregating $1,000,000 or an integral multiple of $1,000,000 (except that no partial prepayment may be made if the remaining principal amount outstanding of such Eurodollar Advance which comprises a Revolving Loan or Competitive Bid Rate Advance would be less than $5,000,000), by paying the principal amount to be prepaid, together with interest accrued and unpaid thereon to the date of prepayment, and all compensation payments pursuant to Section 4.13. if such prepayment is made on a date other than the last day of an Interest Period applicable thereto. Each such optional prepayment shall be applied in accordance with Section 4.7.(c) below. (b) Borrower shall give written notice (or telephonic notice confirmed in writing) to the Agent or the Swing Line Lender, as applicable, of any intended prepayment of the Revolving Loans (i) by 11:00 A.M. (local time for the Agent) on the Business Day of any prepayment of Base Rate Advances or Cost of Funds Advances and (ii) not less than three Business Days prior to any prepayment of Eurodollar Advances or Competitive Bid -39- 49 Rate Advances. Such notice, once given, shall be irrevocable. Upon receipt of such notice of prepayment pursuant to the first sentence of this paragraph (b) with respect to any prepayment of Revolving Loans or Competitive Bid Loans, the Agent shall promptly (and in any event by the same time on the next succeeding Business Day as such notice is received) notify each Lender of the contents of such notice and of such Lender's Applicable Commitment Percentage of each Revolving Loan and its pro rata share of each Competitive Bid Loan subject to such prepayment. (c) Borrower, when providing notice of prepayment pursuant to Section 4.7.(b), may designate the Types of Advances and the specific Borrowing or Borrowings which are to be prepaid, provided that (i) if any prepayment of Eurodollar Advances made pursuant to a single Borrowing of the Revolving Loans shall reduce the outstanding Advances made pursuant to such Borrowing to an amount less than $5,000,000, such Borrowing shall immediately be converted into Base Rate Advances; and (ii) each prepayment made pursuant to a single Borrowing shall be applied pro rata among the Loans comprising such Borrowing. In the absence of a designation by Borrower, the Agent or, with respect to the Swing Line Loans, the Swing Line Lender, shall, subject to the foregoing, make such designation in its discretion but using reasonable efforts to avoid funding losses to the Lenders pursuant to Section 4.13. and subject to the last sentence of Section 4.16. All voluntary prepayments shall be applied to the payment of interest then due and owing before application to principal. SECTION 4.8. MANNER OF PAYMENT, CALCULATION OF INTEREST, TAXES (a) (i) Except as otherwise specifically provided herein, all payments under this Agreement and the other Credit Documents, other than the payments specified in clause (ii) below, shall be made without defense, set-off or counterclaim to the Agent not later than 12:00 noon (local time for the Agent) on the date when due and shall be made in Dollars in immediately available funds at the Agent's Payment Office. (ii) All payments under this Agreement with respect to the Swing Line Loans, including the Swing Line Facility Fee, shall be made without defense, set-off or counterclaim to the Swing Line Lender not later than 12:00 noon (local time for the Swing Line Lender) on the date when due and shall be made in Dollars in immediately available funds at the Swing Line Lender's Payment Office. (b) (i) All such payments shall be made free and clear of and without deduction or withholding for any Taxes in respect of this Agreement, the Notes or other Credit Documents, or any payments of principal, interest, fees or other amounts payable hereunder or thereunder (but excluding, except as provided in paragraph (iii) hereof, in the case of each Lender, taxes imposed on or measured by its net income, and franchise taxes and branch profit taxes imposed on it (A) by the jurisdiction under the laws of which such Lender is organized or any political subdivision thereof and, in the case of each Lender, -40- 50 taxes imposed on or measured by its net income, and franchise taxes and branch profit taxes imposed in it, by the jurisdiction of such Lender's appropriate Lending Office or any political subdivision thereof, and (B) by a jurisdiction in which any payments are to be made by any Borrower hereunder, other than the United States of America, or any political subdivision of any thereof, and that would not have been imposed but for the existence of a connection between such Lender and the jurisdiction imposing such taxes (other than a connection arising as a result of this Agreement or the transactions contemplated by this Agreement), except in the case of taxes described in this clause (B), to the extent such taxes are imposed as a result of a change in the law or regulations of any jurisdiction or any applicable treaty or regulations or in the official interpretation of any such law, treaty or regulations by any government authority charged with the interpretation or administration thereof after the date of this Agreement. If any such Taxes are so levied or imposed, Borrower agrees (A) to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every net payment of all amounts due hereunder and under the Notes and other Credit Documents, after withholding or deduction for or on account of any such Taxes (including additional sums payable under this Section 4.8.), will not be less than the full amount provided for herein had no such deduction or withholding been required, (B) to make such withholding or deduction and (C) to pay the full amount deducted to the relevant authority in accordance with applicable law. Borrower will furnish to the Agent and each Lender, within 30 days after the date the payment of any Taxes is due pursuant to applicable law, certified copies of tax receipts evidencing such payment by Borrower. Borrower will indemnify and hold harmless the Agent and each Lender and reimburse the Agent and each Lender upon written request for the amount of any such Taxes so levied or imposed and paid by the Agent or Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or illegally asserted. A certificate as to the amount of such payment by such Lender or the Agent, absent manifest error, shall be final, conclusive and binding for all purposes. (ii) Each Lender that is organized under the laws of any jurisdiction other than the United States of America or any State thereof (including the District of Columbia) agrees to furnish to Borrower and the Agent, prior to the time it becomes a Lender hereunder, two copies of either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001 or any successor forms thereto (wherein such Lender claims entitlement to complete exemption from U.S. Federal withholding tax on interest paid by Borrower hereunder) and to provide to Borrower and the Agent a new Form 4224 or Form 1001 or any successor forms thereto if any previously delivered form is found to be incomplete or incorrect in any material respect or upon the obsolescence of any previously delivered form; provided, however, that no Lender shall be required to furnish a form under this paragraph (ii) after the date that it becomes a Lender hereunder if it is not entitled to claim an exemption from withholding under applicable law. -41- 51 (iii) Borrower shall also reimburse the Agent and each Lender, upon written request, for any Taxes imposed (including, without limitation, Taxes imposed on the overall net income of the Agent or Lender or its applicable Lending Office pursuant to the laws of the jurisdiction in which the principal executive office or the applicable Lending Office of the Agent or Lender is located) as the Agent or Lender shall determine are payable by the Agent or Lender in respect of amounts paid by or on behalf of Borrower to or on behalf of the Agent or Lender pursuant to paragraph (i) hereof. (iv) In addition to the documents to be furnished pursuant to Section 4.8(b)(ii), each Lender shall, promptly upon the reasonable written request of the Borrower to that effect, deliver to the Borrower such other accurate and complete forms or similar documentation as such Lender is legally able to provide and as may be required from time to time by any applicable law, treaty, rule or regulation or any jurisdiction in order to establish such Lender's tax status for withholding purposed or as may otherwise be appropriate to eliminate or minimize any Taxes on payments under this Agreement or the Notes. (v) The Borrower shall not be required to pay any amounts pursuant to Section 4.8(b)(i) or (iii) to any Lender for the account of any Lending Officer of such Lender in respect of any United States withholding taxes payable hereunder (and the Borrower, if required by law to do so, shall be entitled to withhold such amounts and pays such amounts to the United States Government) if the obligation to pay such additional amounts would not have arisen but for a failure by such Lender to comply with its obligations under Section 4.8(b)(ii), and such Lender shall not be entitled to exemption from deduction or withholding of United Stated Federal income tax in respect of the payment of such sum by the Borrower hereunder for the account of such Lending Office for, in each case, any reason other than a change in United States law or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date such Lender became a Lender hereunder. (vi) Within sixty (60) days of the written request of the Borrower, each Lender shall execute and deliver such certificates, forms or other documents, which can be reasonably furnished consistent with the facts and which are reasonably necessary to assist in applying for refunds of Taxes remitted hereunder. (vii) To the extent that the payment of any Lender's Taxes by the Borrower gives rise from time to time to a Tax Benefit (as hereinafter defined) to such Lender in any jurisdiction other than the jurisdiction which imposed such Taxes, such Lender shall pay to the Borrower the amount of each such Tax Benefit so recognized or received. The amount of each Tax Benefit and, therefore, payment to the Borrower will be determined from time to time by the relevant Lender in its sole discretion, which determination shall be binding and conclusive on all parties hereto. Each such payment will be due and payable by such Lender to the Borrower within a reasonable time after the filing of the income tax return in which such Tax Benefit is recognized or, in the case of any tax re- -42- 52 fund, after the refund is received; provided, however, if at any time thereafter such Lender is required to rescind such Tax Benefit or such Tax Benefit is otherwise disallowed or nullified, the Borrower shall promptly, after notice thereof from such Lender, repay to Lender the amount of such Tax Benefit previously paid to the Borrower and rescinded, disallowed or nullified. For purposed of this section, "Tax Benefit" shall mean the amount by which any Lender's income tax liability for the taxable period in question is reduced below what would have been payable had the Borrower not been required to pay the Lender's Taxes. In case of any dispute with respect to the amount of any payment the Borrower shall have no right to any offset or withholding of payments with respect to future payments due to any Lender under this Agreement or the Notes. (c) Subject to Section 4.4.(c)(ii), whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the applicable rate during such extension. (d) All computations of interest and fees shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable (to the extent computed on the basis of days elapsed). Interest on Base Rate Advances shall be calculated based on the Base Rate from and including the date of such Loan to but excluding the date of the repayment or conversion thereof. Interest on Eurodollar Advances, Cost of Funds Advances and Competitive Bid Rate Advances shall be calculated as to each Interest Period from and including the first day thereof to but excluding the last day thereof. Each determination by the Agent of an interest rate or fee hereunder shall be made in good faith and, except for manifest error, shall be final, conclusive and binding for all purposes. (e) Payment by the Borrower to the Agent in accordance with the terms of this Agreement shall, as to the Borrower, constitute payment to the Lenders under this Agreement. SECTION 4.9. INTEREST RATE NOT ASCERTAINABLE, ETC. In the event that the Agent shall have determined (which determination shall be made in good faith and, absent manifest error, shall be final, conclusive and binding upon all parties) that on any date for determining the Adjusted LIBO Rate for any Interest Period, by reason of any changes arising after the date of this Agreement affecting the London interbank market, or the Agent's position in such market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Adjusted LIBO Rate, then, and in any such event, the Agent shall forthwith give notice (by telephone confirmed in writing) to Borrower and to the Lenders, of such -43- 53 determination and a summary of the basis for such determination. Until the Agent notifies Borrower that the circumstances giving rise to the suspension described herein no longer exist, the obligations of the Lenders to make or permit portions of the Revolving Loans and the Swing Line Loans to remain outstanding past the last day of the then current Interest Periods as Eurodollar Advances shall be suspended, and such affected Advances shall bear the same interest as Base Rate Advances. Nothing set forth in this Section 4.9. shall prohibit the Borrower from utilizing the provisions herein relating to Competitive Bid Rate Advances or Cost of Funds Advances. SECTION 4.10. ILLEGALITY. (a) In the event that any Lender or the Swing Line Lender shall have determined (which determination shall be made in good faith and, absent manifest error, shall be final, conclusive and binding upon all parties) at any time that the making or continuance of any Eurodollar Advance or Competitive Bid Rate Advance has become unlawful by compliance by such Lender in good faith with any applicable law, governmental rule, regulation, guideline or order (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), then, in any such event, the Lender shall give prompt notice (by telephone confirmed in writing) to Borrower and to the Agent of such determination and a summary of the basis for such determination (which notice the Agent shall promptly transmit to the other Lenders). (b) Upon the giving of the notice to Borrower referred to in subsection (a) above, (i) Borrower's right to request and such Lender's obligation to make Eurodollar Advances or Competitive Bid Rate Advances shall be immediately suspended, and such Lender shall make an Advance as part of the requested Borrowing of Eurodollar Advances as a Base Rate Advance, which Base Rate Advance, as the case may be, shall, for all other purposes, be considered part of such Borrowing, and (ii) if the affected Eurodollar Advance or Advances are then outstanding, Borrower shall immediately, or if permitted by applicable law, no later than the date permitted thereby, upon at least one Business Day's written notice to the Agent and the affected Lender, convert each such Advance into a Base Rate Advance or Advances, provided that if more than one Lender is affected at any time, then all affected Lenders must be treated the same pursuant to this Section 4.10.(b). SECTION 4.11. INCREASED COSTS. (a) If, by reason of (x) after the date hereof, the introduction of or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in or in the interpretation of any law or regulation, or (y) the compliance with any guideline or request from any central bank or other governmental authority or quasi-governmental authority exercising control over banks or financial institutions generally (whether or not having the force of law): -44- 54 (i) any Lender (or its applicable Lending Office) shall be subject to any tax, duty or other charge with respect to its Eurodollar Advances or Competitive Bid Rate Advances, or its obligation to make such Advances, or the basis of taxation of payments to any Lender of the principal of or interest on its Eurodollar Advances or Competitive Bid Rate Advances or its obligation to make Eurodollar Advances shall have changed (except for changes in the tax on the overall net income of such Lender or its applicable Lending Office imposed by the jurisdiction in which such Lender's principal executive office or applicable Lending Office is located); or (ii) any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender's applicable Lending Office shall be imposed or deemed applicable or any other condition affecting its Eurodollar Advances or Competitive Bid Rate Advances or its obligation to make Eurodollar Advances or Competitive Bid Rate Advances shall be imposed on any Lender or its applicable Lending Office or the London interbank market; and as a result thereof there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining Eurodollar Advances (except to the extent already included in the determination of the applicable Adjusted LIBO Rate for Eurodollar Advances) or Competitive Bid Rate Advances or its obligation to make Eurodollar Advances, or there shall be a reduction in the amount received or receivable by such Lender or its applicable Lending Office, then Borrower shall from time to time (subject, in the case of certain Taxes, to the applicable provisions of Section 4.8.(b)), upon written notice from and demand by such Lender to Borrower (with a copy of such notice and demand to the Agent), pay to the Agent for the account of such Lender within ten (10) Business Days after the date of such notice and demand, additional amounts sufficient to indemnify such Lender against such increased cost. A certificate as to the amount of such increased cost, submitted to Borrower and the Agent by such Lender in good faith and accompanied by a statement prepared by such Lender describing in reasonable detail the basis for and calculation of such increased cost, shall, except for manifest error, be final, conclusive and binding for all purposes. (b) If any Lender shall advise the Agent that at any time, because of the circumstances described in clauses (x) or (y) in Section 4.11.(a) or any other circumstances beyond such Lender's reasonable control arising after the date of this Agreement affecting such Lender or the London interbank market or such Lender's position in such market, the Adjusted LIBO Rate as determined by the Agent will not adequately and fairly reflect the -45- 55 cost to such Lender of funding its Eurodollar Advances or, if applicable, Competitive Bid Rate Advances, then, and in any such event: (i) the Agent shall forthwith give notice (by telephone confirmed in writing) to Borrower and to the other Lenders of such advice; (ii) Borrower's right to request and such Lender's obligation to make or permit portions of the Loans to remain outstanding past the last day of the then current Interest Periods as Eurodollar Advances or Competitive Bid Rate Advances shall be immediately suspended; (iii) in the event the affected Loan is a Revolving Loan, such Lender shall make a Loan as part of the requested Borrowing under the Revolving Loan Commitments of Eurodollar Advances as a Base Rate Advance, which such Base Rate Advance shall, for all other purposes, be considered part of such Borrowing; and (iv) in the event the affected Loan is a Swing Line Loan, the Swing Line Lender shall make a Loan as part of the requested Borrowing under the Swing Line Commitment of Eurodollar Advances as a Base Rate Advance, which such Base Rate Advance shall, for all other purposes, be considered part of such Borrowing. Nothing set forth in this clause (iv) shall prohibit the Borrower from requesting Cost of Funds Advances from the Swing Line Lender. SECTION 4.12. LENDING OFFICES. (a) Each Lender agrees that, if requested by Borrower, it will use reasonable efforts (subject to overall policy considerations of such Lender) to designate an alternate Lending Office with respect to any of its Eurodollar Advances or Competitive Bid Rate Advance, as the case may be, affected by the matters or circumstances described in Sections 4.8.(b), 4.9., 4.10., 4.11. or 4.17. to reduce the liability of Borrower or avoid the results provided thereunder, so long as such designation is not disadvantageous to such Lender as reasonably determined by such Lender, which determination shall be conclusive and binding on all parties hereto. Nothing in this Section 4.12. shall affect or postpone any of the obligations of Borrower or any right of any Lender provided hereunder. (b) If any Lender that is organized under the laws of any jurisdiction other than the United States of America or any State thereof (including the District of Columbia) issues a public announcement with respect to the closing of its lending offices in the United States such that any withholdings or deductions and additional payments with respect to Taxes may be required to be made by Borrower thereafter pursuant to -46- 56 Section 4.8.(b), such Lender shall use reasonable efforts to furnish Borrower notice thereof as soon as practicable thereafter; provided, however, that no delay or failure to furnish such notice shall in any event release or discharge Borrower from its obligations to such Lender pursuant to Section 4.8.(b) or otherwise result in any liability of such Lender. SECTION 4.13. FUNDING LOSSES. Borrower shall compensate each Lender, upon its written request to Borrower (which request shall set forth the basis for requesting such amounts in reasonable detail and which request shall be made in good faith and, absent manifest error, shall be final, conclusive and binding upon all of the parties hereto), for all actual losses, expenses and liabilities (including, without limitation, any interest paid by such Lender to lenders of funds borrowed by it to make or carry its Eurodollar Advances or Competitive Bid Rate Advances, in either case to the extent not recovered by such Lender in connection with the re-employment of such funds but excluding loss of anticipated profits), which the Lender may sustain: (i) if for any reason (other than a default by such Lender) a borrowing of, or conversion to or continuation of, Eurodollar Advances or Competitive Bid Rate Advances to Borrower does not occur on the date specified therefor in a Notice of Borrowing, Notice of Swing Line Loan, Competitive Bid Accept/Reject Letter, Notice of Conversion/Continuation or Notice of Conversion/Continuation of Swing Line Loans (whether or not withdrawn), (ii) if any repayment (including mandatory prepayments and any conversions pursuant to Section 4.10.(b)) of any Eurodollar Advances to Borrower occurs on a date which is not the last day of an Interest Period applicable thereto, or (iii), if, for any reason, Borrower defaults in its obligation to repay its Eurodollar Advances when required by the terms of this Agreement. SECTION 4.14. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR AND COMPETITIVE BID RATE ADVANCES. Calculation of all amounts payable to a Lender under this Article 4. shall be made as though that Lender had actually funded its relevant Eurodollar Advances or Competitive Bid Rate Advances through the purchase of deposits in the relevant market bearing interest at the rate applicable to such Eurodollar Advances or Competitive Bid Rate Advance in an amount equal to the amount of the Eurodollar Advances or Competitive Bid Rate Advance and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar Advances or Competitive Bid Rate Advance from an offshore office of that Lender to a domestic office of that Lender in the United States of America; provided, however, that each Lender may fund each of its Eurodollar Advances or Competitive Bid Rate Advances in any manner it sees fit and the foregoing assumption shall be used only for calculation of amounts payable under this Article 4. -47- 57 SECTION 4.15. APPORTIONMENT OF PAYMENTS. Aggregate principal and interest payments in respect of Loans and payments in respect of facility fees shall be apportioned among all outstanding Commitments and Loans to which such payments relate, proportionately to the Lenders' respective pro rata portions of such Commitments and outstanding Loans. The Agent shall promptly distribute to each Lender at its payment office specified by any Lender its share of all such payments received by the Agent on the same Business Day as such payment is deemed to be received by the Agent. SECTION 4.16. SHARING OF PAYMENTS, ETC. If any Lender shall obtain any payment or reduction (including, without limitation, any amounts received as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code) of the Obligations (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Applicable Commitment Percentage of payments or reductions on account of such obligations obtained by all the Lenders (other than payments of principal, interest and fees with respect to the Competitive Bid Loans which are payable solely to the Lenders participating therein), such Lender shall forthwith (i) notify each of the other Lenders and Agent of such receipt, and (ii) purchase from the other Lenders such participations in the affected obligations as shall be necessary to cause such purchasing Lender to share the excess payment or reduction, net of costs incurred in connection therewith, ratably with each of them, provided that if all or any portion of such excess payment or reduction is thereafter recovered from such purchasing Lender or additional costs are incurred, the purchase shall be rescinded and the purchase price restored to the extent of such recovery or such additional costs, but without interest unless the Lender obligated to return such funds is required to pay interest on such funds. Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 4.16. may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of Borrower in the amount of such participation. Any payment received by the Agent or any Lender following the occurrence and during the continuation of an Event of Default shall be distributed pro rata amongst the Lenders based upon the percentage obtained by dividing the Obligations owing to each Lender by the total amount of Obligations on the date of receipt of such payment, with such amounts to be applied to the outstanding Obligations in accordance with the terms of this Agreement. SECTION 4.17. CAPITAL ADEQUACY. Without limiting any other provision of this Agreement, in the event that any Lender shall have determined that any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy not currently in effect or -48- 58 fully applicable as of the Closing Date, or any change therein or in the interpretation or application thereof after the Closing Date, or compliance by such Lender with any request or directive regarding capital adequacy not currently in effect or fully applicable as of the Closing Date (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) from a central bank or governmental authority or body having jurisdiction, does or shall have the effect of reducing the rate of return on such Lender's capital as a consequence of its obligations hereunder to a level below that which such Lender could have achieved but for such law, treaty, rule, regulation, guideline or order, or such change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then within ten (10) Business Days after written notice and demand by such Lender (with copies thereof to the Agent), Borrower shall from time to time pay to such Lender additional amounts sufficient to compensate such Lender for such reduction (but, in the case of outstanding Base Rate Advances, without duplication of any amounts already recovered by such Lender by reason of an adjustment in the applicable Base Rate). Each certificate as to the amount payable under this Section 4.17. (which certificate shall set forth the basis for requesting such amounts in reasonable detail), submitted to Borrower by any Lender in good faith, shall, absent manifest error, be final, conclusive and binding for all purposes. SECTION 4.18. LIMITATION ON CERTAIN PAYMENT OBLIGATIONS. (a) Each Lender or the Agent shall make written demand on the Borrower for indemnification or compensation pursuant to Section 4.8.(b) no later than six months after the earlier of (i) on the date on which Lender or the Agent makes payment of any such Taxes and (ii) the date on which the relevant taxing authority or other governmental authority makes written demand upon such Lender or Agent for the payment of such Taxes. (b) Each Lender or Agent shall make written demand on the Borrower for indemnification or compensation pursuant to Section 4.13. no later than six months after the event giving rise to the claim for indemnification or compensation occurs. (c) Each Lender or the Agent shall make written demand on the Borrower for indemnification or compensation pursuant to Section 4.11. or Section 4.17. no later than six months after such Lender or Agent receives actual notice or obtains actual knowledge of the promulgation of a law, rule, order, interpretation or occurrence of another event giving rise to a claim pursuant to such provisions. (d) In the event that the Lenders or Agent fail to give the Borrower notice within the time limitations set forth above, the Borrower shall not have any obligation to pay amounts with respect to such claims accrued prior to six months preceding any written demand therefor. -49- 59 ARTICLE 5. CONDITIONS TO BORROWINGS The obligation of each Lender to make Advances to Borrower is subject to the satisfaction of the following conditions: SECTION 5.1. CONDITIONS PRECEDENT TO INITIAL LOANS. At the time of the making of the initial Loans hereunder on the Closing Date, all obligations of Borrower hereunder incurred prior to the initial Loans (including, without limitation, Borrower's obligations to reimburse the reasonable fees and expenses of counsel to the Agent and any fees and expenses payable to the Agent as previously agreed with Borrower), shall have been paid in full, and the Agent shall have received the following, in form and substance reasonably satisfactory in all respects to the Agent: (a) the duly executed counterparts of this Agreement; (b) the duly completed Revolving Credit Notes evidencing the Revolving Credit Commitments, the duly completed Swing Note evidencing the Swing Line Commitment and the duly executed Competitive Bid Notes evidencing the Competitive Bid Facility; (c) receipt by the Agent of evidence that all governmental, shareholder and material third-party consents (including Hart-Scott-Rodino clearance) and approvals required in connection with the acquisition of the Acquired Company and the other transactions contemplated hereby and expiration of all applicable waiting periods without any action being taken by any authority that could reasonably be likely to restrain, prevent or impose any material adverse conditions on the acquisition of the Acquired Company or such other transactions or that could reasonably be likely to seek or threaten any of the foregoing, and no law or regulation shall be applicable which in the judgment of the Agent could reasonably be likely to have such effect; (d) certificates of the Secretary or Assistant Secretary of the Borrower attaching and certifying copies of the resolutions of the board of directors of the Borrower, authorizing as applicable the execution, delivery and performance of the Credit Documents; (e) certificates of the Secretary or an Assistant Secretary of the Borrower certifying (i) the name, title and true signature of each officer of the Borrower executing the Credit Documents, and (ii) the bylaws of the Borrower; (f) certified copies of the certificate or articles of incorporation of the Borrower and each of its Subsidiaries certified by the Secretary of State and by the Secretary or Assistant Secretary of the Borrower or such Subsidiaries, as appropriate, together -50- 60 with certificates of good standing or existence, as may be available from the Secretary of State of the jurisdiction of incorporation or organization of the Borrower and each of its Subsidiaries, and each other jurisdiction where the ownership of property or the conduct of its business require the Borrower or its Subsidiaries to be qualified, except where a failure to be so qualified would not have a Materially Adverse Effect; (g) certificate of Borrower in substantially the form of Exhibit I attached hereto and appropriately completed; (h) there shall not have been any Material modification, amendment, supplement or waiver to the Purchase Agreement without the prior written consent of the Agent, including, but not limited to, any Material modification, amendment, supplement or waiver relating to the amount or type of consideration to be paid in connection with the acquisition of the Acquired Company and the contents of all disclosure schedules and exhibits, the acquisition of the Acquired Company shall have been consummated substantially in accordance with the terms of the Purchase Agreement; and Agent shall have received a copy of the final Purchase Agreement, together with all exhibits and schedules thereto, certified by an Executive Officer of the Borrower; (i) the favorable opinion of (a) Robert McIntosh, Esquire, corporate counsel to the Borrower and its Subsidiaries as to certain corporate matters, and (b) King & Spalding, counsel to the Borrower and its Subsidiaries as to certain matters, in the form of Exhibits J-1 and J-2, respectively, in each case addressed to the Agent and each of the Lenders; (j) copies of all documents and instruments, including all consents, authorizations and filings, required under the articles or certificate of incorporation and bylaws or other organizational or governing documents, under any Requirement of Law or by any material Contractual Obligation of the Borrower and its Subsidiaries, in connection with the execution, delivery, performance, validity and enforceability of the Credit Documents and the other documents to be executed and delivered hereunder, and such consents, authorizations, filings and orders shall be in full force and effect and all applicable waiting periods shall have expired; and (k) any other document, opinion or certificate reasonably requested by the Agent and the Lenders assuring the Agent and the Lenders that all corporate proceedings and all other legal matters in connection with the authorization, legality, validity and enforceability of the Credit Documents are in form and substance satisfactory to the Lenders. -51- 61 SECTION 5.2. CONDITIONS TO ALL LOANS. At the time of the making of all Loans, including the initial Loans hereunder, (before as well as after giving effect to such Loans and to the proposed use of the proceeds thereof), the following conditions shall have been satisfied or shall exist: (a) there shall exist no Default or Event of Default; (b) all representations and warranties by Borrower contained herein shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Loans except to the extent they expressly relate to an earlier date or have been updated to the extent permitted herein; (c) since the date of the most recent financial statements of the Consolidated Companies described in Section 6.14., there shall have been no change which has had or is reasonably likely to have a Materially Adverse Effect (whether or not any notice with respect to such change has been furnished to the Lenders pursuant to Section 7.7.); (d) there shall be no action or proceeding instituted or pending before any court or other governmental authority or, to the knowledge of Borrower, threatened (i) which is reasonably likely to have a Materially Adverse Effect, or (ii) seeking to prohibit or restrict one or more of the Consolidated Companies right to own or operate any portion of its business or assets, or to compel one or more of the Borrower and its Consolidated Companies to dispose of or hold separate all or any portion of its businesses or assets, where such portion or portions of such business(es) or assets, as the case may be, constitute a Material portion of the total businesses or assets of the Consolidated Companies; (e) the Loans to be made and the use of proceeds thereof shall not contravene, violate or conflict with, or involve the Agent or any Lender in a violation of, any law, rule, injunction, or regulation, or determination of any court of law or other governmental authority applicable to Borrower; and (f) the Agent shall have received such other documents or legal opinions as the Agent or any Lender may reasonably request, all in form and substance reasonably satisfactory to the Agent. Each request for a Borrowing or Competitive Bid Request and the acceptance by Borrower of the proceeds thereof shall constitute a representation and warranty by Borrower, as of the date of the Loans comprising such Borrowing, that the applicable conditions specified in Sections 5.1. and 5.2. have been satisfied. -52- 62 ARTICLE 6. REPRESENTATIONS AND WARRANTIES Borrower (as to itself and all other Consolidated Companies) represents and warrants as follows: SECTION 6.1. CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each of the Consolidated Companies is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. Each of the Consolidated Companies (i) has the corporate power and authority and the legal right to own and operate its property and to conduct its business, (ii) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership of property or the conduct of its business requires such qualification, and (iii) is in compliance with all Requirements of Law, where (a) the failure to have such power, authority and legal right as set forth in clause (i), (b) the failure to be so qualified or in good standing as set forth in clause (ii), or (c) the failure to comply with Requirements of Law as set forth in clause (iii), is reasonably likely, in the aggregate, to have a Materially Adverse Effect. The jurisdiction of incorporation or organization, and the ownership of all issued and outstanding capital stock, for each Subsidiary as of the date of this Agreement is accurately described on Schedule 6.1. Schedule 6.1. may be updated from time to time by the Borrower by giving written notice thereof to the Agent. SECTION 6.2. CORPORATE POWER; AUTHORIZATION. Each of the Borrower and its Subsidiaries has the corporate power and authority to make, deliver and perform the Credit Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of such Credit Documents. No consent or authorization of, or filing with, any Person (including, without limitation, any governmental authority), is required in connection with the execution, delivery or performance by the Borrower or its Subsidiaries, or the validity or enforceability against the Borrower or its Subsidiaries, of the Credit Documents, other than such consents, authorizations or filings which have been made or obtained. SECTION 6.3. ENFORCEABLE OBLIGATIONS. This Agreement has been duly executed and delivered, and each other Credit Document will be duly executed and delivered, by the respective Consolidated Companies, as applicable, and this Agreement constitutes, and each other Credit Document when executed and delivered will constitute, legal, valid and binding obligations of the Consolidated Companies executing the same, enforceable against such Consolidated Companies in accordance with their respective 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 -53- 63 equity. SECTION 6.4. NO LEGAL BAR. The execution, delivery and performance by the Consolidated Companies of the Credit Documents will not violate their articles or certificate of incorporation, bylaws or other organizational or governing documents or any Requirement of Law or cause a breach or default under any of their respective Material Contractual Obligations. SECTION 6.5. NO MATERIAL LITIGATION. Except as set forth on Schedule 6.5., no litigation, investigation or proceeding of or before any court, tribunal, arbitrator or governmental authority is pending or, to the knowledge of any Executive Officer of the Borrower, threatened by or against any of the Consolidated Companies, or against any of their respective properties or revenues, existing or future (a) with respect to any Credit Document, or any of the transactions contemplated hereby or thereby, or (b) which, if adversely determined, is reasonably likely to have a Materially Adverse Effect. SECTION 6.6. INVESTMENT COMPANY ACT, ETC. Neither the Company nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" (as each of the quoted terms is defined or used in the Investment Company Act of 1940, as amended). Neither the Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, or any foreign, federal or local statute or regulation limiting its ability to incur indebtedness for money borrowed, guarantee such indebtedness, or pledge its assets to secure such indebtedness, as contemplated hereby or by any other Credit Document. SECTION 6.7. MARGIN REGULATIONS. No part of the proceeds of any of the Loans will be used for any purpose which violates, or which would be inconsistent or not in compliance with, the provisions of the applicable Margin Regulations. SECTION 6.8. COMPLIANCE WITH ENVIRONMENTAL LAWS. (a) The Consolidated Companies have received no notices of claims or potential liability under, and are in compliance with, all applicable Environmental Laws, where such claims and liabilities under, and failures to comply with, such statutes, regulations, rules, ordinances, laws or licenses, is reasonably likely to result in penalties, fines, claims or other liabilities to the Consolidated Companies in amounts that would have a Materially Adverse Effect, either individually or in the aggregate (including any such -54- 64 penalties, fines, claims, or liabilities relating to the matters set forth on Schedule 6.8.), except as set forth on Schedule 6.8.). (b) Except as set forth on Schedule 6.8.(b), none of the Consolidated Companies has received any notice of violation, or notice of any action, either judicial or administrative, from any governmental authority (whether United States or foreign) relating to the actual or alleged violation of any Environmental Law, including, without limitation, any notice of any actual or alleged spill, leak, or other release of any Hazardous Substance, waste or hazardous waste by any Consolidated Company or its employees or agents, or as to the existence of any contamination on any properties owned by any Consolidated Company, where any such violation, spill, leak, release or contamination is reasonably likely to result in penalties, fines, claims or other liabilities to the Consolidated Companies in amounts that would have a Materially Adverse Effect, either individually or in the aggregate. (c) Except as set forth on Schedule 6.8.(c), the Consolidated Companies have obtained all necessary governmental permits, licenses and approvals for the operations conducted on their respective properties, including without limitation, all required material permits, licenses and approvals for (i) the emission of air pollutants or contaminants, (ii) the treatment or pretreatment and discharge of waste water or storm water, (iii) the treatment, storage, disposal or generation of hazardous wastes, (iv) the withdrawal and usage of ground water or surface water, and (v) the disposal of solid wastes, in any such case where the failure to have such license, permit or approval is reasonably likely to have a Materially Adverse Effect. SECTION 6.9. INSURANCE. The Consolidated Companies currently maintain insurance with respect to their respective properties and businesses, with financially sound and reputable insurers, having coverages against losses or damages of the kinds customarily insured against by reputable companies in the same or similar businesses, such insurance being in amounts no less than those amounts which are customary for such companies under similar circumstances. The Consolidated Companies have paid all material amounts of insurance premiums now due and owing with respect to such insurance policies and coverages, and such policies and coverages are in full force and effect. SECTION 6.10. NO DEFAULT. None of the Consolidated Companies is in default under or with respect to any Contractual Obligation in any respect which has had or is reasonably likely to have a Materially Adverse Effect. -55- 65 SECTION 6.11. NO BURDENSOME RESTRICTIONS. Except as set forth on Schedule 6.11., none of the Consolidated Companies is a party to or bound by any Contractual Obligation or Requirement of Law or any provision of its articles or certificate of incorporation, bylaws or other organizational or governing documents which has had or is reasonably likely to have a Materially Adverse Effect. SECTION 6.12. TAXES. The Borrower and its Subsidiaries have filed all Federal tax returns and, to the knowledge of the Executive Officers of the Borrower, the Borrower and its Subsidiaries have filed all other tax returns which are required to have been filed in any jurisdiction; the Borrower and its Subsidiaries have paid all taxes shown to be due and payable on such Federal returns and other returns and all other taxes, assessments, fees and other charges payable by them, in each case, to the extent the same have become due and payable and before they have become delinquent, except for the filing of any such returns or the payment of any taxes, assessments, fees and other charges the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Borrower or a Subsidiary, as the case may be, has set aside on its books reserves (segregated to the extent required by GAAP) deemed by it in good faith to be adequate. The Borrower has not received written notice of any proposed Material tax assessment with respect to Federal income taxes against the Borrower or any Subsidiary nor does any Executive Officer of the Borrower know of any Material Federal income tax liability on the part of the Borrower or any Subsidiary other than any such assessment or liability which is adequately provided for on the books of the Borrower and its Subsidiaries. SECTION 6.13. SUBSIDIARIES. Except as disclosed on Schedule 6.13., Borrower has no Subsidiaries and neither Borrower nor any Subsidiary is a joint venture partner or general partner in any partnership. Schedule 6.13. indicates which Subsidiaries are Restricted Subsidiaries and which Subsidiaries are Unrestricted Subsidiaries. Schedule 6.13. may be updated from time to time by the Borrower by giving written notice thereof to the Agent. SECTION 6.14. FINANCIAL STATEMENTS. Borrower has furnished to the Agent and the Lenders (i) the audited consolidated balance sheets as of September 30, 1996, 1995, and 1994 of Borrower and the related consolidated statements of income, shareholders' equity and cash flows for the fiscal years then ended, including in each case the related notes. The foregoing financial statements fairly present in all material respects the consolidated financial condition of Borrower as at the dates thereof and results of operations for such periods in conformity -56- 66 with GAAP consistently applied (subject, in the case of the quarterly financial statements, to normal year-end audit adjustments and the absence of certain notes). The Consolidated Companies taken as a whole did not have any material contingent obligations, contingent liabilities, or material liabilities for known taxes, long-term leases or unusual forward or long-term commitments required to be reflected in the foregoing financial statements or the notes thereto that are not so reflected. Since September 30, 1996, there have been no changes with respect to the Consolidated Companies which has had or is reasonably likely to have a Materially Adverse Effect. SECTION 6.15. ERISA. Except as disclosed on Schedule 6.15.: (1) Identification of Plans. None of the Consolidated Companies nor any of their respective ERISA Affiliates maintains or contributes to, or has during the past seven years maintained or contributed to, any Plan that is subject to Title IV of ERISA; (2) Compliance. Each Plan maintained by the Consolidated Companies have at all times been maintained, by their terms and in operation, in compliance with all applicable laws, and the Consolidated Companies are subject to no tax or penalty with respect to any Plan of such Consolidated Company or any ERISA Affiliate thereof, including without limitation, any tax or penalty under Title I or Title IV of ERISA or under Chapter 43 of the Tax Code, or any tax or penalty resulting from a loss of deduction under Sections 162, 404, or 419 of the Tax Code, where the failure to comply with such laws, and such taxes and penalties, together with all other liabilities referred to in this Section 6.15. (taken as a whole), would in the aggregate have a Materially Adverse Effect; (3) Liabilities. The Consolidated Companies are subject to no liabilities (including withdrawal liabilities) with respect to any Plans of such Consolidated Companies or any of their ERISA Affiliates, including without limitation, any liabilities arising from Titles I or IV of ERISA, other than obligations to fund benefits under an ongoing Plan and to pay current contributions, expenses and premiums with respect to such Plans, where such liabilities, together with all other liabilities referred to in this Section 6.15. (taken as a whole), would in the aggregate have a Materially Adverse Effect; (4) Funding. The Consolidated Companies and, with respect to any Plan which is subject to Title IV of ERISA, each of their respective ERISA Affiliates, have made full and timely payment of all amounts (A) required to be contributed under the terms of each Plan and applicable law, and (B) required to be paid as expenses (including PBGC or other premiums) of each Plan, where the failure to pay such amounts (when taken as a whole, including any penalties attributable to such amounts) would have a Materially Adverse Effect. No Plan subject to Title IV of ERISA has an "amount of un- -57- 67 funded benefit liabilities" (as defined in Section 4001(a)(18) of ERISA), determined as if such Plan terminated on any date on which this representation and warranty is deemed made, in any amount which, together with all other liabilities referred to in this Section 6.15. (taken as a whole), would have a Materially Adverse Effect if such amount were then due and payable. The Consolidated Companies are subject to no liabilities with respect to post-retirement medical benefits in any amounts which, together with all other liabilities referred to in this Section 6.15. (taken as a whole), would have a Materially Adverse Effect if such amounts were then due and payable. Schedule 6.15., as it applies to paragraph (1) above, may be updated from time to time by the Borrower by giving written notice thereof to the Agent. SECTION 6.16. PATENTS, TRADEMARKS, LICENSES, ETC. Except as set forth on Schedule 6.16., (i) the Consolidated Companies have obtained and hold in full force and effect all material patents, trademarks, service marks, trade names, copyrights, licenses and other such rights, free from burdensome restrictions, which are necessary for the operation of their respective businesses as presently conducted, and (ii) to the best of Borrower's knowledge, no product, process, method, service or other item presently sold by or employed by any Consolidated Company in connection with such business infringes any patents, trademark, service mark, trade name, copyright, license or other right owned by any other person and there is not presently pending, or to the knowledge of Borrower, threatened, any claim or litigation against or affecting any Consolidated Company contesting such Person's right to sell or use any such product, process, method, substance or other item where the result of such failure to obtain and hold such benefits or such infringement would have a Materially Adverse Effect. SECTION 6.17. OWNERSHIP OF PROPERTY; LIENS. (a) Except as set forth on Schedule 6.17., (i) each Consolidated Company has good and marketable fee simple title to or a valid leasehold interest in all of its real property and good title to, or a valid leasehold interest in, all of its other property, as such properties are reflected in the consolidated balance sheet of the Consolidated Companies as of September 30, 1996 except where the failure to hold such title, leasehold interest or possession would not have a Materially Adverse Effect, referred to in Section 6.14., other than properties disposed of in the ordinary course of business since such date or as otherwise permitted by the terms of this Agreement, subject to no Lien or title defect of any kind, except Liens permitted by Section 8.2. and (ii) the Consolidated Companies enjoy peaceful and undisturbed possession under all of their respective leases. (b) As of the date of this Agreement, the property and assets owned by each Consolidated Company are not subject to any Lien securing any Indebtedness or other -58- 68 obligation of such Consolidated Company in excess of $5,000,000 individually other than as described on Schedule 6.18 hereof. SECTION 6.18. INDEBTEDNESS. Except for the Indebtedness outstanding pursuant to the Prior Agreements to be refinanced on the Closing Date and as set forth on Schedule 6.18. for each Consolidated Company, as of the date hereof none of the Consolidated Companies is an obligor in respect of any Indebtedness for Borrowed Money in excess of $5,000,000 individually, or any commitment to create or incur any Indebtedness for Borrowed Money in excess of $5,000,000 individually. SECTION 6.19. FINANCIAL CONDITION. On the Closing Date and after giving effect to the transactions contemplated by this Agreement and the other Credit Documents, including without limitation, the use of the proceeds of the Loans as provided in Articles 2. and 3. (i) the assets of each Consolidated Company at fair valuation and based on their present fair saleable value will exceed such Consolidated Company's debts, including contingent liabilities, (ii) the remaining capital of such Consolidated Company will not be unreasonably small to conduct such Consolidated Company's business, and (iii) such Consolidated Company will not have incurred debts, or have intended to incur debts, beyond the Consolidated Company's ability to pay such debts as they mature. For purposes of this Section 6.19., "debt" means any liability on a claim, and "claim" means (a) the right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (b) the right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. SECTION 6.20. LABOR MATTERS. Except as set forth in Schedule 6.20., the Consolidated Companies have experienced no strikes, labor disputes, slow downs or work stoppages due to labor disagreements which is reasonably likely to have, a Materially Adverse Effect, and, to the best knowledge of the Executive Officers of the Borrower, there are no such strikes, disputes, slow downs or work stoppages threatened against any Consolidated Company except as disclosed in writing to the Agent. The hours worked and payment made to employees of the Consolidated Companies have not been in violation in any material respect of the Fair Labor Standards Act or any other applicable law dealing with such matters, and all payments due from the Consolidated Companies, or for which any claim may be made against the Consolidated Companies, on account of wages and employee health and welfare insurance and other benefits have been paid or accrued as liabilities on the books -59- 69 of the Consolidated Companies, in each case where the failure to comply with such laws or to pay or accrue such liabilities is reasonably likely to have a Materially Adverse Effect. SECTION 6.21. PAYMENT OR DIVIDEND RESTRICTIONS. Except as described on Schedule 6.21., none of the Consolidated Companies is party to or subject to any agreement or understanding restricting or limiting the payment of any dividends or other distributions by any such Consolidated Company. SECTION 6.22. DISCLOSURE. (a) Neither this Agreement nor any financial statements delivered to the Lenders nor in the most recent version of any other document, certificate or written statement furnished to the Lenders by or on behalf of any Consolidated Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading, it being understood that the representation set forth in this Section 6.22.(a) shall not apply to any financial projections or other pro forma financial information. (b) The financial projections and other pro forma financial information contained in the information referred to in subsection (a) above were based on good faith estimates and assumptions believed by the applicable Consolidated Companies to be reasonable at the time made and at the time furnished to the Agent and/or any Lender, it being recognized by the Lenders that such projections and other pro forma financial information as to future events such projections and other pro forma financial information may differ from the projected results for such period or periods. -60- 70 ARTICLE 7. AFFIRMATIVE COVENANTS So long as any Commitment remains in effect hereunder or any Note shall remain unpaid, Borrower will: SECTION 7.1. CORPORATE EXISTENCE, ETC. Preserve and maintain, and cause each of the Restricted Subsidiaries to preserve and maintain, its corporate existence (except as otherwise permitted pursuant to Section 8.4.), its material rights, franchises, and licenses, and its material patents and copyrights (for the scheduled duration thereof), trademarks, trade names, and service marks, necessary or desirable in the normal conduct of its business, and its qualification to do business as a foreign corporation in all jurisdictions where it conducts business or other activities making such qualification necessary, where the failure to be so qualified is reasonably likely to have a Materially Adverse Effect. SECTION 7.2. COMPLIANCE WITH LAWS, ETC. Comply, and cause each of its Subsidiaries to comply with all Requirements of Law (including, without limitation, the Environmental Laws subject to the exceptions set forth in Section 6.8. where the penalties, claims, fines, and other liabilities resulting from noncompliance with such Environmental Laws do not involve amounts Material in the aggregate) and Contractual Obligations applicable to or binding on any of them where the failure to comply with such Requirements of Law and Contractual Obligations is reasonably likely to have a Materially Adverse Effect. SECTION 7.3. PAYMENT OF TAXES AND CLAIMS, ETC. File and cause each Subsidiary to file all Federal, state, local and foreign tax returns that are required to be filed by each of them and will pay or make provision for the payment of all taxes that have become due pursuant to such returns or pursuant to any assessment in respect thereof received by the Borrower or any Subsidiary, and the Borrower and each Subsidiary will pay or cause to be paid all other taxes, assessments, fees and other governmental charges and levies which, to the knowledge of the Executive Officers of the Borrower or any Subsidiary, are due and payable before the same become delinquent, except only such taxes and assessments as are being contested in good faith by appropriate and timely proceedings and as to which adequate reserves have been established in accordance with GAAP. SECTION 7.4. KEEPING OF BOOKS. Keep, and cause each of its Subsidiaries to keep, proper books of record and account, containing complete and accurate entries of all their respective financial and business transactions. -61- 71 SECTION 7.5. VISITATION, INSPECTION, ETC. Permit, and cause each of its Subsidiaries to permit, any representative of the Agent or any Lender, at the Agent's or such Lender's expense, to visit and inspect any of its property, to examine its books and records and to make copies and take extracts therefrom, and to discuss its affairs, finances and accounts with its officers, all at such reasonable times and as often as the Agent or such Lender may reasonably request after reasonable prior notice to Borrower; provided, however, that at any time following the occurrence and during the continuance of a Default or an Event of Default, no prior notice to Borrower shall be required. SECTION 7.6. INSURANCE; MAINTENANCE OF PROPERTIES. (a) Maintain or cause to be maintained with financially sound and reputable insurers, insurance with respect to its properties and business, and the properties and business of its Subsidiaries, against loss or damage of the kinds customarily insured against by reputable companies in the same or similar businesses, such insurance to be of such types and in such amounts and subject to such deductibles and self-insurance programs as the Borrower in its judgment deems reasonable; provided, however, that in any event Borrower shall use its best efforts to maintain, or cause to be maintained, insurance in amounts and with coverages not materially less favorable to any Consolidated Company as in effect on the date of this Agreement, except where the costs of maintaining such insurance would, in the judgment of the Borrower, be excessive. (b) Cause, and cause each of the Consolidated Companies to cause, all properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, settlements and improvements thereof, all as in the judgment of Borrower may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent Borrower from discontinuing the operation or maintenance of any such properties if such discontinuance is, in the judgment of Borrower, desirable in the conduct of its business or the business of any Consolidated Company. (c) Cause a summary, set forth in format and detail reasonably acceptable to the Agent, of the types and amounts of insurance (property and liability) maintained by the Consolidated Companies to be delivered to the Agent on or before thirty (30) days after the Closing Date. SECTION 7.7. FINANCIAL REPORTS. The Borrower will furnish to the Agent and each Lender: -62- 72 (a) within sixty (60) days after the end of each of the first three quarter-annual periods of each of its fiscal years (and, in any event, in each case as soon as prepared), the quarterly Financial Report of the Borrower as at the end of that period, prepared on a consolidated basis an accompanied by a certificate, dated the date of furnishing, signed by a Financial Officer of the Borrower to the effect that such Financial Report accurately presents in all material respects the consolidated financial condition of the Borrower and its consolidated Subsidiaries and that such Financial Report has been prepared in accordance with GAAP consistently applied (subject to year end adjustments), except that such Financial Report need not be accompanied by notes; (b) within one hundred twenty (120) days after the end of each of its fiscal years (and, in any event, as soon as available), the annual Financial Report of the Borrower for that year prepared on a consolidated basis (which Financial Report shall be reported on by the Borrower's independent certified public accountants, such report to state that such Financial Report fairly presents in all material respects the consolidated financial condition and results of operation of the Borrower and its consolidated Subsidiaries in accordance with GAAP and to be without any material qualifications or exceptions); provided, however, during any period that the Borrower has consolidated Subsidiaries which are not Restricted Subsidiaries, the Borrower shall also provide such financial information in a form sufficient to enable the Agent and the Lenders to determine the compliance of the Borrower with the terms of this Agreement with respect to the Borrower and its Restricted Subsidiaries; (c) within sixty (60) days after the end of each of its first three quarterly accounting periods and within one hundred twenty (120) days after the end of its annual accounting period, a statement certified as true and correct by a Financial Officer of the Borrower, substantially in the form of Exhibit D hereto, reflecting compliance with Sections 8.1., 8.2., 8.3. and 8.4. hereof, with back-up material setting forth in reasonable detail such calculations attached thereto and stating whether any Event of Default has occurred and is continuing; (d) within sixty (60) days after the end of each of its quarterly accounting periods, a statement certified as true and correct by a Financial Officer of the Borrower setting forth the Consolidated Funded Debt to Total Capitalization ratio as of the last day of such quarterly accounting period; (e) promptly upon the filing thereof or otherwise becoming available, copies of all financial statements, annual, quarterly and special reports, proxy statements and notices sent or made available generally by Borrower to its public security holders, of all regular and periodic reports and all registration statements and prospectuses, if any, filed by any of them with any securities exchange or with the Securities and Exchange Commission, and of all press releases and other statements made available generally to the public containing Material developments in the business or financial condition of -63- 73 Borrower and the other Consolidated Companies; (f) promptly upon receipt thereof, copies of all financial statements of, and all reports submitted by, independent public accountants to Borrower in connection with each annual, interim, or special audit of Borrower's financial statements, including without limitation, the comment letter submitted by such accountants to management in connection with their annual audit; (g) as soon possible and in any event within thirty (30) days after the Borrower or any Subsidiary knows or has reason to know that any "Reportable Event" (as defined in Section 4043(b) of ERISA) with respect to any Plan has occurred (other than such a Reportable Event for which the PBGC has waived the 30-day notice requirement under Section 4043(a) of ERISA) and such Reportable Event involves a matter that has had, or is reasonably likely to have, a Materially Adverse Effect, a statement of a Financial Officer of the Borrower or such Subsidiary setting forth details as to such Reportable Event and the action which the Borrower or such Subsidiary proposes to take with respect thereto, together with a copy of the notice of such Reportable Event given to the PBGC if a copy of such notice is available to the Borrower or such Subsidiary; and (h) with reasonable promptness, such other information relating to the Borrower's performance of this Agreement or its financial condition as may reasonably be requested from time to time by the Agent. SECTION 7.8. NOTICES UNDER CERTAIN OTHER INDEBTEDNESS. Immediately upon its receipt thereof, Borrower shall furnish the Agent a copy of any notice received by it or any other Consolidated Company from the holder(s) of Indebtedness (or from any trustee, agent, attorney, or other party acting on behalf of such holder(s)) in an amount which, in the aggregate, exceeds $10,000,000, where such notice states or claims (i) the existence or occurrence of any default or event of default with respect to such Indebtedness under the terms of any indenture, loan or credit agreement, debenture, note, or other document evidencing or governing such Indebtedness, or (ii) the existence or occurrence of any event or condition which requires or permits holder(s) of any Indebtedness of the Consolidated Companies to exercise rights under any Change in Control Provision. SECTION 7.9. NOTICE OF LITIGATION. The Borrower shall notify the Agent of any actions, suits or proceedings instituted by any Person against it or any Subsidiary where the uninsured portion of the money damages sought (which shall include any deductible amount to be paid by the Borrower or such Subsidiary) is in excess of $10,000,000 or which is reasonably likely to have a Materially Adverse Effect. Said notice is to be given along with the quarterly and annual -64- 74 reports required by Section 7.7. hereof, and is to specify the amount of damages being claimed or other relief being sought, the nature of the claim, the Person instituting the action, suit or proceeding, and any other significant features of the claim. SECTION 7.10. SUBSIDIARY GUARANTEES. (a) Subject to subsection (c) below, the Borrower shall cause all of its Restricted Subsidiaries existing as of the Closing Date to execute and deliver a Subsidiary Guarantee and a counterpart Contribution Agreement in substantially the same form as set forth, respectively, in Exhibits "L" and "M", on or before April 21, 1997. The delivery of such documents shall be accompanied by such other documents as the Agent may reasonably request (e.g., certificates of incorporation, articles of incorporation and bylaws, membership operating agreements, opinion letters and appropriate resolutions of the Board of Directors of any such Subsidiary Guarantor). (b) Subject to subsection (c) below, the Borrower shall cause all of its Restricted Subsidiaries not existing as of the Closing Date to execute and deliver Subsidiary Guarantees and a counterpart Contribution Agreement in substantially the same form as set forth, respectively, in Exhibits "L" and "M", within thirty (30) days of the creation or acquisition of any such Restricted Subsidiary by the Borrower or other Restricted Subsidiary. The delivery of such documents shall be accompanied by such other documents as the Agent may reasonably request (e.g., certificates of incorporation, articles of incorporation and bylaws, membership operating agreements, opinion letters and appropriate resolutions of the Board of Directors of any such Subsidiary Guarantor). (c) Notwithstanding the foregoing subsections (a) and (b), the Borrower shall not be required to cause any Restricted Subsidiary to deliver a Subsidiary Guarantee and a counterpart Contribution Agreement if (i) such Restricted Subsidiary is incorporated under any jurisdiction outside of the United States of America (or any of its territories); (ii) the delivery of such documents would cause such Restricted Subsidiary to violate any Requirement of Law; or (iii) the delivery of such documents would result in any Rating Agency downgrading the rating of the Borrower. (d) In the event that the Borrower or any Restricted Subsidiary sells any Subsidiary Guarantor as permitted by Section 8.4 hereof, then such Subsidiary Guarantor shall be released from all obligations under the Subsidiary Guarantee and Contribution Agreement which it had previously delivered to the Agent. Such release shall occur upon the consummation of the sale and the Agent shall execute and deliver any releases or other documents reasonably requested by the Borrower to effectuate such release. -65- 75 ARTICLE 8. NEGATIVE COVENANTS So long as any Commitment remains in effect hereunder or any Note shall remain unpaid: SECTION 8.1. FINANCIAL REQUIREMENTS. The Borrower shall not: (i) Fixed Charges. Suffer or permit, as of the last day of any fiscal quarter, the ratio of (a) Consolidated Net Income Available for Fixed Charges to (b) Fixed Charges to be less than 2.5:1.0, as calculated for a period consisting of the four preceding fiscal quarters. (ii) Consolidated Funded Debt to EBITDA. Permit, as of the last day of any fiscal quarter, the ratio of (a) Consolidated Funded Debt to (b) EBITDA to be greater than 4.0:1.0 for fiscal quarters ending on or before June 30, 1997, and 3.0:1.0 for fiscal quarters ending on or after September 30, 1997, as calculated for the four preceding fiscal quarters ending as of such day. (iii) Consolidated Funded Debt to Total Capitalization. Permit the ratio of Consolidated Funded Debt to Total Capitalization as of the last day of each fiscal quarter ending during the periods set forth below, to exceed the ratio set forth opposite such period
- -------------------------------------------------------------------------------- PERIOD RATIO - -------------------------------------------------------------------------------- Closing Date thru .65:1 June 30, 1997 - -------------------------------------------------------------------------------- September 30, 1997 thru .60:1 June 30, 1998 - -------------------------------------------------------------------------------- September 30, 1998 thru .55:1 Maturity Date - --------------------------------------------------------------------------------
SECTION 8.2. LIENS. The Borrower will not, and will not permit any Restricted Subsidiary to, create, assume or suffer to exist any Lien upon any of their respective properties or assets (hereinafter "Properties") whether now owned or hereafter acquired; provided, however, -66- 76 that this Section 8.2. shall not apply to the following: (a) any Lien for taxes not yet due or taxes or assessments or other governmental charges which are being actively contested in good faith by appropriate proceedings; (b) any Liens, pledges or deposits in connection with worker's compensation or social security, assessments or other similar charges or deposits incidental to the conduct of the business of the Borrower or any Restricted Subsidiary or the ownership of any of their Properties which were not incurred in connection with the borrowing of money or the obtaining of advances or credit and which do not in the aggregate Materially detract from the value of their Properties or Materially impair the use thereof in the operation of their businesses; (c) any Lien existing on any properties of any corporation at the time it becomes a Restricted Subsidiary, or existing prior to the time of acquisition upon any Properties acquired by the Borrower or any Restricted Subsidiary through purchase, merger, consolidation or otherwise, whether or not assumed by the Borrower or such Restricted Subsidiary; (d) any Lien placed upon any asset at the time of its acquisition (or within 60 days thereafter) by the Borrower or any Restricted Subsidiary to secure all or a portion of (or to secure indebtedness incurred prior to or at the time of the acquisition of such asset for the purpose of financing all or a portion of) the purchase price thereof; provided, however, that any such Lien shall not encumber any other properties of the Borrower or such Restricted Subsidiary; (e) statutory Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed by law created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings; (f) pledges or deposits for the purpose of securing a stay or discharge in the course of any legal proceeding provided that the aggregate amount of such pledges or deposits outstanding at any one time does not exceed five percent (5%) of Consolidated Net Worth, unless such excess amount is otherwise permitted pursuant to this Section 8.2; (g) Liens consisting of encumbrances in the nature of zoning restrictions, easements, rights and restrictions of record on the use of real property on the date of the acquisition thereof and statutory Liens of landlords and lessors which in any case do not Materially detract from the value of such property or impair the use thereof; (h) any Lien in favor of the United States of America or any department or agency thereof, or in favor of any state government or political subdivision thereof, or in favor of a prime contractor under a government contract of the United States, or of any -67- 77 state government or any political subdivision thereof, and, in each case, resulting from acceptance of partial, progress, advance or other payments in the ordinary course of business under government contracts of the United States, or of any state government or any political subdivision thereof, or subcontracts thereunder; (i) any Lien existing on the date hereof; (j) any Lien securing Funded Debt of a Restricted Subsidiary to the Borrower; (k) any Lien renewing, extending, refinancing or refunding any Lien permitted by clauses (c), (d), (e), (f), (g), (h), (i), or (j) above; provided, however, that the principal amount secured is not increased, and the Lien is not extended to other Properties; and (l) any Lien other than those permitted by clauses (a) through (k) above; provided, however, that the aggregate amount of all outstanding obligations secured by Liens permitted by this clause (l) shall not at any time exceed ten percent (10%) of the Consolidated Net Worth, and when combined (without duplication) with outstanding Funded Debt of the Restricted Subsidiaries, such total shall not exceed 20% of Total Capitalization. SECTION 8.3. LIMITATIONS ON FUNDED DEBT OF RESTRICTED SUBSIDIARIES. The Borrower will not permit any Restricted Subsidiary to incur or suffer to exist Funded Debt other than: (a) Funded Debt of the Restricted Subsidiaries existing on the date of this Agreement and any renewal, extension, refunding, or refinancing thereof; (b) additional unsecured or secured (to the extent permitted by Section 8.2. above) Funded Debt which, when aggregated (without duplication) with the outstanding Funded Debt of all the Restricted Subsidiaries, does not exceed 20% of the Total Capitalization at the end of each fiscal quarter; (c) Funded Debt of Waldorf Corporation in the aggregate principal amount of $100,000,000 evidenced by its 7.42% Senior Notes due June 30, 2005 (the "Waldorf Debt"), provided, that such Funded Debt shall cease to be permitted under this Section 8.3.(c) on and after June 30, 1997; and (d) Funded Debt of Waldorf Corporation under the Waldorf Credit Agreement in the amount and type described in Schedule 6.18 , provided that such Funded Debt shall cease to be permitted under this Section 8.3(d) on or after April 21, 1997. -68- 78 SECTION 8.4. MERGER AND SALE OF ASSETS. The Borrower will not, without the prior written consent of the Required Lenders, merge or consolidate with any other corporation or sell, lease or transfer or otherwise dispose of all or, during any twelve-month period, a substantial part of its assets (for purposes of this Section 8.4., substantial means assets sold, leased, transferred or otherwise disposed of other than in the ordinary course of business with a book value aggregating an amount greater than 15% of Consolidated Net Worth, determined by reference to the most recent audited Financial Report), to any person or entity other than in the ordinary course of business, nor will the Borrower permit any Restricted Subsidiary to take any of the above actions; provided that notwithstanding any of the foregoing limitations, if no Event of Default shall then exist or immediately thereafter will begin to exist, the Borrower and the Restricted Subsidiaries may take the following actions (none of which shall be included in calculating the percentage in the immediately preceding parenthetical): (a) Any Restricted Subsidiary may merge with (i) the Borrower (provided that the Borrower shall be the continuing or surviving corporation) or (ii) any one or more other Subsidiaries provided that either the continuing or surviving corporation shall be a Restricted Subsidiary or after giving effect to any merger pursuant to this Section 8.4., the Borrower and/or one or more Restricted Subsidiaries shall own not less than the same percentage of the outstanding Voting Stock of the continuing or surviving corporation as the Borrower and/or one or more Restricted Subsidiaries owned of the merged Restricted Subsidiary immediately prior to such merger; (b) Any Restricted Subsidiary may sell, lease, transfer or otherwise dispose of any of its assets to (i) the Borrower, (ii) any Restricted Subsidiary or (iii) any Subsidiary of which the Borrower and/or one or more Restricted Subsidiaries shall own not less than the same percentage of Voting Stock as the Borrower and/or one or more Restricted Subsidiaries then own of the Restricted Subsidiary making such sale, lease, transfer or other disposition; (c) The Borrower may sell, lease, transfer or otherwise dispose of a substantial part of its assets to any Subsidiary, provided (i) that upon completion of a transaction described in this Section 8.4.(c), there shall exist no Default or Event of Default and (ii) that upon completion of a transaction described in this Section 8.4.(c), the Subsidiary to which the Borrower's assets are sold, leased, transferred or otherwise disposed shall be a Restricted Subsidiary; (d) The Borrower may merge with any other corporation, provided that the Borrower shall be the surviving corporation and shall be able to incur at least $1.00 of Funded Debt under the provisions of this Agreement; -69- 79 (e) The Borrower or any of its Restricted Subsidiaries may sell assets to any Person provided that the Borrower or such Restricted Subsidiary is obligated to lease such assets from such Person within one hundred and eighty (180) days provided, however, that the aggregate book value of such assets, together with the aggregate book value of all other assets sold in all such transactions during the then previous twelve-month period shall not exceed an aggregate amount greater than 15% of Consolidated Net Worth determined by reference to the then most recent audited Financial Report; and (f) The Borrower and its Subsidiaries may transfer the assets which constitute their solid fiber partition division to the Sonoco Joint Venture. SECTION 8.5. TRANSACTIONS WITH AFFILIATES. The Borrower will not, and will not permit any Restricted Subsidiary to, enter into or be a party to any transaction or arrangement with any Affiliate (including without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliates), except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than such party would obtain in a comparable arm's-length transaction with a Person other than an Affiliate. SECTION 8.6. NATURE OF BUSINESS. Neither the Borrower nor any Restricted Subsidiary will engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by the Borrower and its Restricted Subsidiaries would be fundamentally changed from the general nature of the business engaged in by the Borrower and its Restricted Subsidiaries on the date of this Agreement, which the parties agree is the manufacture and sale of paperboard, paperboard and plastic products, other types of packaging material and similar products and services connected or incidental thereto. SECTION 8.7. REGULATIONS G, T, U AND X. The Borrower will not nor will it permit any Subsidiary to take any action that would result in any non-compliance of the Advances made hereunder with Regulations G, T, U and X of the Board of Governors of the Federal Reserve System. SECTION 8.8. ERISA COMPLIANCE. Neither the Borrower nor any Subsidiary will incur any Material "accumulated funding deficiency" within the meaning of Section 302(a)(2) of ERISA, or any Material liability under Section 4062 of ERISA to the Pension Benefit Guaranty Corporation ("PBGC") established thereunder in connection with any Plan. -70- 80 SECTION 8.9. LIMITATIONS ON SUBSIDIARIES WHICH ARE NOT RESTRICTED SUBSIDIARIES. The Borrower will not allow any Unrestricted Subsidiary: (a) to own any capital stock or right or option to acquire capital stock of a Consolidated Company, or own or hold any Lien on any property of any Consolidated Company; and (b) to create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to, or suffer to exist any Indebtedness pursuant to which the lender has recourse to any Consolidated Company or to any of the assets of any Consolidated Company ("Recourse Debt") other than Recourse Debt which, when aggregated (without duplication) with the outstanding Recourse Debt of all the Unrestricted Subsidiaries, does not exceed 15% of the Total Capitalization at the end of each fiscal quarter. -71- 81 ARTICLE 9. EVENTS OF DEFAULT Upon the occurrence and during the continuance of any of the following specified events (each an "Event of Default"): SECTION 9.1. PAYMENTS. Borrower shall fail to make promptly when due (including, without limitation, by mandatory prepayment) any principal payment with respect to the Loans, or Borrower shall fail to make any payment of interest, fee or other amount payable hereunder within three (3) Business Days of the due date thereof; SECTION 9.2. COVENANTS WITHOUT NOTICE. Borrower shall fail to observe or perform any covenant or agreement contained in Sections 7.7.(a), (b), (c) and (d), Section 7.10 or Article 8.; SECTION 9.3. OTHER COVENANTS. Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement, other than those referred to in Sections 9.1. and 9.2., and such failure shall remain unremedied for 30 days after the earlier of (i) an Executive Officer of the Borrower obtaining knowledge thereof, or (ii) written notice thereof shall have been given to Borrower by Agent or any Lender; SECTION 9.4. REPRESENTATIONS. Any representation or warranty made or deemed to be made by Borrower or any other Consolidated Company or by any of its officers under this Agreement or any other Credit Document (including the Schedules attached thereto), or any certificate or other document submitted to the Agent or the Lenders by any such Person pursuant to the terms of this Agreement or any other Credit Document, shall be incorrect in any material respect when made or deemed to be made or submitted; SECTION 9.5. NON-PAYMENTS OF OTHER INDEBTEDNESS. Any Consolidated Company shall fail to make when due (whether at stated maturity, by acceleration, on demand or otherwise, and after giving effect to any applicable grace period) any payment of principal of or interest on any Indebtedness (other than the Obligations) exceeding $10,000,000 individually or in the aggregate; -72- 82 SECTION 9.6. DEFAULTS UNDER OTHER AGREEMENTS. Any Consolidated Company shall fail to observe or perform within any applicable grace period any covenants or agreements contained in any agreements or instruments relating to any of its Indebtedness exceeding $10,000,000 individually or in the aggregate, or any other event shall occur if the effect of such failure or other event is to accelerate, or to permit the holder of such Indebtedness or any other Person to accelerate, the maturity of such Indebtedness; or any such Indebtedness shall be required to be prepaid (other than by a regularly scheduled required prepayment) in whole or in part prior to its stated maturity; SECTION 9.7. BANKRUPTCY. Borrower or any other Consolidated Company shall commence a voluntary case concerning itself under the Bankruptcy Code or applicable foreign bankruptcy laws; or an involuntary case for bankruptcy is commenced against any Consolidated Company and the petition is not controverted within 30 days, or is not dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) or similar official under applicable foreign bankruptcy laws is appointed for, or takes charge of, all or any substantial part of the property of any Consolidated Company; or any Consolidated Company commences proceedings of its own bankruptcy or to be granted a suspension of payments or any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction, whether now or hereafter in effect, relating to any Consolidated Company or there is commenced against any Consolidated Company any such proceeding which remains undismissed for a period of 60 days; or any Consolidated Company is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or any Consolidated Company suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or any Consolidated Company makes a general assignment for the benefit of creditors; or any Consolidated Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or any Consolidated Company shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or any Consolidated Company shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate action is taken by any Consolidated Company for the purpose of effecting any of the foregoing; SECTION 9.8. ERISA. A Plan of a Consolidated Company or a Plan subject to Title IV of ERISA of any of its ERISA Affiliates -73- 83 (i) shall fail to be funded in accordance with the minimum funding standard required by applicable law, the terms of such Plan, Section 412 of the Tax Code or Section 302 of ERISA for any plan year or a waiver of such standard is sought or granted with respect to such Plan under applicable law, the terms of such Plan or Section 412 of the Tax Code or Section 303 of ERISA; or (ii) is being, or has been, terminated or the subject of termination proceedings under applicable law or the terms of such Plan; or (iii) shall require a Consolidated Company to provide security under applicable law, the terms of such Plan, Section 401 or 412 of the Tax Code or Section 306 or 307 of ERISA; or (iv) results in a liability to a Consolidated Company under applicable law, the terms of such Plan, or Title IV of ERISA; and there shall result from any such failure, waiver, termination or other event a liability to the PBGC or a Plan that would have a Materially Adverse Effect. SECTION 9.9. MONEY JUDGMENT. Judgments or orders for the payment of money in excess of $10,000,000 individually or in the aggregate or otherwise having a Materially Adverse Effect shall be rendered against Borrower or any other Consolidated Company and such judgment or order shall continue unsatisfied (in the case of a money judgment) and in effect for a period of 30 days during which execution shall not be effectively stayed or deferred (whether by action of a court, by agreement or otherwise); -74- 84 SECTION 9.10. DEFAULT UNDER OTHER CREDIT DOCUMENTS. There shall exist or occur any "Event of Default" as provided under the terms of any Credit Document, or any Credit Document ceases to be in full force and effect or the validity or enforceability thereof is disaffirmed by or on behalf of Borrower or any other Consolidated Company, or at any time it is or becomes unlawful for Borrower or any other Consolidated Company to perform or comply with its obligations under any Credit Document, or the obligations of Borrower or any other Consolidated Company under any Credit Document are not or cease to be legal, valid and binding on Borrower or any such Consolidated Company; then, and in any such event, and at any time thereafter if any Event of Default shall then be continuing, the Agent may, and upon the written or telex request of the Required Lenders, shall, by written notice to Borrower, take any or all of the following actions, without prejudice to the rights of the Agent, any Lender or the holder of any Note to enforce its claims against Borrower or any other Consolidated Company: (i) declare all Commitments terminated, whereupon the Commitments of each Lender shall terminate immediately and any facility fee shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest on the Loans, and all other Obligations owing hereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided, that, if an Event of Default specified in Section 9.7. shall occur, the result which would occur upon the giving of written notice by the Agent to any Consolidated Company, as specified in clauses (i) and (ii) above, shall occur automatically without the giving of any such notice, and (iii) may exercise any other rights or remedies available under the Credit Documents, at law or in equity. -75- 85 ARTICLE 10. THE AGENT SECTION 10.1. APPOINTMENT OF AGENT. Each Lender hereby designates SunTrust as Agent to administer all matters concerning the Loans and to act as herein specified. Each Lender hereby irrevocably authorizes, and each holder of any Note by the acceptance of a Note shall be deemed irrevocably to authorize, the Agent to take such actions on its behalf under the provisions of this Agreement, the other Credit Documents, and all other instruments and agreements referred to herein or therein, and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its agents or employees. SECTION 10.2. AUTHORIZATION OF AGENT WITH RESPECT TO THE SECURITY DOCUMENTS. (a) Each Lender hereby authorizes the Agent to enter into any Security Documents, and to take all action contemplated thereby. All rights and remedies under any Security Documents may be exercised by the Agent for the benefit of the Agent and the Lenders and the other beneficiaries thereof upon the terms thereof. The Lenders further agree that the Agent may assign its rights and obligations under any of the Security Documents to any affiliate of the Agent or to any trustee, if necessary or appropriate under applicable law, which assignee in each such case shall (subject to compliance with any requirements of applicable law governing the assignment of such Security Documents) be entitled to all the rights of the Agent under and with respect to any applicable Security Document. (b) In each circumstance where, under any provision of any Security Document, the Agent shall have the right to grant or withhold any consent, exercise any remedy, make any determination or direct any action by the Agent under such Security Document, the Agent shall act in respect of such consent, exercise of remedies, determination or action, as the case may be, with the consent of and at the direction of the Required Lenders; provided, however, that no such consent of the Required Lenders shall be required with respect to any consent, determination or other matter that is, in the Agent's judgment, ministerial or administrative in nature. In each circumstance where any consent of or direction from the Required Lenders is required, the Agent shall send to the Lenders a notice setting forth a description in reasonable detail of the matter as to which consent or direction is requested and the Agent's proposed course of action with respect thereto. In the event the Agent shall not have received a response from any Lender within five (5) Business Days after such Lender's receipt of such notice, such Lender shall be deemed to have agreed to the course of action proposed by the Agent. -76- 86 SECTION 10.3. NATURE OF DUTIES OF AGENT. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Credit Documents. None of the Agent nor any of its respective officers, directors, employees or agents shall be liable for any action taken or omitted by it as such hereunder or in connection herewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Agent shall be ministerial and administrative in nature; the Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Lender; and nothing in this Agreement, express or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or the other Credit Documents except as expressly set forth herein. SECTION 10.4. LACK OF RELIANCE ON THE AGENT. (a) Independently and without reliance upon the Agent, each Lender, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Consolidated Companies in connection with the taking or not taking of any action in connection herewith, and (ii) its own appraisal of the creditworthiness of the Consolidated Companies, and, except as expressly provided in this Agreement, the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter. (b) The Agent shall not be responsible to any Lender for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, priority or sufficiency of this Agreement, the Notes, or any other documents contemplated hereby or thereby, or the financial condition of the Consolidated Companies, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement, the Notes, or the other documents contemplated hereby or thereby, or the financial condition of the Consolidated Companies, or the existence or possible existence of any Default or Event of Default. SECTION 10.5. CERTAIN RIGHTS OF THE AGENT. If the Agent shall request instructions from the Required Lenders with respect to any action or actions (including the failure to act) in connection with this Agreement, the Agent shall be entitled to refrain from such act or taking such act, unless and until the Agent shall have received instructions from the Required Lenders; and the Agent shall not incur liability in any Person by reason of so refraining. Without limiting the -77- 87 foregoing, no Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Lenders. SECTION 10.6. RELIANCE BY AGENT. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cable gram, radiogram, order or other documentary, teletransmission or telephone message believed by it to be genuine and correct and to have been signed, sent or made by the proper Person. The Agent may consult with legal counsel (including counsel for any Consolidated Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 10.7. INDEMNIFICATION OF AGENT. To the extent the Agent is not reimbursed and indemnified by the Consolidated Companies, each Lender will reimburse and indemnify the Agent, ratably according to the respective amounts of the Loans outstanding under all Facilities (or if no amounts are outstanding, ratably in accordance with the Total Commitments), in either case, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in performing its duties hereunder, in any way relating to or arising out of this Agreement or the other Credit Documents; provided that no Lender shall be liable to the Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. SECTION 10.8. THE AGENT IN ITS INDIVIDUAL CAPACITY. With respect to its obligation to lend under this Agreement, the Loans made by it and the Notes issued to it, the Agent shall have the same rights and powers hereunder as any other Lender or holder of a Note and may exercise the same as though it were not performing the duties specified herein; and the terms "Lenders", "Required Lenders", "holders of Notes", or any similar terms shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust, financial advisory or other business with the Consolidated Companies or any Affiliate of the Consolidated Companies as if it were not performing the duties specified herein, and may accept fees and other consideration from the Consolidated Companies for services in connection with this Agreement and otherwise without having to account for the same to the Lenders. -78- 88 SECTION 10.9. HOLDERS OF NOTES. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent. Any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. SECTION 10.10. SUCCESSOR AGENT. (a) The Agent may resign at any time by giving written notice thereof to the Lenders and Borrower and may be removed at any time with or without cause by the Required Lenders; provided, however, the Agent may not resign or be removed until a successor Agent has been appointed and shall have accepted such appointment. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent subject to Borrower's prior written approval. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent subject to Borrower's prior written approval, which shall be a bank which maintains an office in the United States, or a commercial bank organized under the laws of the United States of America or any State thereof, or any Affiliate of such bank, having a combined capital and surplus of at least $100,000,000. In the event that the Agent is no longer a Lender hereunder, the Agent shall promptly resign as Agent. (b) Upon the acceptance of any appointment as the Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article 10. shall inure to its benefit as to any actions taken or omitted to be taken by it while it was an Agent under this Agreement. -79- 89 ARTICLE 11. MISCELLANEOUS SECTION 11.1. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, telecopy or similar teletransmission or writing) and shall be given to such party at its address or applicable teletransmission number set forth on the signature pages hereof, or such other address or applicable teletransmission number as such party may hereafter specify by notice to the Agent and Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by mail, three Business Days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, (iii) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and the appropriate confirmation is received, or (iv) if given by any other means (including, without limitation, by air courier), when delivered or received at the address specified in this Section; provided that notices to the Agent shall not be effective until received. SECTION 11.2. AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement or the other Credit Documents, nor consent to any departure by any Consolidated Company therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders do any of the following: (i) waive any of the conditions specified in Section 5.1. or 5.2., (ii) increase the Commitments or other contractual obligations to Borrower under this Agreement, (iii) reduce the principal of, or interest on, the Notes or any fees hereunder, (iv) postpone any date fixed for the payment in respect of principal of, or interest on, the Notes or any fees hereunder, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number or identity of Lenders which shall be required for the Lenders or any of them to take any action hereunder, (vi) modify the definition of "Required Lenders," (vii) reduce any obligation owed under or release any Subsidiary Guarantee (except as required under Section 7.10(d). or (viii) modify this Section 11.2. Notwithstanding the foregoing, no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required hereinabove to take such action, affect the rights or duties of the Agent under this Agreement or under any other Credit Document. -80- 90 SECTION 11.3. NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of the Agent, any Lender or any holder of a Note in exercising any right or remedy hereunder or under any other Credit Document, and no course of dealing between any Consolidated Company and the Agent, any Lender or the holder of any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right or remedy hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Agent, any Lender or the holder of any Note would otherwise have. No notice to or demand on any Consolidated Company not required hereunder or under any other Credit Document in any case shall entitle any Consolidated Company to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Agent, the Lenders or the holder of any Note to any other or further action in any circumstances without notice or demand. SECTION 11.4. PAYMENT OF EXPENSES, ETC. Borrower shall: (i) whether or not the transactions hereby contemplated are consummated, pay all reasonable, out-of-pocket costs and expenses of the Agent in connection with the preparation, execution and delivery of, preservation of rights under, enforcement of, and, after a Default or Event of Default or, upon the request of the Borrower, refinancing, renegotiation or restructuring of, this Agreement and the other Credit Documents and the documents and instruments referred to therein, and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees actually incurred and disbursements of counsel for the Agent), and in the case of enforcement of this Agreement or any Credit Document after an Event of Default, all such reasonable, out-of-pocket costs and expenses (including, without limitation, the reasonable fees actually incurred and reasonable disbursements and charges of counsel), for any of the Lenders; (ii) subject, in the case of certain Taxes, to the applicable provisions of Section 4.8.(b), pay and hold each of the Lenders harmless from and against any and all present and future stamp, documentary, and other similar Taxes with respect to this Agreement, the Notes and any other Credit Documents, any collateral described therein, or any payments due thereunder, and save each Lender harmless -81- 91 from and against any and all liabilities with respect to or resulting from any delay or omission to pay such Taxes; and (iii) indemnify the Agent and each Lender, and their respective officers, directors, employees, representatives and agents from, and hold each of them harmless against, any and all costs, losses, liabilities, claims, damages or expenses incurred by any of them (whether or not any of them is designated a party thereto) (an "Indemnitee") arising out of or by reason of any investigation, litigation or other proceeding related to any actual or proposed use of the proceeds of any of the Loans or any Consolidated Company entering into and performing of the Agreement, the Notes, or the other Credit Documents, including, without limitation, the reasonable fees actually incurred and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding; provided, however, Borrower shall not be obligated to indemnify any Indemnitee for any of the foregoing arising out of such Indemnitee's gross negligence or willful misconduct; (iv) without limiting the indemnities set forth in subsection (iii) above, indemnify each Indemnitee for any and all expenses and costs (including without limitation, remedial, removal, response, abatement, cleanup, investigative, closure and monitoring costs), losses, claims (including claims for contribution or indemnity and including the cost of investigating or defending any claim and whether or not such claim is ultimately defeated, and whether such claim arose before, during or after any Consolidated Company's ownership, operation, possession or control of its business, property or facilities or before, on or after the date hereof, and including also any amounts paid incidental to any compromise or settlement by the Indemnitee or Indemnitees to the holders of any such claim), lawsuits, liabilities, obligations, actions, judgments, suits, disbursements, encumbrances, liens, damages (including without limitation damages for contamination or destruction of natural resources), penalties and fines of any kind or nature whatsoever (including without limitation in all cases the reasonable fees actually incurred, other charges and disbursements of counsel in connection therewith) incurred, suffered or sustained by that Indemnitee based upon, arising under or relating to Environmental Laws based on, arising out of or relating to in whole or in part, the existence or exercise of any rights or remedies by any Indemnitee under this Agreement, any other Credit Document or any related -82- 92 documents. If and to the extent that the obligations of Borrower under this Section 11.4. are unenforceable for any reason, Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. SECTION 11.5. RIGHT OF SETOFF. In addition to and not in limitation of all rights of offset that any Lender or other holder of a Note may have under applicable law, each Lender or other holder of a Note shall, upon the occurrence and during the continuation of any Event of Default and whether or not such Lender or such holder has made any demand or any Consolidated Company's obligations have matured, have the right to appropriate and apply to the payment of any Consolidated Company's obligations hereunder and under the other Credit Documents, all deposits of any Consolidated Company (general or special, time or demand, provisional or final) then or thereafter held by and other indebtedness or property then or thereafter owing by such Lender or other holder to any Consolidated Company, whether or not related to this Agreement or any transaction hereunder. SECTION 11.6. BENEFIT OF AGREEMENT; ASSIGNMENTS AND PARTICIPATIONS. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that Borrower may not assign or transfer any of its interest hereunder without the prior written consent of the Lenders. (b) Any Lender may make, carry or transfer Loans at, to or for the account of, any of its branch offices or the office of an Affiliate of such Lender. (c) Each Lender may assign all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it and the Notes held by it) to any financial institution; provided, however, that (i) the Agent and, except during the continuance of a Default or Event of Default, the Borrower must give their prior written consent to such assignment (which consent shall not be unreasonably withheld or delayed) unless such assignment is to an Affiliate of the assigning Lender, (ii) the amount of the Commitments of the assigning Lender subject to each assignment (determined as of the date the assignment and acceptance with respect to such assignment is delivered to the Agent) shall not be less than an amount equal to $10,000,000 or greater integral multiplies thereof, and (iii) the parties to each such assignment shall execute and deliver to the Agent an Assignment and Acceptance, together with the Note or Notes subject to such assignment and, unless such assignment is to an Affiliate of such Lender, a processing and recordation fee of $2,500. -83- 93 Borrower shall not be responsible for such processing and recordation fee or any costs or expenses incurred by any Lender or the Agent in connection with such assignment. From and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, the assignee thereunder shall be a party hereto and to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement. Within five (5) Business Days after receipt of the notice and the Assignment and Acceptance, Borrower, at its own expense, shall execute and deliver to the Agent, in exchange for the surrendered Note or Notes, a new Note or Notes to the order of such assignee in a principal amount equal to the applicable Commitments assumed by it pursuant to such Assignment and Acceptance and new Note or Notes to the assigning Lender in the amount of its retained Commitment or Commitments. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the date of the surrendered Note or Notes which they replace, and shall otherwise be in substantially the form attached hereto. (d) Each Lender may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments in the Loans owing to it and the Notes held by it), provided, however, that (i) no Lender may sell a participation in its aggregate Commitments (after giving effect to any permitted assignment hereof) in an amount in excess of fifty percent (50%) of such aggregate Commitments, provided, however, sales of participations to an Affiliate of such Lender shall not be included in such calculation and shall not require the consent of the Borrower; provided, however, no such maximum amount shall be applicable to any such participation sold at any time there exists an Event of Default hereunder, (ii) such Lender's obligations under this Agreement shall remain unchanged, (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, and (iv) the participating bank or other entity shall not be entitled to the benefit (except through its selling Lender) of the cost protection provisions contained in Article 4. of this Agreement, and (v) Borrower and the Agent and other Lenders shall continue to deal solely and directly with each Lender in connection with such Lender's rights and obligations under this Agreement and the other Credit Documents, and such Lender shall retain the sole right to enforce the obligations of Borrower relating to the Loans and to approve any amendment, modification or waiver of any provisions of this Agreement. (e) Any Lender or participant may, in connection with the assignment or participation or proposed assignment or participation, pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant any information relating to Borrower or the other Consolidated Companies furnished to such Lender by or on behalf of Borrower or any other Consolidated Company. With respect to any disclosure of confidential, non-public, proprietary information, such proposed assignee or participant shall -84- 94 agree to use the information only for the purpose of making any necessary credit judgments with respect to this credit facility and not to use the information in any manner prohibited by any law, including without limitation, the securities laws of the United States. The proposed participant or assignee shall agree not to disclose any of such information except as permitted by Section 11.15. hereof. The proposed participant or assignee shall further agree to return all documents or other written material and copies thereof received from any Lender, the Agent or Borrower relating to such confidential information unless otherwise properly disposed of by such entity. (f) Any Lender may at any time assign all or any portion of its rights in this Agreement and the Notes issued to it to a Federal Reserve Bank; provided that no such assignment shall release the Lender from any of its obligations hereunder. (g) If (i) any Taxes referred to in Section 4.8.(b) have been levied or imposed so as to require withholdings and reductions by the Borrower and payment by the Borrower of additional amounts to any Lender as a result thereof or any Lender shall make demand for payment of any material additional amounts as compensation for increased costs pursuant to Section 4.11., then and in such event, upon request from the Borrower delivered to such Lender and the Agent, such Lender shall assign, in accordance with the provisions of Section 11.6.(c), all of its rights and obligations under this Agreement and the other Credit Documents to another Lender or other financial institution selected by the Borrower and consented to by the Agent in consideration for the payment by such assignee to the Lender of the principal of and interest on the outstanding Loans accrued to the date of such assignment and the assumption of such Lender's Revolving Credit Commitment, together with any and all other amounts owing to such Lender under any provisions of this Agreement or the other Credit Documents accrued to the date of such assignment. -85- 95 SECTION 11.7. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND UNDER THE NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF) OF THE STATE OF GEORGIA. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES OR ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN THE SUPERIOR COURT OF FULTON COUNTY, GEORGIA, OR ANY OTHER COURT OF THE STATE OF GEORGIA OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF GEORGIA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, BORROWER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. (c) THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE TRIAL BY JURY, AND BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. (d) Nothing herein shall affect the right of the Agent, any Lender, any holder of a Note or any Consolidated Company to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against Borrower in any other jurisdiction. SECTION 11.8. INDEPENDENT NATURE OF LENDERS' RIGHTS. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights pursuant to this Agreement and its Notes, and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. SECTION 11.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered -86- 96 shall be an original, but all of which shall together constitute one and the same instrument. SECTION 11.10. EFFECTIVENESS; SURVIVAL. (a) This Agreement shall become effective on the date (the "Effective Date") on which all of the parties hereto shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Agent pursuant to Section 11.1. or, in the case of the Lenders, shall have given to the Agent written (which may be delivered by facsimile) or telex notice (actually received) that the same has been signed and mailed to them. (b) The obligations of Borrower under Sections 4.8.(b), 4.11., 4.13., 4.14., 4.17. and 11.4. hereof shall survive the payment in full of the Notes after the Maturity Date. All representations and warranties made herein, in the certificates, reports, notices, and other documents delivered pursuant to this Agreement shall survive the execution and delivery of this Agreement, the other Credit Documents, and such other agreements and documents, the making of the Loans hereunder, and the execution and delivery of the Notes. SECTION 11.11. SEVERABILITY. In case any provision in or obligation under this Agreement or the other Credit Documents shall be invalid, illegal or unenforceable, in whole or in part, in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 11.12. INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitation of, another covenant, shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. SECTION 11.13. CHANGE IN ACCOUNTING PRINCIPLES, FISCAL YEAR OR TAX LAWS. If (i) any preparation of the financial statements referred to in Section 7.7. hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accounts (or successors thereto or agencies with similar functions) result in a material change in the method of calculation of financial covenants, standards or terms found in this Agreement, (ii) there is any change in Borrower's fiscal quarter or -87- 97 fiscal year, or (iii) there is a material change in federal tax laws which materially affects any of the Consolidated Companies' ability to comply with the financial covenants, standards or terms found in this Agreement, Borrower and the Required Lenders agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating any of the Consolidated Companies' financial condition shall be the same after such changes as if such changes had not been made. Unless and until such provisions have been so amended, the provisions of this Agreement shall govern. SECTION 11.14. HEADINGS DESCRIPTIVE; ENTIRE AGREEMENT. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. This Agreement, the other Credit Documents, and the agreements and documents required to be delivered pursuant to the terms of this Agreement constitute the entire agreement among the parties hereto and thereto regarding the subject matters hereof and thereof and supersede all prior agreements, representations and understandings related to such subject matters. SECTION 11.15. DISCLOSURE OF CONFIDENTIAL INFORMATION. The Agent and the Lenders agree to use their best efforts to hold in confidence and not disclose any written information (other than information (i) which was publicly known from a source other than the Borrower or a Subsidiary, at the time of disclosure (except pursuant to disclosure in connection with this Agreement), (ii) which subsequently becomes publicly known through no act or omission by them, or (iii) which otherwise becomes known to them, other than through disclosure by the Borrower or a Subsidiary or by any other Person whom the Agent or such Lender has reason to believe disclosed such information in violation of or contrary to the confidentiality requirements or policies of the Borrower or a Subsidiary) delivered or made available by or on behalf of the Borrower or any Subsidiary to them (including without limitation any non-public information obtained pursuant to Section 7.5. or 7.7.) in connection with or pursuant to this Agreement which is proprietary in nature and clearly marked or labeled as being confidential information, provided that nothing herein shall prevent the Agent or any Lender from delivering copies of any financial statements and other documents delivered to the Agent or such Lender, and disclosing any other information disclosed to the Agent or such Lender, by or on behalf of the Borrower or any Subsidiary in connection with or pursuant to this Agreement to (i) the Agent's or such Lender's directors, officers, employees, agents and professional consultants, (ii) any other Lender, (iii) any Person to which such Lender offers to assign its Notes or Commitments or any part thereof (which Person agrees to be bound by the provisions of this Section 11.15), (iv) any Person to which such Lender sells or offers to sell a participation in all or any part of its Notes or Commitments (which Person agrees to be bound by the provisions of this Section 11.15), (v) any federal -88- 98 or state regulatory authority having jurisdiction over the Agent or such Lender, and (vi) any other Person to which such delivery or disclosure may be necessary (a) to effect compliance with any law, rule, regulation or order applicable to the Agent or such Lender, (b) in response to any subpoena or other legal process, (c) in connection with any litigation to which the Agent or such Lender is a party or (d) in order to protect such Lender's investment in its Notes. SECTION 11.16. INTEREST. In no event shall the amount of interest, and all charges, amounts or fees contracted for, charged or collected pursuant to this Agreement, the Notes or the other Credit Documents and deemed to be interest under applicable law (collectively, "Interest") exceed the highest rate of interest allowed by applicable law (the "Maximum Rate"), and in the event any such payment is inadvertently received by any Lender, then the excess sum (the "Excess") shall be credited as a payment of principal, unless the Borrower shall notify such Lender in writing that it elects to have the Excess returned forthwith. It is the express intent hereof that the Borrower not pay and the Lenders not receive, directly or indirectly in any manner whatsoever, interest in excess of that which may legally be paid by the Borrower under applicable law. The right to accelerate maturity of any of the Loans does not include the right to accelerate any interest that has not otherwise accrued on the date of such acceleration, and the Agent and the Lenders do not intend to collect any unearned interest in the event of any such acceleration. All monies paid to the Agent or the Lenders hereunder or under any of the Notes or the other Credit Documents, whether at maturity or by prepayment, shall be subject to rebate of unearned interest as and to the extent required by applicable law. By the execution of this Agreement, the Borrower covenants, to the fullest extent permitted by law, that (i) the credit or return of any Excess shall constitute the acceptance by the Borrower of such Excess, and (ii) the Borrower shall not seek or pursue any other remedy, legal or equitable, against the Agent or any Lender, based in whole or in part upon contracting for charging or receiving any Interest in excess of the Maximum Rate. For the purpose of determining whether or not any Excess has been contracted for, charged or received by the Agent or any Lender, all interest at any time contracted for, charged or received from the Borrower in connection with this Agreement, the Notes or any of the other Credit Documents shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread in equal parts throughout the full term of the Commitments. The Borrower, the Agent and each Lender shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium rather than as Interest and (ii) exclude voluntary prepayments and the effects thereof. The provisions of this Section shall be deemed to be incorporated into each Note and each of the other Credit Documents (whether or not any provision of this Section is referred to therein). All such Credit Documents and communications relating to any Interest owed by the Borrower and all figures set forth therein shall, for the sole purpose of computing the extent of obligations -89- 99 hereunder and under the Notes and the other Credit Documents be automatically recomputed by the Borrower, and by any court considering the same, to give effect to the adjustments or credits required by this Section. [Signatures on Next page] -90- 100 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in Atlanta, Georgia, by their duly authorized officers as of the day and year first above written. ROCK-TENN COMPANY (CORPORATE SEAL) By:/s/ David C. Nicholson ------------------------------------- Title:Senior Vice President, Chief ------------------------------- Financial Officer and Secretary Attest: By: Robert B. McIntosh -------------------------- Title: Assistant Secretary ------------------- Address for notice: Rock-Tenn Company P.O. Box 4098 Norcross, Georgia 30091 Attention: Chief Financial Officer [Signatures Continued on Next Page] -91- 101 SUNTRUST BANK, ATLANTA, AS AGENT By:/s/ Jenna M. Hale ------------------------------------- Title: Assistant Vice President ------------------------------- (BANK SEAL) By: ------------------------------------- Title: ------------------------------- Address for notice: SunTrust Bank Atlanta 25 Park Place Atlanta, Georgia 30303 Attention: Jenna Hale [Signatures Continued on Next Page] -92- 102 SUNTRUST BANK, ATLANTA, as LENDER By: /s/ Jenna M. Hale --------------------------------- Title: Assistant Vice President --------------------------- (BANK SEAL) By: --------------------------------- Title: --------------------------- Address for notice: SunTrust Bank Atlanta 25 Park Place Atlanta, Georgia 30303 Attention: Jenna Hale Telecopy No.: 404/827-6270 Payment Office: 25 Park Place, N.E. 23rd Floor Atlanta, Georgia 30303 REVOLVING CREDIT COMMITMENT $400,000,000 APPLICABLE COMMITMENT PERCENTAGE 100% SWING LINE COMMITMENT $ 20,000,000 -93- EX-4.2 3 1ST AMENDMENT TO CREDIT AGREEMENT FEBRUARY 20 1 EXHIBIT 4.2 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT dated as of February 20, 1997 (the "Amendment") by and among ROCK-TENN COMPANY, a Georgia corporation (the "Borrower"), SUNTRUST BANK, ATLANTA in its capacity as a Lender under the Credit Agreement (as such terms are defined below) and SUNTRUST BANK, ATLANTA in its capacity as agent for the Lenders (together with any successor agent for such Lenders as may be appointed from time to time pursuant to Article 10. of the Credit Agreement (the "Agent"). WHEREAS, the Borrower, the Agent and the Lender are parties to that certain Credit Agreement dated as of January 21, 1997, by and among the Borrower, the Agent and the other banks and lending institutions party to the Credit Agreement from time to time which become "Lenders" as provided therein (collectively, the "Lenders") (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 certain provisions of 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 deleting the second sentence of Section 2.9(d) in its entirety and inserting in lieu thereof the following: "If a payment is received by the Agent before 12:00 noon (local time for the Agent) on a Business Day, the Agent shall distribute each Lender's share of the payment to such Lender before 2:00 p.m. (local time for the Agent) on the same day; or if a payment is received by the Agent after 12:00 noon (local time for the Agent) on a Business Day or is received on a day other than a Business Day, the Agent shall distribute each Lender's share of the payment to such Lender before 2:00 p.m. (local time for the Agent) on the next Business Day.". (b) The Credit Agreement is hereby further amended by deleting clause (iv) of Section 11.2 in its entirety and inserting in lieu thereof the following: -1- 2 "(iv) postpone any date fixed for the payment in respect of principal of, or interest on, the Notes (other than in connection with the extension of the Maturity Date in accordance with Section 2.5 hereof) or any fees hereunder,". (c) The Credit Agreement is hereby further amended by deleting clause (viii) of Section 11.2 in its entirety and inserting in lieu thereof the following: "(viii) modify this Section 11.2 or Section 2.5". Section 2. Benefits of Credit Agreement. Each reference to the Credit Agreement in any of the Credit 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 3. 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. Section 4. Conditions to Effectiveness of Amendment. The effectiveness of this Amendment are 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 -2- 3 satisfactory in form and substance to the Agent: (a) this Amendment executed by the Borrower; (b) a certificate of incumbency signed by the Secretary of the Borrower with respect to each of the officers of the Borrower authorized to execute and deliver the Amendment; and (c) such other approvals, opinions or documents as the Agent may reasonably request. Section 5. Reaffirmation. The Borrower hereby repeats and reaffirms all representations and warranties made by the Borrower in the Credit Agreement and the other Credit 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 full. Section 6. Benefits. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Section 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA. Section 8. Effect. Except as expressly herein amended, the terms and conditions of the Credit Agreement shall remain in full force and effect. Section 9. 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] -3- 4 IN WITNESS WHEREOF, the parties have caused this First 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: /s/ David C. Nicholson ----------------------------------- Title: Senior Vice President, ------------------------------ Secretary and Chief Financial Officer Attest: By: /s/ Robert B. McIntosh -------------------------- Title: Assistant Secretary ------------------- SUNTRUST BANK, ATLANTA, AS AGENT AND LENDER By: /s/ Jenna M. Hale ------------------------------------ Title: Assistant Vice President ------------------------------ By: ------------------------------------ Title: ------------------------------ -4- EX-4.3 4 2ND AMENDMENT TO CREDIT AGREEMENT JUNE 6 1 EXHIBIT 4.3 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT dated as of June 6, 1997 (the "Amendment") by and among ROCK-TENN COMPANY, a Georgia corporation (the "Borrower"), the Lenders under the Credit Agreement (as such terms are defined below) and SUNTRUST BANK, ATLANTA in its capacity as agent for the Lenders (together with any successor agent for such Lenders as may be appointed from time to time pursuant to Article 10 of the Credit Agreement (the "Agent")). WHEREAS, the Borrower, the Agent and the Lenders are parties to that certain Credit Agreement dated as of January 21, 1997, by and among the Borrower, the Agent and the other banks and lending institutions party to the Credit Agreement from time to time which become "Lenders" as provided therein (collectively, the "Lenders"), as amended by that certain First Amendment to Credit Agreement dated as of February 20, 1997 (as so 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 to, among other things, increase the Total Commitments to $450,000,000 which includes increasing the Revolving Credit Commitment to $430,000,000, but only 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 deleting from Section 1.1 the definitions of the terms "Applicable Commitment Percentage", "Applicable Margin", "Facility Fee Percentage", "Material", "Materially Adverse Effect", "Swing Line Commitment", "Swing Line Lender" and "Total Commitments" and substituting in their respective places the following: "'Applicable Commitment Percentage' shall mean, for each Lender, (i) in the case of Revolving Credit Commitments, a fraction, the 2 numerator of which shall be the then amount of such Lender's Revolving Credit Commitment and the denominator of which shall be the aggregate amount of the Revolving Credit Commitments of all the Lenders and (ii) in the case of Total Commitments, a fraction, the numerator of which shall be the then amount of such Lender's Revolving Credit Commitment and, in the case of the Swing Line Lender, the Swing Line Commitment, and the denominator of which shall be the aggregate amount of the Revolving Credit Commitments of all the Lenders and the Swing Line Commitment. The Applicable Commitment Percentage of Revolving Credit Commitments and the Applicable Percentage of Total Commitments of each Lender as of the Closing Date is as set forth on the signature pages hereof. 'Applicable Margin' shall mean the per annum rates set forth across from the Ratio of Consolidated Funded Debt to Total Capitalization as calculated as of the end of the preceding fiscal quarter determined by reference to the table set forth below. Any changes to the Applicable Margin will be effective as of the date specified in Section 4.6.
Ratio of Consolidated Applicable Margin --------------------- ----------------- Funded Debt to Total -------------------- Capitalization -------------- >60% .575% >55% but <60% .500% - >50% but <55% .425% - >45% but <50% .325% - >35% but <45% .275% - >25% but <35% .225% - <25% .175% -
'Facility Fee Percentage' shall mean the per annum rates set forth across from the Ratio of Consolidated Funded Debt to Total Capitalization as calculated as of the end of the preceding fiscal quarter determined by reference to the table set forth below. Any changes to the Facility Fee Percentage will be effective as of the date specified in Section 4.6. -2- 3
Ratio of Consolidated Facility Fee --------------------- ------------ Funded Debt to Total Percentage -------------------- ---------- Capitalization -------------- >60% .300% >55% but <60% .250% - >50% but <55% .200% - >45% but <50% .150% - >35% but <45% .125% - >25% but <35% .100% - <25% .075% -
'Material' (or words derived therefrom) as used in this Agreement, means the measure of a matter of significance which shall in no event be determined as being less than an amount equal to the greater of (i) Ten Million Dollars ($10,000,000) or (ii) ten percent (10%) of the Consolidated Net Worth. 'Materially Adverse Effect' shall mean any Material adverse change in (i) the business, operations, financial condition or assets of the Consolidated Companies, taken as a whole, (ii) the ability of Borrower to perform its obligations under this Agreement, or (iii) the ability of the Consolidated Companies (taken as a whole) to perform their respective obligations, if any, under the Credit Documents. Notwithstanding anything set forth herein to the contrary, the effect of the writeoff of goodwill taken by the Borrower for the fiscal quarter ending March 31, 1997 resulting from the closure of its Mundelin, Illinois plant shall not constitute a "Materially Adverse Effect". 'Swing Line Commitment' shall mean, at any time for the Swing Line Lender, an amount equal to the Swing Line Commitment set forth on the signature page of the Swing Line Lender, as the same may be increased or decreased from time to time as a result of any assignment thereof pursuant to Section 11.6., or any amendment thereof pursuant to Section 11.2. The Swing Line Commitment shall be in addition to the Revolving Credit Commitment of the Swing Line Lender. 'Swing Line Lender' shall mean SunTrust and any successor or assignee thereof; provided, however, that the Swing Line Lender must at -3- 4 all times be a Lender having a Revolving Credit Commitment in excess of the Swing Line Commitment. 'Total Commitments' shall mean the sum of the Revolving Credit Commitments of all Lenders and the Swing Line Commitment of the Swing Line Lender." (b) The Credit Agreement is hereby further amended by deleting the words, "Applicable Commitment Percentage" in the last line of Section 2.3(c) and substituting in lieu thereof the words, "Applicable Commitment Percentage of Revolving Credit Commitments". (c) The Credit Agreement is hereby further amended by deleting Section 2.3(d) in its entirety and inserting in lieu thereof the following: "(d) If at any time the aggregate outstanding Competitive Bid Loans, Revolving Loans and Swing Line Loans exceed the Total Commitments, the Borrower shall immediately cause an amount equal to such excess to be applied as follows in the order of priority indicated: First, to the prepayment of outstanding Swing Line Loans; Second, to the prepayment of outstanding Revolving Loans; and Third, to the prepayment of outstanding Competitive Bid Loans. Any such prepayment to be applied to such Loans as designated by the Borrower and, in the event the Borrower fails to designate a Loan, to such Loans with the earliest maturity dates, based upon the remaining terms of their respective Interest Periods, and with respect to Loans with the same Interest Period, pro rata to the Lenders extending such Loans. Any prepayment of Swing Line Loans, Revolving Loans and Competitive Bid Loans pursuant to this Section 2.3. shall be made, insofar as is possible, in such a way as to avoid any funding losses pursuant to Section 4.13.". (d) The Credit Agreement is hereby further amended by deleting the words, "Applicable Commitment Percentage" in the fourth and fifth lines of Section 2.9 and substituting in lieu thereof the words, "Applicable Commitment Percentage of Revolving Credit Commitments". -4- 5 (e) The Credit Agreement is hereby further amended by deleting Section 3.4 in its entirety and inserting in lieu thereof the following: "SECTION 3.4 INTENTIONALLY OMITTED.". (f) The Credit Agreement is hereby further amended by deleting the words, "Applicable Commitment Percentage" in the sixth line of Section 4.2(a) and substituting in lieu thereof the words, "Applicable Commitment Percentage of Revolving Credit Commitments". (g) The Credit Agreement is hereby further amended by deleting the words, "Applicable Commitment Percentage" in the second line of Section 4.2(e) and substituting in lieu thereof the words, "Applicable Commitment Percentage of Revolving Credit Commitments". (h) The Credit Agreement is hereby further amended by deleting Section 4.5(a) in its entirety and inserting in lieu thereof the following: "(a) Borrower shall pay to the Agent, for the ratable benefit of each Lender based upon its respective Applicable Commitment Percentage of the Total Commitments, a facility fee (the "Facility Fee") for the period commencing on the Closing Date to and including the Maturity Date, payable quarterly in arrears on the last day of each calendar quarter, commencing on March 31, 1997, and on the Maturity Date, equal to the Facility Fee Percentage multiplied by the average daily amount of the Total Commitments, whether or not utilized.". (i) The Credit Agreement is hereby further amended by deleting the words, "Applicable Commitment Percentage" in the tenth and eleventh lines of Section 4.7(b) and substituting in lieu thereof the words, "Applicable Commitment Percentage of Revolving Credit Commitments". (j) The Credit Agreement is hereby further amended by deleting the words, "Applicable Commitment Percentage" in the fourth and fifth lines of Section 4.16 and substituting in lieu thereof the words, "Applicable Commitment Percentage of Total Commitments". -5- 6 (k) The Credit Agreement is hereby further amended by adding the following new Section 4.19: "SECTION 4.19 CONVERSION OF SWING LINE LOANS AND READJUSTMENT OF APPLICABLE COMMITMENT PERCENTAGES UPON ACCELERATION. Upon the acceleration of the Loans in accordance with Section 9.10 hereof (including any automatic acceleration provided for therein) (an "Acceleration"), all of the outstanding Swing Line Loans shall automatically be converted into Revolving Loans and each of the Lenders shall be deemed to have purchased or sold, as applicable, a portion of the Revolving Loans so that after giving effect to such purchases and sales, each Lender (including the Swing Line Lender) shall have a pro rata share of the outstanding Revolving Loans based upon such Lender's Applicable Commitment Percentage of Total Commitments. Accordingly, following an Acceleration, the Agent shall promptly determine the portion of any Revolving Loan, if any, that each Lender shall be deemed to have purchased or sold in order to assure that the total outstanding Revolving Loans made by each Lender, after giving effect to the conversion of all outstanding Swing Line Loans, equals such Lender's Applicable Commitment Percentage of the Total Commitments. Determinations of the amounts of Revolving Loan that are deemed to have been purchased and sold hereunder shall be conclusive absent manifest error. Upon making such determinations, the Agent shall promptly notify each of the Lenders of the portion of Revolving Loans that such Lender is deemed to have purchased and/or sold. To the extent any Lender is deemed to have purchased a Revolving Loan from another Lender hereunder, then such Lender shall on or before 11:00 a.m. (local time for the Agent) on the first Business Day after receipt of notice from the Agent, deposit in an account specified by the Agent an amount equal to the principal amount of the portion of the Revolving Loan which it is deemed to have purchased in same day funds, whereupon such funds shall be immediately delivered to the Lender deemed to have sold the portion of such Revolving Loan. In no event shall any such amount be received by the Borrower. Upon the payment of the amounts by a purchasing Lender required herein, the amount so funded shall become an obligation under such Lender's Revolving Credit Note and shall no longer be owed under the Revolving Credit Note of the selling Lender. Each Lender's obligation to purchase and sell the Revolving Loans -6- 7 referred to in this Section 4.19 shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever; (ii) any adverse change in the condition (financial or otherwise) of the Borrower or any other Consolidated Company; (iii) the acceleration or maturity of any Loans or the termination of the Revolving Credit Commitments after the making of any Revolving Loan; (iv) any breach of this Agreement by the Borrower or any other Lender; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.". (l) The Credit Agreement is hereby further amended by deleting Section 7.10(b) in entirety and inserting in lieu thereof the following: "(b) Subject to subsection (c) below, the Borrower shall cause all of its Restricted Subsidiaries not existing as of the Closing Date to execute and deliver Subsidiary Guarantees and a counterpart Contribution Agreement in substantially the same form as set forth, respectively, in Exhibits "L" and "M", within thirty (30) days of the creation or acquisition of any such Restricted Subsidiary by the Borrower or other Restricted Subsidiary; provided, however, that in the case of any Subsidiary which holds no assets and is formed solely to effectuate an acquisition, the thirty (30) day period referenced above shall begin on the earlier of (i) such Subsidiary acquiring any assets or (ii) the consummation of the acquisition for which such Subsidiary was formed. The delivery of such documents shall be accompanied by such other documents as the Agent may reasonably request (e.g., certificates of incorporation, articles of incorporation and bylaws, membership operating agreements, opinion letters and appropriate resolutions of the Board of Directors of any such Subsidiary Guarantor).". (m) The Credit Agreement is hereby further amended by deleting Section 8.1 in its entirety and inserting in lieu thereof the following: "SECTION 8.1 FINANCIAL REQUIREMENTS. The Borrower shall not: (i) Fixed Charges. Suffer or permit, the ratio of (a) Consolidated Net Income Available for Fixed Charges to (b) Fixed Charges as -7- 8 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:
----------------------------------------- PERIOD RATIO ------ ----- ----------------------------------------- Closing Date thru 2.5:1.0 March 31, 1997 ----------------------------------------- June 30, 1997 thru 1.5:1.0 March 31, 1998 ----------------------------------------- June 30, 1998 thru 2.0:1.0 September 30, 1999 ----------------------------------------- December 31, 1999 thru 2.5:1.0 Maturity Date -----------------------------------------
(ii) Consolidated Funded Debt to EBITDA. Permit the ratio of (a) Consolidated 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 thru 4.25:1.0 September 30, 1997 ------------------------------------------- December 31, 1997 thru 4.0:1.0 September 30, 1998 ------------------------------------------- December 31, 1998 thru 3.5:1.0 September 30, 1999 ------------------------------------------- December 31, 1999 thru 3.0:1.0 Maturity Date -------------------------------------------
-8- 9 (iii) Consolidated Funded Debt to Total Capitalization. Permit the ratio of Consolidated Funded Debt to Total Capitalization as of the last day of each fiscal quarter ending during the periods set forth below, to exceed the ratio set forth opposite such period:
--------------------------------------- PERIOD RATIO ------ ----- --------------------------------------- Closing Date thru .65:1 September 30, 1998 --------------------------------------- December 31, 1998 thru .60:1 September 30, 1999 --------------------------------------- December 31, 1999 thru .55:1 Maturity Date ---------------------------------------
(n) The Credit Agreement is further amended by changing the amount of the (i) Revolving Credit Commitments, (ii) the Swing Line Commitments and (iii) the Applicable Commitment Percentage of each of the Lenders, and the Swing Line Lender, in the case of the Swing Line Commitment, to the respective amounts set forth on the signature pages attached hereto. Section 2. Acknowledgment of Lenders' Commitments; Repayment of Outstanding Loans. (a) The parties hereto hereby agree that after giving effect to the transactions contemplated by this Amendment, the amount of each Lender's respective Commitment and Applicable Commitment Percentage and, in the case of the Swing Line Lender, the Swing Line Commitment, is set forth on the signature pages hereto. Accordingly, for purposes of the definitions of "Applicable Commitment Percentage", "Revolving Credit Commitment" and "Swing Line Commitment", the signature pages hereto shall constitute signature pages to the Credit Agreement. (b) Upon the effectiveness of this Amendment, all of the outstanding Loans shall be repaid by the Borrower in their entirety, together with any fees under Section 4.13 of the Credit Agreement. -9- 10 Section 3. Benefits of Credit Documents. (a) Each reference to the Credit Agreement in any of the Credit 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. (b) Each reference to the Revolving Credit Notes in any of the Credit Documents shall be deemed to be a reference to the Revolving Credit Notes, substantially in the form of Exhibit A hereto, dated the date hereof, payable to the order of each of the Lenders, in the aggregate principal amount of $450,000,000 (the "New Revolving Credit Notes") in replacement of the outstanding Revolving Credit Notes in favor of each of the Lenders in the aggregate principal amount of $400,000,000. (c) Each reference to the Competitive Bid Notes in any of the Credit Documents shall be deemed to be a reference to the Competitive Bid Notes, substantially in the form of Exhibit B hereto, each dated the date hereof, payable to the order of each of the Lenders, each in the principal amount of $450,000,000 (the "New Competitive Bid Notes", the New Competitive Bid Notes, together with the New Revolving Credit Notes, the "New Notes") in replacement of the outstanding Competitive Bid Notes in favor of each of the Lenders each in the principal amount of $400,000,000. 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 each of the parties hereto; (b) the New Revolving Credit Notes executed by the Borrower; (c) the New Competitive Bid Notes executed by the Borrower; (d) the Acknowledgment and Consent of the Guarantors, substantially in the form of Exhibit C hereto, executed by each of the Guarantors (the "Acknowledgment"); -10- 11 (e) A certificate of the Secretary or Assistant Secretary of the Borrower which certifies as to (i) the incumbency with respect to each of the officers of the Borrower authorized to execute and deliver this Amendment, the New Notes and the other documents in connection therewith and (ii) the truth and correctness of attached copies of the following: (A) all corporate or other necessary action taken by the Borrower (including the resolutions of the board of directors of Borrower) to authorize the execution, delivery and performance of this Amendment, the New Notes and the other documents entered in connection therewith; (B) the certificate of incorporation and by-laws of the Borrower (or a statement that such documents have not been amended, supplemented or otherwise modified from copies of such documents previously delivered to the Agent); and (C) a certificate of existence or other good standing certificate issued by the Secretary of State of the State of Georgia; (f) a certificate executed by a Financial Officer of the Borrower, stating that: (i) on such date, and after giving effect to the transactions contemplated hereby, no Default or Event of Default has occurred and is continuing; (ii) there has been no change which has had or is reasonably likely to have a Materially Adverse Effect since March 31, 1997; (iii) the representations and warranties set forth in Article 6 of the Agreement are true and correct in all material respects on and as of such date with the same effect as though made on and as of such date; and (iv) the Borrower on such date is in compliance with all the terms and provisions set forth in the Credit Agreement on its part to be observed and performed; (g) A certificate of the Secretary or Assistant Secretary of each of the Guarantors which certifies as to (i) the incumbency with respect to each of the officers of such Guarantor authorized to execute and deliver the Acknowledgment and the other documents in connection therewith and (ii) the truth and correctness of attached copies of (A) of all corporate or other necessary action taken by such Guarantor (including the resolutions of the board of directors of such Guarantor) to authorize the execution, delivery and performance of the Acknowledgment and (B) the certificate of incorporation and by-laws of such Guarantor (or a statement that such documents have not been amended, supplemented or otherwise modified from copies of such documents previously delivered to the Agent); (h) payment by the Borrower of a fee equal to $337,500.00 to the Agent to be distributed to the Lenders pro rata based upon their Applicable Commitment Percentage of the Total Commitments; (i) opinions of (i) Robert McIntosh, Esquire, corporate counsel to the Borrower and the Guarantors as to certain corporate matters, and (ii) King & Spalding, -11- 12 counsel to the Borrower and the Guarantors regarding the enforceability of the Amendment, the Credit Agreement as amended by the Amendment, and the New Notes, and such other matters as Agent or its counsel may request; and (j) 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 the New Notes, and to perform this Amendment, the New Notes and the Credit Agreement, as amended by this Amendment, in accordance with their respective terms. This Amendment and each of the New Notes have been duly executed and delivered by the duly authorized officers of the Borrower, and each of this Amendment, each New Note, 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 New Notes, and the performance by the Borrower of this Amendment, the New Notes 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. Section 6. Reaffirmation. The Borrower hereby repeats and reaffirms all representations and warranties made by the Borrower in the Credit Agreement and the other Credit 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 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 Guarantor. By execution of the Acknowledgment, each Guarantor hereby: -12- 13 (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 the Acknowledgment, and to perform the Acknowledgment in accordance with its terms. The Acknowledgment has been duly executed and delivered by the duly authorized officers of each Guarantor, and is a legal, valid and binding obligation of each Guarantor enforceable against each 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 the Acknowledgment and the performance by the such Guarantor of the Acknowledgment in accordance with its 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 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 the Borrower or 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. -13- 14 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. 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 following pages] 15 [SIGNATURE PAGE TO SECOND AMENDMENT TO CREDIT AGREEMENT] SUNTRUST BANK, ATLANTA, AS AGENT AND LENDER By: ----------------------------------- Title: ----------------------------- By: ----------------------------------- Title: ----------------------------- REVOLVING CREDIT COMMITMENT $100,000,000 APPLICABLE COMMITMENT PERCENTAGE OF 23.2558% REVOLVING CREDIT COMMITMENTS SWING LINE COMMITMENT $ 20,000,000 APPLICABLE COMMITMENT PERCENTAGE OF 26.6667% TOTAL COMMITMENTS
WACHOVIA BANK OF GEORGIA, N.A. By: ----------------------------------- Title: ----------------------------- By: ----------------------------------- Title: ----------------------------- REVOLVING CREDIT COMMITMENT $115,000,000 APPLICABLE COMMITMENT PERCENTAGE OF 26.7442% REVOLVING CREDIT COMMITMENTS APPLICABLE COMMITMENT PERCENTAGE OF 25.5556% TOTAL COMMITMENTS
[Signatures continued on next page] -2- 16 [SIGNATURE PAGE TO SECOND AMENDMENT TO CREDIT AGREEMENT] THE CHASE MANHATTAN BANK By: ----------------------------------- Title: ----------------------------- REVOLVING CREDIT COMMITMENT $72,500,000 APPLICABLE COMMITMENT PERCENTAGE OF 16.8605% REVOLVING CREDIT COMMITMENTS APPLICABLE COMMITMENT PERCENTAGE OF 16.1111% TOTAL COMMITMENTS
NATIONSBANK, N.A. By: ----------------------------------- Title: ----------------------------- By: ----------------------------------- Title: ----------------------------- REVOLVING CREDIT COMMITMENT $72,500,000 APPLICABLE COMMITMENT PERCENTAGE OF 16.8605% REVOLVING CREDIT COMMITMENTS APPLICABLE COMMITMENT PERCENTAGE OF 16.1111% TOTAL COMMITMENTS
-3- 17 [Signatures continued on next page] -4- 18 [SIGNATURE PAGE TO SECOND AMENDMENT TO CREDIT AGREEMENT] CIBC, INC. By:/s/ Page Colburn ----------------------------------- Title: Director ----------------------------- REVOLVING CREDIT COMMITMENT $70,000,000 APPLICABLE COMMITMENT PERCENTAGE OF 16.2791% REVOLVING CREDIT COMMITMENTS APPLICABLE COMMITMENT PERCENTAGE OF 15.5556% TOTAL COMMITMENTS
-5- EX-4.4 5 AGREEMENT TO PROVIDE OTHER DEBT INSTRUMENTS 1 EXHIBIT 4.4 Rock-Tenn Company has excluded from filing herewith instruments relating to (i) the $5,850,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1986, issued by the Waxahachie Industrial Development Authority; (ii) the $6,750,000 Economic Development Revenue Bonds (Rock-Tenn Company, Mill Division Inc. Project), Series 1995, issued by the City of Columbus, Indiana; (iii) the $3,300,000 Economic Development Revenue Bonds (Rock-Tenn Converting Company Facility), Series 1994, issued by the Maryland Industrial Development Financing Authority; (iv) the $4,000,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1995, issued by the Industrial Development Board of the City of Tullahoma, Tennessee; (v) the $2,750,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project, Series 1995, issued by the Industrial Development Board of the County of Wilson; (vi) the $2,500,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1995, issued by the Development Authority of DeKalb County; (vii) the $2,500,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1993, issued by the City of Harrison, Arkansas; (viii) the $1,500,000 Industrial Development Revenue Bonds (Rock-Tenn Company Mill Division, Inc.), Series 1996, issued by the Development Authority of DeKalb County; (ix) the $1,500,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1996, issued by the Hart County Industrial Development Authority; (x) the $3,500,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1997, issued by the Union County Industrial Facilities and Pollution Control Financing Authority; and (xi) the $25,000,000 Senior Unsecured Notes Purchase Agreement, dated as of July 1, 1992, between Rock-Tenn Company and Great-West Life and Annuity Insurance Company. Rock-Tenn Company hereby agrees to furnish a copy of the constituent agreements relating to these bonds to the Securities and Exchange Commission upon request. EX-10.8 6 JOINT VENTURE AGREEMENT 1 EXHIBIT 10.8 - ------------------------------------------------------------------------------- JOINT VENTURE AGREEMENT DATED AS OF SEPTEMBER 5, 1997 AMONG ROCK-TENN COMPANY, ROCK-TENN PARTITION COMPANY, SONOCO PRODUCTS COMPANY AND SONOCO PARTITIONS, INC. - ------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2 Additional Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 1.3 Interpretation and Construction of this Agreement . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 2. JOINT VENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.1 Organization of Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.2 Name and Place of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.3 Percentage Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.4 Purpose of the Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.5 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 3. MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.1 Managing Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.2 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 4. ACTIVITIES BY THE PARTIES AND THE JOINT VENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.1 In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.2 Non-Competition Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.3 Non-Competition Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 5. TO JOINT VENTURE; ASSUMED LIABILITIES; PRORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 5.1 Contemporaneous Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 5.2 Additional Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 5.3 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 5.4 Repurchase of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 5.5 Accounts Receivable True Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 5.6 Inventory True Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 5.7 Accounts Receivable and Inventory Indemnity . . . . . . . . . . . . . . . . . . . . . . . . 18
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PAGE ---- Section 5.8 Allocation and Proration of Certain Items . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 6. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 6.1 Representations and Warranties of Rock-Tenn and Rock-Tenn Partition . . . . . . . . . . . . 20 Section 6.2 Representations and Warranties of Sonoco and Sonoco Partitions . . . . . . . . . . . . . . 21 ARTICLE 7. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 7.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 7.2 Claims on Behalf of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 7.3 Covenants Regarding Ownership of Subs. . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 7.4 Parent Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 7.5 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 7.6 Transfer of Venture Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 7.7 Effect of Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE 8. BUY-OUT RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 8.1 Buy-Out Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 8.2 Buy-Out Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 8.3 Buy-Out Upon Default, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 8.4 Buy/Sell Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 8.5 Waiver of Buy-Out Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 8.6 Determination of Appraised Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 8.7 Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE 9. DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 9.1 Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 9.2 Equitable Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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PAGE ---- ARTICLE 10. POST-TERMINATION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 10.1 Consequences of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 11.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 11.2 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 11.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 11.4 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.5 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.8 No Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.9 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.10 No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.11 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 11.12 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 11.13 Disclaimer of Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 11.14 Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
- iii - 5 EXHIBITS Exhibit A -- Opinion of Counsel to Rock-Tenn and Rock-Tenn Partition Exhibit B -- Opinion of Counsel to Sonoco and Sonoco Partitions, Inc. - iv - 6 SCHEDULES Schedule A -- Initial Business Plan - v - 7 JOINT VENTURE AGREEMENT THIS JOINT VENTURE AGREEMENT (this " Agreement"), dated as of September 5, 1997, by and among ROCK-TENN COMPANY, a Georgia corporation ("Rock-Tenn"), ROCK-TENN PARTITION COMPANY, a Georgia corporation ("Rock-Tenn Partition"), SONOCO PRODUCTS COMPANY, a South Carolina corporation ("Sonoco"), and SONOCO PARTITIONS, INC., a South Carolina corporation ("Sonoco Partitions"); W I T N E S S E T H: WHEREAS, each of Rock-Tenn and Sonoco is engaged in the solid fiber partition business; and WHEREAS, Rock-Tenn and Sonoco have agreed to form a Joint Venture (as defined herein) to engage in the solid fiber partition business on a worldwide basis; and WHEREAS, the Joint Venture will be organized as a Delaware limited liability company (the " Company"); and WHEREAS, Rock-Tenn and Sonoco have agreed to contribute certain assets which form a part of their respective solid fiber partition businesses to the Company and to license certain other assets which form part of their respective solid fiber businesses to the Company and intend that, except as expressly provided herein, they will engage in the solid fiber partition business exclusively through the Company; and WHEREAS, Rock-Tenn Partition and Sonoco Partitions have been formed by Rock-Tenn and Sonoco, respectively, to hold their ownership interests in the Joint Venture; NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein and in the other Operative Agreements, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows: ARTICLE 1. DEFINITIONS AND CONSTRUCTION Section 1.1 Certain Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Operating Agreement. As used in this Agreement, the following terms shall have the meanings specified below: "Accounts Receivable" shall mean (i) in respect of Rock-Tenn, the accounts receivable of Rock-Tenn described in the Contribution Agreement dated the date hereof among Rock-Tenn, 8 Rock-Tenn Partition and the Company which have been contributed to the Company by Rock-Tenn Partition on the date hereof and (ii) in respect of Sonoco, the accounts receivable of Sonoco described in the Contribution Agreement dated the date hereof among Sonoco, Sonoco Partitions and the Company (the "Sonoco Contribution Agreement") which have been contributed to the Company by Sonoco Partitions on the date hereof, which shall include the accounts receivable of the Sonoco Contributed Sub. "Affiliate" shall mean, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by, or is under common Control with, such Person. "Applicable Law" shall mean all applicable provisions of all (i) constitutions, treaties, statutes, laws (including common law), rules, regulations, ordinances or codes of any Governmental Authority, and (ii) orders, decisions, injunctions, judgments, awards and decrees of any Governmental Authority. "Approval" shall mean any consent, approval, license, permit, authorization, order, registration, waiver, grant, concession, license, exemption, certificate, declaration, filing, report or notice. "Assignment Agreements" shall mean (i) the Trademark Assignment Agreement dated the date hereof between Rock- Tenn Partition and the Company, (ii) the Patent Assignment dated the date hereof between Rock-Tenn Partition and the Company, (iii) the Trademark Assignment Agreement dated the date hereof between Sonoco Partitions and the Company, and (iv) the Patent Assignment dated the date hereof between Sonoco Partitions and the Company. "Assumed Liabilities" shall mean the Rock-Tenn Liabilities and the Sonoco Liabilities. "Bankruptcy" shall mean, with respect to any Person, (i) the commencement, under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar Applicable Law of any jurisdiction, whether now or hereafter in effect, by such Person of a case or proceeding seeking (A) the entry as to such Person of an order of relief, (B) such Person's own bankruptcy, liquidation, reorganization, rehabilitation or composition or adjustment of debts, or (C) a suspension or moratorium of payments; (ii) the commencement against such Person of any case or proceeding of the type described in clause (i) of this definition which remains undismissed for a period of sixty (60) days; (iii) the appointment of a custodian, trustee, administrator or similar official under any Applicable Law described in clause (i) of this definition with respect to such Person, or the taking charge by such custodian, trustee, administrator or similar official, of all or any substantial part of the property of such Person; (iv) any adjudication that such Person is insolvent or bankrupt; (v) the entering of any order of relief in, or other order approving, any case or proceeding of the type described in clause (i) of this definition; (vi) the making by such Person of a general assignment for the benefit of its creditors; (vii) the failure by such Person to pay, or the statement by such Person that it is unable to pay, or shall be 2 9 unable to pay,its debts generally as they become due; (viii) the calling by such Person of a meeting of its creditors with a view to arranging a composition or adjustment of its debts; (ix) any indication by such Person, either by an act or failure to act, of its consent to, approval of or acquiescence in, any of the actions, orders or events described in the foregoing clauses of this definition; or (x) the taking of any corporate or similar action by such Person for the purpose of effecting any of the actions, orders or events described in the foregoing clauses of this definition. "Business Day" shall mean any day other than a day on which commercial banks in the City of New York, Columbia, South Carolina or Atlanta, Georgia are required by Applicable Law to be closed and a day on which the Federal Reserve wire transfer system is closed. "Business Plan" shall mean the Initial Business Plan and each other strategic business plan prepared annually for the Company pursuant to the Operating Agreement. "CEO" shall mean the Chief Executive Officer of the Company. "CFO" shall mean the Chief Financial Officer of the Company. "Change of Control" shall mean, as to any Rock-Tenn Party or Sonoco Party: (a) a decision by the Board of Directors of such Person to sell Control of such Person or not to oppose a third party tender offer for securities of such Person which entitles the owners of such securities to exercise in the aggregate more than 50% of the voting power of such Person; (b) a change in the identity of a majority of the members of the Board of Directors of such Person due to (i) a proxy contest (or the threat to engage in a proxy contest); or (ii) any unsolicited tender, exchange or other purchase offer which has not been approved by a majority of the members of the Board of Directors of such Person; or (c) a third party acquires or agrees to acquire, by purchase or otherwise, all or a material portion of the assets of such Person and its Subsidiaries taken as a whole. "Company" shall mean RTS Packaging, LLC, a Delaware limited liability company. "Competing Business" shall mean any business or venture related to the manufacture, sale, distribution or licensing of solid fiber partitions or any products substantially similar to or substitutable for solid fiber partitions, specifically excluding corrugated partitions and cushion fiber packaging. "Contract" shall mean any loan or credit agreement, note, bond, indenture, mortgage, deed of trust, lease, franchise, contract, or other agreement, obligation, instrument or binding commitment of any nature. 3 10 "Contribution Agreements" shall mean (i) the Contribution Agreement dated the date hereof among Rock-Tenn, Rock-Tenn Partition and the Company, and (ii) the Sonoco Contribution Agreement. "Control" (including, with its correlative meanings, "Controlled by" and "under common Control with") shall mean, with respect to any Person, any of the following: (i) ownership, directly or indirectly, by such Person of equity securities entitling it to exercise in the aggregate more than 50% of the voting power of the entity in question, or (ii) the possession by such Person of the power, directly or indirectly, (A) to elect a majority of the board of directors (or equivalent governing body) of the entity in question; or (B) to direct or cause the direction of the management and policies of or with respect to the entity in question, whether through ownership of securities, by Contract or otherwise. "COO" shall mean the Chief Operating Officer of the Company. "Employee Matters Agreement" shall mean the Employee Matters Agreement dated the date hereof among Rock-Tenn, Sonoco and the Company. "Environmental Laws" shall mean any and all national, federal, state, provincial, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning any Hazardous Materials or Petroleum Products or environmental protection as now or at any time hereafter in effect, together with any amendment or re- authorization thereto or thereof. "Fiscal Year" shall mean the period commencing October 1 in any year and ending on September 30 in such year, except that the first Fiscal Year of Company shall commence on the date hereof and end on September 30, 1997. "GAAP" shall mean the current accounting principles recommended by the American Institute of Certified Public Accountants, or in the event not covered by recommendations, principles having general acceptance among certified public accountants at the particular time. "Governmental Approval" shall mean any Approval of a Governmental Authority. "Governmental Authority" shall mean any federation, nation, state, sovereign or government, any federal, regional, state or local political subdivision, any governmental or administrative body, instrumentality, department or agency or any court, administrative hearing body, commission or other similar dispute resolving panel or body, and any other entity exercising executive, legislative, judicial, regulatory or administrative functions of a government. "Hazardous Materials" shall mean any waste, pollutant, contaminant, substance, by-product or other material identified in or regulated under any Environmental Law, including without 4 11 limitation, the Toxic Substances Control Act, the federal Comprehensive Environmental Response, Compensation and Liability Act and the Resource Conservation and Recovery Act. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976. "Initial Business Plan" shall mean the strategic business plan of the Company in the form attached hereto as Schedule A. "Injunction" shall mean any preliminary, temporary, interim or final injunction, temporary restraining order or other legal prohibition or equitable remedy ordered by any Governmental Authority requiring or prohibiting action. "Inventory" shall mean (i) in respect of Rock-Tenn, the inventory of Rock-Tenn described in the Contribution Agreement dated as of the date hereof among Rock-Tenn, Rock-Tenn Partition and the Company which has been contributed to the Company on the date hereof and (ii) in respect of Sonoco, the inventory of Sonoco described in the Contribution Agreement dated as of the date hereof among Sonoco, Sonoco Partitions and the Company which have been contributed to the Company on the date hereof, which shall include the inventory of the Sonoco Contributed Sub. "Invest or Participate" (including, with its correlative meanings, "Investment or Participation," "Invested or Participated" and "Investing or Participating"), as it relates to a Party or any of its Affiliates, shall mean, with respect to any other Person that engages in a Competing Business, directly or indirectly through an Affiliate, (a) to acquire, as a principal, partner, shareholder, beneficial owner or in any similar capacity, any ownership interest in such Person or (b) by Contract or otherwise to manage, operate or finance such Person, or to participate in the management, operation or financing of such Person, or to act as agent, representative, consultant or in any similar capacity for such Person, or to use the name of such Person, or permit the use of the name of such Party or its Affiliate by such Person, to the extent that any of such activities described in this clause (b) are related to such Competing Business. "Joint Venture" shall mean the Company and the rights and obligations of the Parties under the Operative Agreements. "Judgment" shall mean any judgment, order, judicial decree or arbitral award of any Governmental Authority. "License Agreement" shall mean the Trademark License Agreement dated the date hereof between Rock-Tenn and the Company. "Lien" shall mean any mortgage, pledge, security interest, adverse claim, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing 5 12 of or agreement to give any financing statement under the Uniform Commercial Code or similar Applicable Law of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "Losses" shall mean any and all claims, losses, liabilities, damages (including fines, penalties, and criminal or civil judgments and settlements), costs (including court costs) and expenses (including reasonable attorneys' and accountants' fees). "Managing Board" shall mean the managing board of the Company. "Material Adverse Effect" shall mean, with respect to any Person, the effect of any event, occurrence, fact, condition or change that is materially adverse to the business, operations, results of operations, financial condition, assets or liabilities of such Person. "Material Default" shall mean, with respect to the Rock-Tenn Parties or the Sonoco Parties, a breach by a Rock- Tenn Party or Sonoco Party, as the case may be, of its obligations under (i) Sections 4.2, 5.5, 5.6, 5.7, 7.1, 7.3, 7.4, 7.5, 7.6, 8.3 or 8.4 of this Agreement and (ii) a section of another Operative Agreement which by its express terms provides that a breach by a Rock-Tenn Party or Sonoco Party, as the case may be, of its obligations thereunder shall constitute a "Material Default" under this Agreement; provided, that in any case, such breach shall be termed a "Material Default" only if such breach, if it can be cured within such period, shall not have been cured within thirty (30) days after written notice of such breach is given to such Rock-Tenn Party or Sonoco Party by the other Party. "Members" shall mean the holders from time to time of ownership interests in the Company. "Operating Agreement" shall mean the Amended and Restated Operating Agreement of the Company dated the date hereof between Rock-Tenn Partition and Sonoco Partitions. "Operative Agreements" shall mean this Agreement, the License Agreement, the Supply Agreement, the Services Agreements, the Operating Agreement, the Contribution Agreements and the Assignment Agreements. "Opinions of Counsel" shall mean the opinions of counsel to Rock-Tenn and Rock-Tenn Partition and counsel to Sonoco and Sonoco Partitions in the form of Exhibit A and Exhibit B, respectively. "Parties" shall mean Rock-Tenn, Rock-Tenn Partition, Sonoco and Sonoco Partitions, and upon any Transfer of a Venture Interest pursuant to Article 10 of the Operating Agreement, such permitted transferee. 6 13 "Person" shall mean an individual or a partnership, an association, a joint venture, a limited liability company, a corporation, a business or a trust or other entity organized under any Applicable Law, an unincorporated organization or any Governmental Authority. "Petroleum Products" shall mean gasoline, diesel fuel, motor oil, waste or used oil, heating oil, kerosene or other petroleum products. "Proceeding" shall mean any action, litigation, suit, proceeding or formal investigation or review of any nature, civil, criminal, regulatory or otherwise, before any Governmental Authority. "Rock-Tenn Contributed Assets" shall mean the assets owned or used or held for use primarily in the conduct of the Solid Fiber Partition Business by Rock-Tenn Partition and its Affiliates described in the Contribution Agreement dated the date hereof among Rock-Tenn, Rock-Tenn Partition and the Company which have been contributed to the Company on the date hereof. "Rock-Tenn Liabilities" shall mean the debts, liabilities and obligations of Rock-Tenn and its Subsidiaries relating primarily to the Rock-Tenn Solid Fiber Partition Business described in the Contribution Agreement dated the date hereof among Rock-Tenn, Rock-Tenn Partition and the Company which have been assumed by the Company on the date hereof. "Rock-Tenn Licensed Assets" shall mean the tradenames and trademarks of Rock-Tenn and its Subsidiaries relating to the Rock-Tenn Solid Fiber Partition Business described in the License Agreement dated the date hereof between Rock- Tenn and the Company which have been licensed to the Company on the date hereof. "Rock-Tenn Services" shall mean the administrative services described in the Services Agreement dated the date hereof between Rock-Tenn and the Company which shall be provided by Rock-Tenn to the Company after the date hereof. "Rock-Tenn Solid Fiber Partition Business" shall mean the solid fiber partition business of Rock-Tenn and its Subsidiaries conducted by Rock-Tenn and its Subsidiaries immediately prior to the date hereof. "Rock-Tenn Venture Interest" shall mean the Venture Interest of Rock-Tenn and its Wholly Owned Subsidiaries. "Services Agreements" shall mean (i) the Services Agreement dated the date hereof between Rock-Tenn and the Company, (ii) the Services Agreement dated the date hereof between Sonoco and the Company and (iii) the Services Agreement dated the date hereof between Sonoco de Mexico and RTS Empaques S. de R.L. de C.V. 7 14 "Solid Fiber Partition Businesses" shall mean the Rock-Tenn Solid Fiber Partition Business and the Sonoco Solid Fiber Partition Business as such businesses may be expanded or modified by the Company. "Sonoco Contributed Assets" shall mean the assets owned or used or held for use primarily in the conduct of the Solid Fiber Partition Business by Sonoco Partitions and its Affiliates described in the Sonoco Contribution Agreement which have been contributed to the Company on the date hereof. "Sonoco Contributed Sub" shall mean RTS Empaques S. de R.L. de C.V. "Sonoco Contributed Sub Assets" shall mean the assets owned or used or held for use primarily in the conduct of the Solid Fiber Partition Business by Sonoco Contributed Sub described in the Sonoco Contribution Agreement which have been contributed to the Company on the date hereof. "Sonoco Liabilities" shall mean the debts, liabilities and obligations of Sonoco and its Subsidiaries relating primarily to the Sonoco Solid Fiber Partition Business described in the Sonoco Contribution Agreement which have been assumed by the Company on the date hereof. "Sonoco Services" shall mean the administrative services described in (i) the Services Agreement dated the date hereof between Sonoco and the Company and (ii) the Services Agreement dated the date hereof between Sonoco de Mexico and RTS Empaques, S. de R.L. de C.V. which shall be provided by Sonoco and Sonoco de Mexico, respectively, after the date hereof. "Sonoco Solid Fiber Partition Business" shall mean the solid fiber partition business of Sonoco and its Subsidiaries conducted by Sonoco and its Subsidiaries immediately prior to the date hereof. "Sonoco Venture Interest" shall mean the Venture Interest of Sonoco and its Wholly Owned Subsidiaries. "Subsidiary" shall mean, with respect to any Person (the "Parent"), any other Person in which the Parent, one or more direct or indirect Subsidiaries of the Parent, or the Parent and one or more of its direct or indirect Subsidiaries (i) have the ability, through ownership of securities individually or as a group, ordinarily, in the absence of contingencies, to elect a majority of the directors (or individuals performing similar functions) of such other Person, and (ii) own more than 50% of the equity interests of such Person. "Supply Agreement" shall mean the Board Supply Agreement dated the date hereof among Rock-Tenn, Sonoco and the Company. 8 15 "Third Party Approval" shall mean the Approval of a Person other than a Governmental Authority, a Party or its Affiliates or the Company or its Affiliates. "Transactions" shall mean the transactions contemplated by the Operative Agreements. "Transfer" shall mean to sell, exchange, assign, transfer, pledge, hypothecate or otherwise dispose of. "Venture Business" shall mean the solid fiber partition business and any other activities, businesses or transactions the Joint Venture may engage in pursuant to Section 2.4. "Venture Interests" shall mean the shares or other equity interests in the Joint Venture including the capital accounts of the Company. "Wholly Owned" shall mean, when used to designate the ownership interest of any Person in an entity, that such Person owns directly or indirectly all of the outstanding shares or other equity interests and voting power of such entity. Section 1.2 Additional Definitions.
Defined Term Defined in - ------------ ---------- Accounts Receivable Report Section 5.5(a) Accounts Receivable Shortfall Amount Section 5.5(a) Accounts Receivable Shortfall Party Section 5.5(a) Adjusted Accounts Receivable Value Section 5.5(a) Adjusted Inventory Value Section 5.6(a) Agreement Introductory Paragraph Appraised Value Section 8.6(a) Buy-Out Event Section 8.1 Buy-Out Notice Section 8.1(a) Competing Assets Section 4.3(b) Competing Assets Closing Date Section 4.3(b) Competing Assets Sale Notice Section 4.3(b) Competing Assets Sale Offer Section 4.3(b) Estimated Accounts Receivable Shortfall Amount Section 5.6(a) Indemnifying Parties Section 7.1(g) Inventory Report Section 5.6(a) Inventory Shortfall Party Section 5.6(a) Offeree Section 8.4 Offeror Section 8.4 Parent Definition of "Subsidiary" Process Agent Section 9.1
9 16 Protected Parties Section 7.1(b) Representatives Section 7.5(a)(i) Resale Assets Section 5.4(a) Resale Closing Date Section 5.4(a) Resale Notice Section 5.4(a) Resale Offer Section 5.4(a) Resale Party Section 5.4(a) Rock-Tenn Introductory Paragraph Rock-Tenn Party Section 8.3(b) Rock-Tenn Protected Parties Section 7.1(b) Rock-Tenn Partition Introductory Paragraph Securities Laws Section 7.5(h) Shortfall Amount Section 5.6(a) Sonoco Introductory Paragraph Sonoco Contribution Agreement Section 1.1 Sonoco Partitions Introductory Paragraph Sonoco Party Section 8.3(a) Sonoco Protected Parties Section 7.1(a) Value Opinion Section 8.6(b)
Section 1.3 Interpretation and Construction of this Agreement. The definitions in Sections 1.1 and 1.2 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." All references herein to Articles, Sections, Exhibits and Schedules shall be deemed to be references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. The table of contents and the headings of the Articles and Sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. Unless the context shall otherwise require, any reference to any agreement or other instrument or statute or regulation is to such agreement, instrument, statute or regulation as amended and supplemented from time to time (and, in the case of a statute or regulation, to any successor provision). Any reference in this Agreement to a "day" or a number of "days" (without the explicit qualification of "Business") shall be interpreted as a reference to a calendar day or number of calendar days. If any action or notice is to be taken or given on or by a particular calendar day, and such calendar day is not a Business Day, then such action or notice shall be deferred until, or may be taken or given, on the next Business Day. 10 17 ARTICLE 2. THE JOINT VENTURE Section 2.1 Organization of Joint Venture. Prior to or contemporaneously with the execution and delivery of this Agreement, Rock-Tenn Partition and Sonoco Partitions have executed and delivered the Operating Agreement and all other documents necessary to organize the Company as a Delaware limited liability company. Unless otherwise agreed by the Parties, the Company shall conduct the Venture Business. The Parties may from time to time form, or cause the Company to form, one or more other entities directly or indirectly owned by the Parties to conduct the Venture Business. Section 2.2 Name and Place of Business. The name of the Company shall be RTS Packaging, LLC. The principal place of business of the Company initially shall be located at 504D Thrasher Street, Norcross, Georgia 30071. The principal place of business of the Company may be changed from time to time by the Managing Board. Section 2.3 Percentage Interests. The Percentage Interest (i) of Rock-Tenn Partition shall be 65% and (ii) of Sonoco Partitions shall be 35%. Section 2.4 Purpose of the Joint Venture. The purpose of the Joint Venture is to engage in the Solid Fiber Partition Business on a worldwide basis. The Joint Venture shall have the following additional purposes: (a) to perform the agreements and arrangements referred to in this Agreement and the other Operative Agreements; and (b) to engage in any other lawful activity, business or transaction as may be approved by the Managing Board. Section 2.5 Term. The term of the Joint Venture shall be indefinite, unless earlier terminated in the accordance with the provisions of this Agreement or the Operating Agreement. A Party may terminate the Joint Venture on December 31, 2002, and on December 31 of each calendar year thereafter, by delivering to the other Party a Buy-Out Notice pursuant to Article 8, which notice shall be delivered at least one year prior to the proposed termination date. If neither Party gives any such notice in respect of any such December 31, the term of the Joint Venture will continue unless and until terminated in accordance with the provisions of this Agreement or the Operating Agreement. 11 18 ARTICLE 3. MANAGEMENT Section 3.1 Managing Board. The Company shall be managed by the Managing Board, which shall consist of five members. Rock-Tenn Partition shall be entitled to designate three members to the Managing Board, and Sonoco Partitions shall be entitled to designate two members to the Managing Board. In each election of members, Rock-Tenn Partition and Sonoco Partitions shall vote their Venture Interests to effect the election of the Managing Board nominees so designated. The Managing Board shall conduct the Venture Business in accordance with the Business Plan, this Agreement and the Operating Agreement. Section 3.2 Officers. (a) The Managing Board shall select the principal officers of the Company, including the CEO, the COO and the CFO, in accordance with Sections 6.5 and 8.1 of the Operating Agreement. The Parties have agreed that the initial principal officers of the Company shall be: CEO Richard E. Steed COO Terry Durham CFO Nancy Garner (b) To the extent provided in Sections 6.5 and 8.1 of the Operating Agreement, the Managing Board shall have the right at any time to remove and replace any officer of the Company and to designate any permanent or temporary replacement of such officer. ARTICLE 4. OTHER ACTIVITIES BY THE PARTIES AND THE JOINT VENTURE Section 4.1 In General. The Parties acknowledge that to support their intention to engage in the Solid Fiber Partition Business solely through the Joint Venture and to protect adequately their interests in the Joint Venture and the Company, it is necessary and essential that the Parties enter into and adhere to the covenants contained in this Article 4. Section 4.2 Non-Competition Obligations. Except as provided in Section 4.3 (i) during the term of the Joint Venture and for a period of ten (10) years following the termination of the Joint Venture, no Party or any of its Affiliates shall, and (ii) during the term of the Joint Venture and for a period of ten (10) years following the withdrawal of a Party from the Joint Venture in the case of a Buy-Out pursuant to Article 8 or otherwise, no such withdrawing Party or any of its Affiliates shall: 12 19 (i) Engage in any Competing Business; or (ii) Invest or Participate in any Person that engages in any Competing Business. This Section 4.2 shall not affect the right of a Party or its Affiliate that purchases the Venture Interest of the other Party and its Affiliates pursuant to Article 8 hereof to conduct the Venture Business following the consummation of such purchase and the termination of the Joint Venture. Section 4.3 Non-Competition Exceptions. Nothing in this Article 4 shall be construed to prohibit any of the following activities by a Party or any of its Affiliates: (a) Five Percent Investments. The acquisition or ownership by a Party (directly or indirectly through an Affiliate) of any securities of a company whose securities are listed for trading on a securities exchange or market in the United States, if such securities (i) were not acquired directly from such Person in a private placement or similar transaction, (ii) do not represent more than 5% of the aggregate voting power of the outstanding equity securities of such Person (assuming the conversion, exercise or exchange of all such securities held by such Party or its Affiliate that are convertible, exercisable or exchangeable into or for voting securities), and (iii) in the case of debt securities, entitle the holder thereof to receive only interest or other returns that are not based on the value or results of operations of such Person. (b) Ownership of Competing Business Pending Divestiture. The acquisition and ownership of any direct or indirect interest in a business or venture which in part consists of a Competing Business; provided that within ninety (90) days following the date of such acquisition such Party or its Affiliates either (i) transfers the assets of such business or venture which relates to a Competing Business (the "Competing Assets") to the Joint Venture on terms mutually agreed to by such Party and the Joint Venture, or (ii) if the Joint Venture elects not to purchase the Competing Assets, transfers the Competing Assets to a third party that is not an Affiliate of either Rock-Tenn or Sonoco. In the event that a Party (directly or indirectly through an Affiliate) determines to transfer the Competing Assets to a third party that is not Affiliate of either Rock-Tenn or Sonoco, such Party shall, prior to entering into any agreement for the sale of such Competing Assets, offer to sell such Competing Assets to the Joint Venture (the "Competing Assets Sale Offer") by written notice (the "Competing Assets Sale Notice") to the Joint Venture, which shall (1) describe such Competing Assets and any Liens relating thereto, (2) state the purchase price of such Competing Assets, which shall be the purchase price offered by such third party for such Competing Assets, and describe all other material terms of the offer of the third party purchaser, and (3) state the closing date for the purchase by the Joint Venture of such Competing Assets, which shall be a Business Day not later than thirty (30) days after the date of the Competing Assets Sale Notice (the "Competing Assets Closing Date"). For a period of fifteen (15) days after receipt of the Competing Assets Sale Notice, the Joint Venture shall have the right to purchase all, but not less than all, of such Competing Assets on the terms set forth in the Competing Assets Sale Notice. The right of the Joint Venture to purchase the Competing Assets pursuant to a Competing Assets Sale Notice shall be exercisable 13 20 by delivering written notice of the exercise thereof, prior to the expiration of the fifteen (15) day period referred to above, to the transferring Party, which notice shall constitute the irrevocable agreement of the Joint Venture to purchase the Competing Assets on the terms set forth in the Competing Assets Sale Notice. The failure of the Joint Venture to respond to the Competing Assets Sale Notice within such fifteen (15) day period referred to above shall be deemed a waiver of the Joint Venture's rights to purchase the Competing Assets pursuant to this Section 4.3(b). The closing of the purchase of Competing Assets pursuant to this Section 4.3(b) shall be held at the principal office of the Joint Venture on the Competing Assets Closing Date or at such other place and on such other date as the parties to such transaction may agree. At closing, the transferring Party shall deliver to the Joint Venture title to such Competing Assets, free and clear of all Liens other than Liens to which such Competing Assets are subject which are described in the Competing Assets Sale Notice, and the Joint Venture shall deliver to the transferring Party the purchase price for the Competing Assets payable in accordance with the terms set forth in the Competing Assets Sale Notice, provided, that in the event that all or any portion of the purchase price includes property, the Joint Venture may pay cash in lieu of such property in an amount equal to the fair market value of such property. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. No purchase by the Joint Venture of any Competing Assets pursuant to this Section 4.3(b) shall relieve such transferring Party or any of its Affiliates from their respective obligations under Article 4 hereof. If the Joint Venture fails to respond to the Competing Assets Sale Notice within such fifteen (15) day period referred to above, the Party that proposes to sell the Competing Assets will be permitted to sell such Competing Assets to such third party; provided that (i) such sale is consummated solely in accordance with the price, terms and conditions described in the Competing Assets Sale Notice and (ii) such sale is consummated within sixty (60) days following the end of the fifteen (15) day period referred to above. ARTICLE 5. CONTRIBUTIONS TO JOINT VENTURE; ASSUMED LIABILITIES; PRORATIONS Section 5.1 Contemporaneous Deliveries. (a) Contemporaneously with the execution and delivery of this Agreement, the Parties have, and have caused their respective Subsidiaries to, execute and deliver the following Operative Agreements to which each such Party or Subsidiary is a party: (i) Services Agreements; (ii) Supply Agreement; (iii) License Agreement; (iv) Operating Agreement; 14 21 (v) Employee Matters Agreement; (vi) Contribution Agreements; and (vii) Assignment Agreements. (b) Contemporaneously with the execution and delivery of this Agreement, the Parties have caused their respective counsel to deliver the Opinions of Counsel. Section 5.2 Additional Capital Contributions. The Parties shall make additional capital contributions to the Joint Venture in accordance with the Operating Agreement. Section 5.3 Further Assurances. The Parties shall from time to time hereafter at the request of another Party and without further consideration execute and deliver to the Company such instruments of transfer, conveyance and assignment in addition to those delivered pursuant to Section 5.1 as the Company shall reasonably request to transfer, convey and assign more effectively their respective Solid Fiber Partition Businesses to the Company. In addition, each such Party shall from time to time hereafter at another Party's request and without further consideration execute and deliver to the Company such instruments of assumption in addition to the Assignment Agreements as such Party shall reasonably request to evidence more fully the Company's assumption of the Assumed Liabilities. Section 5.4 Repurchase of Assets. (a) In the event that the Joint Venture determines to sell to a third party any of the assets contributed to the Joint Venture by Rock-Tenn, Sonoco or any of their respective Affiliates, including the Sonoco Contributed Sub Assets (as such term is defined in the Sonoco Contribution Agreement), but excluding finished products and accounts receivable (the "Resale Assets"), the Joint Venture shall, prior to entering into any agreement for the sale of such Resale Assets, offer to sell such Resale Assets to Rock-Tenn if such Resale Assets are Rock-Tenn Contributed Assets and to Sonoco if such Resale Assets are Sonoco Contributed Assets or Sonoco Contributed Sub Assets (the "Resale Offer") by written notice (the "Resale Notice") to Rock-Tenn or Sonoco (as appropriate), with a copy to the other, which shall (1) describe the Resale Assets and any Liens relating thereto, (2) state the purchase price of the Resale Assets, which shall be the book value of the Resale Assets on the books and records of the Joint Venture payable in cash, and (3) state the closing date for the purchase of the Resale Assets, which shall be a Business Day not later than thirty (30) days after the date of the Resale Notice (the "Resale Closing Date"). For a period of fifteen (15) days after receipt of the Resale Notice, Rock-Tenn or Sonoco (as appropriate) (the "Resale Party") shall have the right to purchase all, but not less than all, of the Resale Assets on the terms set forth in the Resale Notice. The Resale Assets shall be sold to the Resale Party free and clear of all Liens, provided, that if such Resale Assets are not free and clear of all Liens, the Resale Party may elect instead to subtract the principal amount secured by any such existing Lien from the purchase price for such Resale Assets. 15 22 The right of the Resale Party to purchase the Resale Assets pursuant to a Resale Notice shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the fifteen (15) day period referred to above, to the Joint Venture, with a copy to the other Party, which notice shall constitute the irrevocable agreement of the Resale Party to purchase the Resale Assets on the terms set forth in the Resale Notice. The failure of the Resale Party to respond to the Resale Notice within such fifteen (15) day period referred to above shall be deemed a waiver of such Resale Party's rights under this Section 5.4(a). (b) The closing of the purchase of Resale Assets pursuant to this Section 5.4 shall be held at the principal office of the Joint Venture on the Resale Closing Date or at such other place and on such other date as the parties to such transaction may agree. At closing, the Joint Venture shall deliver to the Resale Party title to such Resale Assets, free and clear of all Liens other than Liens to which such Resale Assets are subject which are described in the Resale Notice and which have been offset against the purchase price for such Resale Assets, and the Resale Party shall deliver to the Joint Venture the purchase price for the Resale Assets in cash. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. (c) No purchase by the Resale Party of any Resale Assets pursuant to this Section 5.4 shall relieve such Resale Party or any of its Affiliates from their respective obligations under Article 4 hereof. If the Resale Party fails to respond to the Resale Notice within such fifteen (15) day period referred to above, the Joint Venture will be permitted to sell the Resale Assets to such third party. Section 5.5 Accounts Receivable True Up. (a) As soon as possible after the date hereof, but in any event not later than one hundred twenty (120) days after the date hereof, the Company shall cause to be prepared and delivered to Rock-Tenn and Sonoco a report of the Accounts Receivable of the Company as of the date hereof (the "Accounts Receivable Report"), which shall describe (i) the aggregate "Adjusted Accounts Receivable Value" (as hereinafter defined) of the Company as of the date hereof, (ii) the aggregate Adjusted Accounts Receivable Value contributed to the Company on the date hereof by Rock- Tenn, and (iii) the aggregate Adjusted Accounts Receivable Value contributed to the Company on the date hereof by Sonoco. The aggregate Adjusted Accounts Receivable Value contributed to the Company on the date hereof by Rock-Tenn and Sonoco, respectively, shall be (i) in the case of Rock-Tenn, the aggregate amount of all Accounts Receivable contributed to the Company by Rock-Tenn on the date hereof, and (ii) in the case of Sonoco, the aggregate amount of all Accounts Receivable contributed to the Company by Sonoco on the date hereof. The aggregate Adjusted Accounts Receivable Value contributed to the Company on the date hereof shall be the sum of the aggregate Adjusted Accounts Receivable Value contributed by Rock-Tenn and Sonoco to the Company on the date hereof. (b) Rock-Tenn and Sonoco shall review the Accounts Receivable Report promptly upon receiving it to determine whether (i) the aggregate Adjusted Accounts Receivable Value contributed to the Company by Rock-Tenn on the date hereof as shown in the Accounts Receivable Report is 16 23 less than 65% of the aggregate Adjusted Accounts Receivable Value contributed by Rock-Tenn and Sonoco to the Company on the date hereof or (ii) the aggregate Adjusted Accounts Receivable Value contributed to the Company by Sonoco on the date hereof as shown on the Accounts Receivable Report is less than 35% of the aggregate Adjusted Accounts Receivable Value contributed by Rock-Tenn and Sonoco to the Company on the date hereof (the party which contributes less than the percentage specified above applicable to it of the Adjusted Accounts Receivable Value of the Company on the date hereof shall be referred to herein as the "Accounts Receivable Shortfall Party"). Promptly upon such determination, the Accounts Receivable Shortfall Party shall calculate the "Accounts Receivable Shortfall Amount." The Accounts Receivable Shortfall Amount shall be an amount which (1) in the event that Rock-Tenn is the Accounts Receivable Shortfall Party, will cause the sum of (x) the Accounts Receivable Shortfall Amount and (y) the aggregate Adjusted Accounts Receivable Value contributed to the Company by Rock-Tenn on the date hereof to be equal to 65% of the sum of (i) the Accounts Receivable Shortfall Amount, (ii) the aggregate Adjusted Accounts Receivable Value contributed to the Company on the date hereof by Rock-Tenn and Sonoco, and (iii) the "Estimated Accounts Receivable Shortfall Amount" contributed to the Company on the date hereof by Sonoco pursuant to Section 1.1(a)(xvi) of the Sonoco Contribution Agreement, and (2) in the event that Sonoco is the Accounts Receivable Shortfall Party, will cause the sum of (x) the Accounts Receivable Shortfall Amount, the Estimated Accounts Receivable Shortfall Amount and the aggregate Adjusted Accounts Receivable Value contributed to the Company by Sonoco on the date hereof to be equal to 35% of the sum of (i) the Accounts Receivable Shortfall Amount, (ii) the aggregate Adjusted Accounts Receivable Value contributed to the Company on the date hereof by Rock-Tenn and Sonoco, and (iii) the Estimated Accounts Receivable Shortfall Amount contributed to the Company on the date hereof by Sonoco pursuant to Section 1.1(a)(xvi) of the Sonoco Contribution Agreement. (c) Promptly after calculating the Accounts Receivable Shortfall Amount, the Accounts Receivable Shortfall Party shall deliver to the Company in cash an amount equal to the Accounts Receivable Shortfall Amount. Section 5.6 Inventory True Up. (a) As soon as possible after the date hereof, but in any event no later than thirty (30) days after the date hereof, the Company shall cause to be prepared and delivered to Rock-Tenn and Sonoco a report of the Inventory of the Company as of the date hereof (the "Inventory Report"), which shall describe (i) the aggregate "Adjusted Inventory Value" (as hereinafter defined) of the Company as of the date hereof, (ii) the aggregate Adjusted Inventory Value contributed to the Company on the date hereof by Rock-Tenn, and (iii) the aggregate Adjusted Inventory Value Contributed to the Company on the date hereof by Sonoco. The aggregate Adjusted Inventory Value contributed to the Company on the date hereof by Rock-Tenn and Sonoco, respectively, shall be determined by a physical inventory conducted by the Company as of the date hereof and shall be equal to (i) the value of all standard paperboard included in such Inventory calculated at $360 per ton and the value of all nonstandard paperboard (including, by way of example only, SBS, polycoated, Casemate, Marksman and Winegard) at Rock-Tenn's or Sonoco's cost, respectively, plus 17 24 each Party's standard upcharges, plus (ii) 80% of the market price on the date hereof of all finished goods included in such Inventory, plus (iii) the book value on the date hereof of all other Inventory (determined on a FIFO basis). No Inventory shall be included in the aggregate Adjusted Inventory Value unless such Inventory is first quality and useable in the ordinary course of the business of the Company. Rock-Tenn and Sonoco shall certify to the Company their respective Adjusted Inventory Value within thirty (30) days after the date hereof. The aggregate Adjusted Inventory Value contributed to the Company on the date hereof shall be the sum of the aggregate Adjusted Inventory Value contributed by Rock-Tenn and Sonoco to the Company on the date hereof. (b) Rock-Tenn and Sonoco shall review the Inventory Report promptly upon receiving it to determine whether (i) the aggregate Adjusted Inventory Value contributed to the Company by Rock-Tenn on the date hereof as shown in the Inventory Report is less than 65% of the aggregate Adjusted Inventory Value contributed by Rock-Tenn and Sonoco to the Company on the date hereof or (ii) the aggregate Adjusted Inventory Value contributed to the Company by Sonoco on the date hereof as shown on the Inventory Report is less than 35% of the aggregate Adjusted Inventory Value contributed by Rock-Tenn and Sonoco to the Company on the date hereof (the party which contributes less than the percentage specified above applicable to it of the Adjusted Inventory Value of the Company on the date hereof shall be referred to herein as the "Inventory Shortfall Party"). Promptly upon such determination, the Inventory Shortfall Party shall calculate the "Inventory Shortfall Amount." The Inventory Shortfall Amount shall be an amount which will cause the sum of (x) the Inventory Shortfall Amount and (y) the aggregate Adjusted Inventory Value contributed to the Company by the Inventory Shortfall Party on the Closing Date to be equal to 65% (if Rock-Tenn is the Inventory Shortfall Party) or 35% (if Sonoco is the Inventory Shortfall Party) of the sum of (1) the Inventory Shortfall Amount and (2) the aggregate Adjusted Inventory Value contributed to the Company on the date hereof by Rock-Tenn and Sonoco. (c) Promptly after calculating the Inventory Shortfall Amount, the Inventory Shortfall Party shall deliver to the Company in cash an amount equal to the Inventory Shortfall Amount. Section 5.7 Accounts Receivable and Inventory Indemnity. (a) In the event that any Accounts Receivable contributed by Rock-Tenn or Sonoco to the Company on the date hereof and included in the aggregate Adjusted Accounts Receivable Value of the Company at the date hereof is not collected in full by the Company within one hundred twenty (120) days after the stated due date of such Accounts Receivable, Rock-Tenn or Sonoco, as the case may be, shall, upon written notice from the Company, purchase such Accounts Receivable from the Company for a purchase price equal to the value of such Account Receivable as described in the Accounts Receivable Report. (b) In the event that any Inventory contributed by Rock-Tenn or Sonoco to the Company on the date hereof is not used or sold by the Company in the ordinary course of its business within one (1) year after the date hereof, Rock-Tenn or Sonoco, as the case may be, shall, upon written notice from the Company, purchase such Inventory from the Company for a purchase price equal 18 25 to the value of such Inventory as set forth in the Inventory Report. The Parties understand and agree that a number of factors must be considered when determining which of the Inventory contributed to the Company by Rock-Tenn Partition and Sonoco Partitions should be used or sold at any particular time; however, the Parties intend that unless the Company determines, in its discretion, that the Company must use or sell Inventory contributed to the Company by any particular Party, the Company shall use or sell such inventory on a basis proportional to Rock-Tenn's and Sonoco's Percentage Interests in the Company. (c) The closing of the purchase by Rock-Tenn or Sonoco of Accounts Receivable or Inventory pursuant to Section 5.7(a) or (b) shall be held at the principal office of the Company on a date mutually agreeable to the parties to such transaction but not later than thirty (30) days after the date of notice from the Company regarding such purchase transaction. At such closing, the Company shall deliver to Rock-Tenn or Sonoco, as the case may be, customary documentation conveying to Rock-Tenn or Sonoco all right, title and interest of the Company in and to such Accounts Receivable or Inventory, and Rock-Tenn or Sonoco, as the case may be, shall deliver to the Company the purchase price in cash of such Accounts Receivable or Inventory. At such closing, the parties to such transaction shall execute such additional documents as are otherwise necessary or appropriate. Section 5.8 Allocation and Proration of Certain Items. (a) Except as otherwise provided in this Agreement or in the Employee Matters Agreement, all revenues, liabilities and expenses with respect to any or all of the Rock-Tenn Contributed Assets, the Rock-Tenn Liabilities, the Sonoco Contributed Assets, the Sonoco Contributed Sub Assets and the Sonoco Liabilities shall be prorated between Rock-Tenn or Sonoco, as the case may be, and the Company as of 11:59 p.m. on the date hereof. Revenue shall be deemed to have accrued when it was earned (whether or not billed); liability or expense shall be deemed to have accrued when the event giving rise to such liability or expense occurred (whether or not such liability was paid or payable on the date hereof.) Any such revenue, liability or expense which accrues after 11:59 p.m. on the date hereof shall be for the benefit of, or the responsibility of, the Company. Any such revenue, liability or expense which accrued on or prior to 11:59 p.m. on the date hereof shall be for the benefit of, or the responsibility of, Rock-Tenn or Sonoco as the case may be. (b) Notwithstanding the provisions of Section 5.8(a), Rock-Tenn and the Joint Venture will prorate as soon as reasonably practicable after the date hereof all real and ad valorem property taxes and special tax assessments, utility, water and sewer charges and similar expense items in respect of the Rock-Tenn Solid Fiber Partition Business based upon current bills if available and, if not available, based on the most recent bills available, with such prorations based upon the number of days during the billing period for each such expense occurring on or prior to 11:59 p.m. on the date hereof (for which Rock-Tenn shall be responsible) and occuring after 11:59 p.m. on the date 19 26 hereof (for which the Joint Venture shall be responsible.) Appropriate cash adjustments shall be made by Rock-Tenn or the Joint Venture as the case may require, as soon as practicable after current bills are available with respect to each such expense item to give effect to the prorations provided for in this Section 5.8(b) based upon actual billed amounts. (c) Notwithstanding the provisions of Section 5.8(a), Sonoco and the Joint Venture will prorate as soon as reasonably practicable after the date hereof all real and ad valorem property taxes and special tax assessments, utility, water and sewer charges and similar expense items in respect of the Sonoco Solid Fiber Partition Business based upon current bills if available and, if not available, based on the most recent bills available, with such prorations based upon the number of days during the billing period for each such expense occurring on or prior to 11:59 p.m. on the date hereof (for which Sonoco shall be responsible) and occuring after 11:59 p.m. on the date hereof (for which the Joint Venture shall be responsible.). Appropriate cash adjustments shall be made by Sonoco or the Joint Venture as the case may require, as soon as practicable after current bills are available with respect to each such expense item to give effect to the prorations provided for in this Section 5.8(c) based upon actual billed amounts. ARTICLE 6. REPRESENTATIONS AND WARRANTIES Section 6.1 Representations and Warranties of Rock-Tenn and Rock-Tenn Partition. Rock-Tenn and Rock-Tenn Partition, jointly and severally, represent and warrant to Sonoco and Sonoco Partitions as follows: (a) Organization and Standing. Each of Rock-Tenn and Rock-Tenn Partition is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia, and has all requisite corporate power and corporate authority necessary to enable it to own, lease or otherwise hold its properties and assets and to carry on its business as presently conducted. (b) Authorization; Validity. Each of Rock-Tenn and Rock-Tenn Partition has all requisite corporate power and corporate authority to enter into and perform its obligations under this Agreement and to consummate the Transactions to be consummated by it. Each of Rock-Tenn and Rock-Tenn Partition has all requisite corporate power and corporate authority to enter into and perform its obligations under the other Operative Agreements to which it is a party and to consummate the Transactions to be consummated by it. The execution, delivery and performance by each of Rock-Tenn and Rock-Tenn Partition of this Agreement have been, and the execution, delivery and performance by each of Rock-Tenn and Rock-Tenn Partition of the other Operative Agreements to which it is a party and the consummation by each of Rock-Tenn and Rock-Tenn Partition of the Transactions contemplated by Article 5 to be consummated by it on the date hereof have been duly authorized by all necessary corporate action on the part of Rock-Tenn and Rock-Tenn Partition. This Agreement has been, and the other Operative Agreements to which Rock-Tenn 20 27 or Rock-Tenn Partition is a party have been, duly executed and delivered by Rock-Tenn or Rock-Tenn Partition, as applicable. This Agreement constitutes, and the other Operative Agreements to which Rock-Tenn or Rock-Tenn Partition is a party constitute, legal, valid and binding obligations of Rock-Tenn or Rock-Tenn Partition, as applicable, enforceable against it in accordance with their respective terms. (c) No Conflicts. The execution, delivery and performance by each of Rock-Tenn and Rock- Tenn Partition of this Agreement do not, and the execution, delivery and performance by each of Rock-Tenn and Rock-Tenn Partition of the other Operative Agreements to which it is a party do not, and the consummation of the Transactions contemplated by Article 5 to be consummated by it and the compliance with the terms of the Operative Agreements to which it is a party on the date hereof do not, conflict with, result in any violation of or default (with or without notice or lapse of time or both) under, give rise to a right of termination, cancellation or acceleration of any obligation (in each case by any third party) or to the loss of any benefit under, or result in or require the creation, imposition or extension of any Lien upon any of its properties or assets under (i) any provision of the Articles of Incorporation or Bylaws of Rock-Tenn and Rock-Tenn Partition or (ii) any Judgment, Injunction, Applicable Law or Contract to which it is a party or by which it or any of its properties is bound (except, with respect to clause (ii), for such conflicts, violations, defaults, rights or losses that, individually or in the aggregate, would not have an adverse effect on the ability of Rock-Tenn or Rock-Tenn Partition (as applicable) to perform in all material respects its obligations under this Agreement and the other Operative Agreements to which it is a party in accordance with their respective terms). To the knowledge of Rock-Tenn and Rock-Tenn Partition, no Third Party Approval and no Governmental Approval is required to be obtained or made by Rock-Tenn or Rock-Tenn Partition in connection with the execution, delivery and performance of this Agreement and the Transactions contemplated by this Agreement, except for Third Party Approvals or Governmental Approvals the absence of which, individually or in the aggregate, would not have an adverse effect on the ability of Rock-Tenn or Rock-Tenn Partition to perform in all material respects its obligations under this Agreement and the other Operative Agreements to which it is a party in accordance with their respective terms. (d) Brokers or Finders. No Person is or will be entitled to any broker's or finder's fee or any other commission or similar fee as a result of any actions by Rock-Tenn or Rock-Tenn Partition in connection with any of the Transactions. (e) Litigation. To the knowledge of Rock-Tenn and Rock-Tenn Partition, there is no Proceeding pending or threatened against Rock-Tenn or Rock-Tenn Partition reasonably likely to restrain, enjoin or otherwise prevent the consummation of the Transactions. (f) Operative Agreement Representations. The representations and warranties made by Rock- Tenn and Rock-Tenn Partition as set forth in each of the other Operative Agreements to which either of them is a party are or will be true and correct in all material respects as of the date they are or will be made (unless expressly stated to be made as of some other date). 21 28 Section 6.2 Representations and Warranties of Sonoco and Sonoco Partitions. Sonoco and Sonoco Partitions, jointly and severally, represent and warrant to Rock-Tenn and Rock-Tenn Partition as follows: (a) Organization and Standing. Each of Sonoco and Sonoco Partitions is a corporation duly formed and validly existing under the laws of the jurisdiction of its formation, and each of Sonoco and Sonoco Partitions has all requisite corporate power and corporate authority necessary to enable it to own, lease or otherwise hold its properties and assets and to carry on its business as presently conducted. (b) Authorization; Validity. Each of Sonoco and Sonoco Partitions has all requisite corporate power and corporate authority to enter into and perform its obligations under this Agreement and to consummate the Transactions to be consummated by it. Each of Sonoco and Sonoco Partitions has all requisite corporate power and corporate authority to enter into and perform its obligations under the other Operative Agreements to which it is a party and to consummate the Transactions to be consummated by it. The execution, delivery and performance by Sonoco and Sonoco Partitions of this Agreement have been, and the execution, delivery and performance by each of Sonoco and Sonoco Partitions of the other Operative Agreements to which it is a party and the consummation by each of Sonoco and Sonoco Partitions of the Transactions contemplated by Article 5 to be consummated by it on the date hereof have been, duly authorized by all necessary corporate action on the part of Sonoco and Sonoco Partitions. This Agreement has been, and the other Operative Agreements to which Sonoco or Sonoco Partitions is a party have been, duly executed and delivered by Sonoco and Sonoco Partitions, as applicable. This Agreement constitutes, and the other Operative Agreements to which Sonoco or Sonoco Partitions is a party constitute, legal, valid and binding obligations of Sonoco or Sonoco Partitions, as applicable, enforceable against it in accordance with their respective terms. (c) No Conflicts. The execution, delivery and performance by each of Sonoco and Sonoco Partitions of this Agreement do not, and the execution, delivery and performance by each of Sonoco and Sonoco Partitions of the other Operative Agreements to which it is a party do not, and the consummation of the Transactions contemplated by Article 5 to be consummated by it and the compliance with the terms of the Operative Agreements to which it is a party on the date hereof do not, conflict with, result in any violation of or default (with or without notice or lapse of time or both) under, give rise to a right of termination, cancellation or acceleration of any obligation (in each case by any third party) or to the loss of any benefit under, or result in or require the creation, imposition or extension of any Lien upon any of its properties or assets under (A) any provision of its Articles of Incorporation or Bylaws or (B) any Judgment, Injunction, Applicable Law or Contract to which it is a party or by which it or any of its properties is bound (except, with respect to clause (B), for such conflicts, violations, defaults, rights or losses that, individually or in the aggregate, would not have an adverse effect on the ability of Sonoco or Sonoco Partitions (as applicable) to perform in all material respects its obligations under this Agreement and the other Operative Agreements to which it is a party in accordance with their respective terms). To the knowledge of Sonoco and Sonoco Partitions, no Third Party Approval and no Governmental Approval is required 22 29 to be obtained or made by Sonoco or Sonoco Partitions in connection with the execution, delivery and performance of this Agreement and the Transactions contemplated by this Agreement, except for Third Party Approvals or Governmental Approvals the absence of which, individually or in the aggregate, would not have an adverse effect on the ability of Sonoco or Sonoco Partitions (as applicable) to perform in all material respects its obligations under this Agreement and the other Operative Agreements to which it is a party in accordance with their respective terms. (d) Brokers or Finders. No Person is or will be entitled to any broker's or finder's fee or any other commission or similar fee as a result of any actions by Sonoco or Sonoco Partitions in connection with any of the Transactions. (e) Litigation. To the knowledge of Sonoco and Sonoco Partitions, there is no Proceeding pending or threatened against Sonoco or Sonoco Partitions reasonably likely to restrain, enjoin or otherwise prevent the consummation of the Transactions. (f) Operative Agreement Representations. The representations and warranties made by Sonoco and Sonoco Partitions as set forth in each of the other Operative Agreements to which either of them is a party are or will be true and correct in all material respects as of the date they are or will be made (unless expressly stated to be made as of some other date). ARTICLE 7. COVENANTS Section 7.1 Indemnification. (a) Rock-Tenn and Rock-Tenn Partition, jointly and severally, shall pay, indemnify and reimburse each of Sonoco and Sonoco Partitions and their respective Subsidiaries, officers, directors, employees and agents and the Joint Venture (the "Sonoco Protected Parties") for any and all Losses suffered or incurred by any of them as a result of, or with respect to, any breach or inaccuracy of any representation, warranty, covenant or agreement by Rock-Tenn or Rock-Tenn Partition contained herein or in any other Operative Agreement, whether or not resulting from third party claims. (b) Sonoco and Sonoco Partitions, jointly and severally, shall pay, indemnify and reimburse Rock-Tenn and Rock-Tenn Partition and their respective Subsidiaries, officers, directors, employees and agents and the Joint Venture (the "Rock-Tenn Protected Parties"; the Sonoco Protected Parties or the Rock-Tenn Protected Parties are referred to as the "Protected Parties") for any and all Losses suffered or incurred by any of them as a result of, or with respect to, any breach or inaccuracy of any representation, warranty, covenant or agreement by Sonoco or Sonoco Partitions, whether or not resulting from third party claims. 23 30 (c) (1) Rock-Tenn shall indemnify, defend and hold harmless the Joint Venture, Sonoco and Sonoco Partitions for any and all Losses suffered or incurred by the Joint Venture or Sonoco as a result of or with respect to (x) any violation of or noncompliance with, or alleged violation of or noncompliance with, any Environmental Laws (including, without limitation, with respect to any alleged nuisance or trespass or alleged exposure to Hazardous Materials in the workplace) arising out of or relating to the operation of the Rock-Tenn Contributed Assets (whether by Rock-Tenn and its Affiliates or by any prior owner, lessee or user of such Rock-Tenn Contributed Assets) prior to the date hereof and (y) any claim arising under any Environmental Law resulting from the ownership, use, control or operation at any time prior to the date hereof of any of the Rock-Tenn Contributed Assets (whether currently or previously owned, leased or used by Rock-Tenn and its Affiliates or by any prior owner, lessee or user of such Rock-Tenn Contributed Assets), including, without limitation, arising from any release of any Hazardous Materials or any off-site shipment of any Hazardous Materials at or from any such Rock-Tenn Contributed Assets (whether by Rock-Tenn and its Affiliates or by any prior owner, lessee or user of such Rock-Tenn Contributed Assets). Anything in this Agreement to the contrary notwithstanding, Rock-Tenn shall be solely responsible for all Losses under this Section 7.1(c)(1) resulting from facts or circumstances which occurred prior to the date hereof. The Joint Venture shall be responsible for all Losses under this Section 7.1(c)(1) resulting from facts or circumstances which occur on or after the date hereof; provided, however, if Rock-Tenn and the Joint Venture cannot mutually agree, with such agreement not to be unreasonably withheld, whether the facts or circumstances which give rise to a Loss under this Section 7.1(c)(1) occurred prior to, or on or after the date hereof, then Rock-Tenn shall be responsible for any such Loss. (2) Sonoco shall indemnify, defend and hold harmless the Joint Venture, Rock-Tenn and Rock-Tenn Partition for any and all Losses suffered or incurred by the Joint Venture or Rock-Tenn as a result of or with respect to (x) any violation of or noncompliance with, or alleged violation of or noncompliance with, any Environmental Laws (including, without limitation, with respect to any alleged nuisance or trespass or alleged exposure to Hazardous Materials in the workplace) arising out of or relating to the operation of the Sonoco Contributed Assets or Sonoco Contributed Sub Assets (whether by Sonoco and its Affiliates or by any prior owner, lessee or user of such Sonoco Contributed Assets) prior to the date hereof and (y) any claim arising under any Environmental Law resulting from the ownership, use, control or operation at any time prior to the date hereof of any of the Sonoco Contributed Assets or Sonoco Contributed Sub Assets (whether currently or previously owned, leased or used by Sonoco and its Affiliates or by any prior owner, lessee or user of such Sonoco Contributed Assets or Sonoco Contributed Sub Assets), including, without limitation, arising from any release of any Hazardous Materials or any off-site shipment of any Hazardous Materials at or from any such Sonoco Contributed Assets or Sonoco Contributed Sub Assets (whether by Sonoco and its Affiliates or by any prior owner, lessee or user of such Sonoco Contributed Assets). Anything in this Agreement to the contrary notwithstanding, Sonoco shall be solely responsible for all Losses under this Section 7.1(c)(2) resulting from facts or circumstances which occurred prior to the date hereof. The Joint Venture shall be responsible for all Losses under this Section 7.1(c)(2) resulting from facts or circumstances which occur on or after the date hereof; provided, however, if Sonoco and the Joint Venture cannot mutually agree, with such agreement not 24 31 to be unreasonably withheld, whether the facts or circumstances which give rise to a Loss under this Section 7.1(c)(2) occurred prior to, or on or after the date hereof, then Sonoco shall be responsible for any such Loss. (d) Each Party agrees that the remedies provided in this Section 7.1, and the enforcement thereof in accordance with Article 9 (including the right to seek equitable relief pursuant to Section 9.2), shall constitute the sole and exclusive remedies for recovery against another Party for breaches of any of the representations, warranties, covenants and agreements in this Agreement and in any other Operative Agreement that expressly provides that the remedies provided for in this Section 7.1 shall constitute the sole and exclusive remedies for the recovery by one party to any such Operative Agreement against another party to such Operative Agreement for a breach of any representation, warranty, covenant or agreement contained in such Operative Agreement (the "Specified Operative Agreements"), except for other remedies as are expressly provided for in this Agreement or in any other Specified Operative Agreement. None of the Parties shall in any event be liable for any consequential, special, exemplary, punitive, incidental or indirect damages, including loss of profit or goodwill; provided, however, that this Section 7.1(d) shall not limit the liability of a Party for fraud or any willful misconduct; and provided further that this Section 7.1(d) shall not affect the calculation of the amount of any Loss (and the corresponding indemnification rights with respect thereto) of a Protected Party arising from a claim made by a third party against such Protected Party. No Protected Party shall be compensated more than once for the same Loss. (e) The representations and warranties contained herein shall not be extinguished on the date hereof, but shall survive for a period of two years following the date hereof. The covenants and agreements contained herein shall not be extinguished on the date hereof, but shall survive for the period of the applicable statute of limitations, except to the extent specifically provided herein. The representations, warranties, covenants and agreements contained in the Specified Operative Agreements shall survive for periods after the date hereof to the extent provided in such Specified Operative Agreements. No investigation or other examination by the Parties or their respective representatives shall affect the term of survival of the representations, warranties, covenants and agreements set forth above. The survival of the representations, warranties, covenants and agreements for a specified period as provided above shall mean that no Party may commence a claim for breach of any such representation, warranty, covenant or agreement after such period. (f) No Party shall make any claim for indemnification under this Section 7.1 (other than Section 7.1(c)) in respect of a breach of a representation or warranty contained in Article 6 of this Agreement or in any Specified Operative Agreement unless and until the aggregate Loss or Losses arising out of or resulting from such breaches exceed U.S. $250,000, in which event such Party may claim indemnification for the amount of such Losses that exceeds U.S. $250,000; provided however, that this Section 7.1(f) shall not apply to indemnification in respect of fraud or willful misconduct. (g) The Protected Parties shall promptly notify the other Party or Parties that may be required to provide indemnification pursuant to Section 7.1(a), (b) or (c) (the "Indemnifying Parties"), in writing, of any claim thereunder, specifying in reasonable detail the nature of the Loss 25 32 suffered by the Protected Parties, and, if known, the amount, or an estimate of the amount, of the Loss arising therefrom, provided that failure of the Protected Parties to give the Indemnifying Parties prompt notice as provided herein shall not relieve the Indemnifying Parties of any of their obligations hereunder, except to the extent any of the Indemnifying Parties are prejudiced by such failure. The Protected Parties shall provide to the Indemnifying Parties as promptly as practicable thereafter information and documentation reasonably requested by the Indemnifying Parties to support and verify the claim asserted, unless the Protected Parties have been advised by counsel that it is reasonably likely that a loss of privilege will occur with respect to such information and documentation. (h) If a Party has made a claim against another Party under this Section 7.1 with respect to a Loss suffered by a Protected Party which arises out of the claim of any third party, or if there is any claim against a third party available by virtue of the circumstances of such a Loss, the Indemnifying Parties may assume the defense or the prosecution thereof by written notice to the Protected Parties, including the employment of counsel or accountants, at the Indemnifying Parties' cost and expense. The Protected Parties shall have the right to employ counsel separate from counsel employed by the Indemnifying Parties in any such action and to participate therein, but the fees and expenses of such counsel employed by the Protected Parties shall be at their expense unless counsel for the Protected Parties shall have advised that it is reasonably likely that any Protected Party may raise a defense or claim that is inconsistent with any defense or claim available to an Indemnifying Party, in which case such fees and expenses shall be borne by the Indemnifying Party; provided, however, that the Indemnifying Party shall be required to bear such fees and expenses only if such defense or claim of the Protected Party has a reasonable likelihood of success. The Indemnifying Parties shall not be liable for any settlement of any such claim effected without their prior written consent, which shall not be unreasonably withheld; provided that if the Indemnifying Parties do not assume the defense or prosecution of a claim within thirty (30) days of notice thereof, the Protected Parties may settle such claim without the consent of the Indemnifying Parties. The Indemnifying Parties shall not agree to a settlement of or settle any claim which provides for any relief other than the payment of monetary damages or which would have an adverse effect on any such Protected Party and its Subsidiaries taken as a whole (if applicable) without the prior written consent of such Protected Party. Whether or not the Indemnifying Parties choose to so defend or prosecute such claim, all the Parties shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith except to the extent that any such Parties have been advised by counsel that it is reasonably likely that a loss of privilege will occur with respect to such information, documentation and testimony. The Indemnifying Parties shall be subrogated to all rights and remedies of the Protected Parties in respect of a Loss suffered by the Protected Parties, but only to the extent the Indemnifying Parties have discharged in full any obligations they may have with respect to such Loss pursuant to this Section 7.1. Section 7.2 Claims on Behalf of the Company. Sonoco and Sonoco Partitions shall have the sole and exclusive right to act on behalf of the Company (i) with respect to any claim by the Company against any of Rock-Tenn or Rock-Tenn Partition arising from a breach by Rock-Tenn or 26 33 Rock-Tenn Partition of any representation, warranty, covenant or agreement included in this Agreement or any other Operative Agreement and (ii) with respect to any discussions between the Company and Rock-Tenn or Rock-Tenn Partition in respect of any dispute between the Company and Rock-Tenn or Rock-Tenn Partition or in respect of any other matter which under the terms hereof or of any other Operative Agreement requires the agreement of the Company and Rock-Tenn or Rock-Tenn Partition. Rock-Tenn and Rock-Tenn Partition shall have the sole and exclusive right to act on behalf of the Company (x) with respect to any claim by the Company against Sonoco or Sonoco Partitions arising from a breach by Sonoco or Sonoco Partitions of any representation, warranty, covenant or agreement included in this Agreement or any other Operative Agreement and (y) with respect to any discussions between the Company and Sonoco or Sonoco Partitions in respect of any dispute between the Company and Sonoco or Sonoco Partitions or in respect of any other matter which under the terms hereof or of any other Operative Agreement requires the agreement of the Company and Sonoco or Sonoco Partitions. Such power shall include, in each case, the sole right, at the expense of the Company, to initiate, prosecute and settle any such claim, and such actions will not require approval of the Managing Board of the Company. Each of the Parties agrees to vote their Venture Interests in the Company and take such other actions as may be necessary to give effect to this Section 7.2. All such claims will be brought in accordance with Section 7.1 and Article 9. Section 7.3 Covenants Regarding Ownership of Subs. (a) Rock-Tenn agrees that it shall at all times in the aggregate own directly or indirectly through Wholly Owned Subsidiaries 100% of the economic interests in and voting power of Rock-Tenn Partition and any other Wholly Owned Subsidiary of Rock-Tenn holding any Venture Interest in the Joint Venture. (b) Sonoco agrees that it shall at all times in the aggregate own directly or indirectly through its Wholly Owned Subsidiaries 100% of the economic interests and voting power of Sonoco Partitions and any other Wholly Owned Subsidiary of Sonoco holding any Venture Interest in the Joint Venture. Section 7.4 Parent Guarantees. (a) Rock-Tenn hereby unconditionally, absolutely and irrevocably guarantees to Sonoco and Sonoco Partitions and their successors and assigns the full and prompt payment and performance of any and all obligations of Rock-Tenn Partition and any other Wholly Owned Subsidiary of Rock-Tenn holding any Venture Interest in the Joint Venture under this Agreement and all other Operative Agreements. (b) Sonoco hereby unconditionally, absolutely and irrevocably guarantees to Rock-Tenn and Rock-Tenn Partition and their successors and assigns the full and prompt payment and performance of any and all obligations of Sonoco Partitions and any other Wholly Owned Subsidiary 27 34 of Sonoco holding any Venture Interest in the Joint Venture under this Agreement and all other Operative Agreements. Section 7.5 Confidentiality. (a) Except as provided in this Section 7.5, each Party agrees that from and after the date hereof: (i) all confidential or proprietary information communicated, whether before, on or after the date of this Agreement, to it or any of its Affiliates or their respective officers, directors, employees, agents, representatives or professional advisors (collectively, the "Representatives") or the Joint Venture or any of its Affiliates or their respective Representatives in connection with, or as a result of, the Joint Venture, this Agreement, any of the other Operative Agreements or the Transactions contemplated thereby or otherwise received by such Party or any of its Representatives or the Joint Venture or any of its Representatives in connection with, or as a result of, the Joint Venture or the operation of the Venture Business, shall be held in confidence to the same extent as such Party holds its own confidential and proprietary information; provided that such Party shall not use, and shall cause the Joint Venture not to use, less than a reasonable standard of care in maintaining the confidentiality of such information; (ii) such Party will not, and such Party will cause each of its Representatives and the Joint Venture and each of its Representatives not to, disclose such confidential or proprietary information to any third party; and (iii) such Party will, and such Party will cause each of its Representatives and the Joint Venture and each of its Representatives, to use such confidential and proprietary information only to implement the provisions of, and exercise its rights under, this Agreement and the other Operative Agreements or in connection with the operation of the Joint Venture or the Venture Business and for no other purpose. (b) A Party may disclose confidential or proprietary information of the other Party or the Joint Venture to its Representatives who need to know such information to perform their functions in connection with the implementation of the provisions of, or the exercise of rights under, this Agreement or any of the other Operative Agreements or in connection with the operation of the Joint Venture or the Venture Business; provided that before disclosing any such confidential or proprietary information to any Representative, such Party shall notify such Representative of such Party's obligation to comply with this Agreement. Any Party so disclosing confidential or proprietary information of the other Party or the Joint Venture shall be responsible for any breach of this Section 7.5 by any of its Representatives and such Party agrees, at its sole expense, to use its reasonable efforts (including court proceedings) to restrain its Representatives from any prohibited or unauthorized disclosure or use of any such confidential or proprietary information. Each Party 28 35 shall notify the other Party as soon as possible if it has knowledge of a material breach of this Section 7.5. (c) No confidential or proprietary information of a Party or the Joint Venture shall be reproduced by the other Party in any form except to the extent reasonably necessary in connection with the implementation of the provisions of, or the exercise of rights under, this Agreement or any other Operative Agreement or in connection with the operation of the Joint Venture or the Venture Business. (d) This Section 7.5 shall not apply to any confidential or proprietary information of a Party or the Joint Venture which the receiving Party can establish to have: (i) been disclosed by the receiving Party with the prior written consent of the other Party or the Joint Venture, respectively; (ii) become generally available to the public other than as a result of disclosure by the receiving Party or any of its Representatives; (iii) been independently developed by the receiving Party or any of its Representatives who have not had knowledge of such confidential or proprietary information; (iv) been rightfully obtained by the receiving Party or any of its Representatives from a third party (other than the other Party or any of its Representatives or the Joint Venture) without knowledge or reason to know that such third party is obligated to protect its confidentiality; or (v) been obligated to be produced or disclosed by Applicable Law or any Governmental Authority; provided that such production or disclosure shall have been made in accordance with Sections 7.5(g) and (h). (e) A Party may disclose confidential or proprietary information of the other Party or the Joint Venture as may be reasonably necessary for such Party to implement the provisions of, or exercise its rights under, this Agreement and the other Operative Agreements or to otherwise further the Venture Business or the purposes of the Joint Venture; provided that such disclosures may only be made under this Section 7.5(e) if such disclosing Party notifies the Person to which it is making such disclosure that the information being disclosed is confidential or proprietary information. (f) In addition to the other requirements provided in this Section 7.5, each Party agrees that it will comply and that it will cause its Representatives and the Joint Venture and its Representatives to comply with all obligations relating to the protection, use and/or nondisclosure of confidential or proprietary information which are contained in the License Agreements. 29 36 (g) Except as set forth in Section 7.5(h), if a Party is requested by any Governmental Authority or required by Applicable Law to disclose any confidential or proprietary information of the other Party or the Joint Venture, such Party will provide the other Party or the Joint Venture, respectively, with written notice of such request or requirement as soon as possible and prior to such disclosure. Such other Party or the Joint Venture may then either seek appropriate protective relief from all or part of such request or requirement or waive the disclosing Party's compliance with this Agreement with respect to all or part of such request or requirement. Each Party agrees that it shall use all commercially reasonable efforts to cooperate with the other Party or the Joint Venture in attempting to obtain any protective order which such Party or the Joint Venture chooses to seek pursuant to this Section 7.5(g). In absence of such relief, if, in the opinion of counsel for the disclosing Party, such disclosing Party is legally compelled to disclose any confidential or proprietary information of the other Party or the Joint Venture, then such disclosing Party may disclose only that portion of such confidential or proprietary information which its counsel advises in writing that such disclosing Party is compelled to disclose; provided that the disclosing Party shall exercise all commercially reasonable efforts to preserve the confidentiality of such confidential or proprietary information, including cooperating with the other Party or the Joint Venture, respectively, to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded to such confidential or proprietary information. (h) If a Party reasonably deems it necessary to disclose any confidential or proprietary information of the other Party or the Joint Venture in order to comply with the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or any rules or regulations promulgated thereunder, or the rules of the New York Stock Exchange or any other applicable stock exchange (the "Securities Laws"), such Party shall provide the other Party or the Joint Venture, respectively, with written notice of such proposed disclosure as soon as possible and disclose such confidential or proprietary information only after receipt of (x) such other Party's or the Joint Venture's respective written consent to disclose confidential or proprietary information or (y) receipt of a written opinion of counsel for such Party that such Party is legally compelled to disclose such confidential or proprietary information under the Securities Laws, and then only that portion of such confidential or proprietary information which counsel advises in writing that such Party is compelled to disclose. (i) Each Party may disclose confidential or proprietary information of the Joint Venture to industry investment analysts, shareholders of either party or potential investors in the ordinary course of business of such Party. Section 7.6 Transfer of Venture Interests. Except as provided herein or in the Operating Agreement, no Party shall Transfer its Venture Interest in whole or in part, directly or indirectly, and any purported Transfer of all or any part of a Party's Venture Interest shall be void and of no effect against the Joint Venture, the other Party, any creditor of the Joint Venture or any person claiming against the Joint Venture, unless such Transfer is made in accordance with the terms of this Agreement and the Operating Agreement. 30 37 Section 7.7 Effect of Applicable Law. If any provision contained in any Operative Agreement is inconsistent with, or prohibited by, Applicable Laws, each of the Parties agrees to take all reasonable steps necessary to modify such provision in a manner which is as similar as possible in terms and effect as the original provision and which preserves substantially the intended purpose of the original provision, but which is not inconsistent with, or prohibited by, such Applicable Laws. ARTICLE 8. BUY-OUT RIGHTS Section 8.1 Buy-Out Rights. The following shall be "Buy-Out Events" with respect to the Joint Venture: (a) a Party shall have exercised its right to terminate the term of the Joint Venture pursuant to Section 2.5 (in which case such Party shall deliver a written notice (a "Buy-Out Notice") in accordance with Section 8.2); (b) a Material Default has occurred (in which case the non-defaulting Party may deliver a Buy-Out Notice in accordance with Section 8.2); (c) the Bankruptcy of a Party (in which case the non-bankrupt Party may deliver a Buy-Out Notice in accordance with Section 8.2); (d) a Change of Control shall occur with respect to Rock-Tenn or Sonoco (in which case such Party shall deliver a Buy-Out Notice in accordance with Section 8.2); and (e) written mutual consent of all of the Parties (in which case any Party may deliver a Buy-Out Notice in accordance with Section 8.2). Section 8.2 Buy-Out Notice. (a) If a Buy-Out Event occurs under Sections 8.1(a) or (d), the Party delivering a Buy-Out Notice pursuant to Sections 8.1(a) or (d) shall give such Buy-Out Notice to the other Party and to the Managing Board within thirty (30) days after (i) an election to terminate the Joint Venture in the case of a Buy-Out Notice delivered pursuant to Section 8.1(a) or (ii) the date of the Change of Control with respect to such Party in the case of a Buy-Out Notice delivered pursuant to Section 8.1(d). (b) If a Buy-Out Event occurs under Sections 8.1(b), (c) or (e), the Party which is entitled to deliver a Buy-Out Notice pursuant to Sections 8.1(b), (c) or (e) may give such Buy-Out Notice to the other Party and to the Managing Board (i) within thirty (30) days after the Parties execute a mutual consent to terminate the Joint Venture in the case of a Buy-Out Notice delivered pursuant 31 38 to Section 8.1(e), and (ii) within one hundred eighty (180) days following the date upon which such Party becomes aware of the occurrence of any Buy-Out Event under Sections 8.1(b) or (c). Section 8.3 Buy-Out Upon Default, Etc. (a) In the case of a Buy-Out Event under Section 8.1(b) resulting from a Material Default by Sonoco, Sonoco Partitions or any other Wholly Owned Subsidiary of Sonoco holding any Venture Interest (each a "Sonoco Party"), or under Section 8.1(c) resulting from a Bankruptcy of a Sonoco Party, Rock-Tenn and Rock-Tenn Partition shall have the option to purchase all, but not less than all, of the Venture Interests of the Sonoco Parties. In order to determine the option price, the Parties shall cause the Appraised Value of the Venture Interests of the Sonoco Parties to be determined pursuant to Section 8.6. If Rock-Tenn and Rock-Tenn Partition elect to exercise their option to purchase the Venture Interests of the Sonoco Parties, Rock-Tenn and Rock-Tenn Partition shall deliver written notice of such exercise to the Sonoco Parties within ninety (90) days following receipt of the Value Opinion (as defined in Section 8.6). Such written notice shall constitute an offer by Rock-Tenn and Rock-Tenn Partition to purchase the Venture Interests of the Sonoco Parties at the price set forth below in this Section 8.3(a), and the Sonoco Parties hereby accept any such offer by Rock-Tenn and Rock-Tenn Partition. If Rock-Tenn and Rock-Tenn Partition fail to deliver such written notice of such exercise within said 90-day period, they will be deemed to have elected not to purchase the Venture Interests of the Sonoco Parties. In the event that Rock-Tenn and Rock-Tenn Partition purchase the Venture Interests of the Sonoco Parties pursuant to this Section 8.3(a), the purchase price for the Venture Interests shall be an amount payable in cash equal to 100% of the Appraised Value of such Venture Interests. (b) In the case of a Buy-Out Event under Section 8.1(b) resulting from a Material Default by Rock-Tenn, Rock-Tenn Partition or any other Wholly Owned Subsidiary of Rock-Tenn holding any Venture Interest (each a "Rock-Tenn Party"), or under Section 8.1(c) resulting from the Bankruptcy of a Rock-Tenn Party, Sonoco and Sonoco Partitions shall have the option to purchase all, but not less than all, of the Venture Interests of the Rock-Tenn Parties. In order to determine the option price, the Parties shall cause the Appraised Value of the Venture Interests of the Rock-Tenn Parties to be determined pursuant to Section 8.6. If Sonoco and Sonoco Partitions elect to exercise their option to purchase the Venture Interests of the Rock-Tenn Parties, Sonoco and Sonoco Partitions shall deliver written notice of such exercise to the Rock-Tenn Parties within ninety (90) days following receipt of the Value Opinion. Such written notice shall constitute an offer by Sonoco and Sonoco Partitions to purchase the Venture Interests of the Rock-Tenn Parties at the price set forth below in this Section 8.3(b), and the Rock-Tenn Parties hereby accept any such offer by Sonoco and Sonoco Partitions. If Sonoco and Sonoco Partitions fail to deliver such written notice of such exercise within said 90-day period, they will be deemed to have elected not to purchase the Venture Interests of the Rock-Tenn Parties. In the event that Sonoco and Sonoco Partitions purchase the Venture Interests of the Rock-Tenn Parties pursuant to this Section 8.3(b), the purchase price for the Venture Interests shall be an amount payable in cash equal to 100% of the Appraised Value of such Venture Interests. 32 39 Section 8.4 Buy/Sell Arrangements. In the case of a Buy-Out Event under Section 8.1(a), 8.1(d) or 8.1(e), the Party that delivers the Buy-Out Notice (sometimes in this Article called the "Offeror") shall be deemed to have made to the other Party (sometimes in this Article called the "Offeree") an irrevocable offer to purchase the Venture Interest of the Offeree in the Joint Venture and an irrevocable offer to sell the Venture Interest of the Offeror in the Joint Venture. In the case of a Buy-Out Event under Sections 8.1(a) or (e), the Offeror shall specify in the Buy-Out Notice the purchase price offered to be paid by the Offeror for the Venture Interest of the Offeree. In the case of a Buy-Out Event under Section 8.1(d), the purchase price shall be the Appraised Value of the Joint Venture multiplied by the selling Member's Percentage Interest. The Offeree shall have thirty (30) days from the date of the Buy-Out Notice to accept the Offeror's offer to sell its Venture Interest to the Offeror at the purchase price contained in the Buy-Out Notice or to purchase the Venture Interest of the Offeror at a price equal to the purchase price contained in the Buy-Out Notice multiplied by the Offeror's Percentage Interest divided by the Offeree's Percentage Interest. If the Offeree does not respond to the offer of the Offeror within such thirty (30) day period, the Offeree shall be deemed to have accepted the offer of the Offeror to purchase the Venture Interest of the Offeree. Section 8.5 Waiver of Buy-Out Rights. Notwithstanding the foregoing, in the event that a Party fails to give a Buy-Out Notice within the time period set forth in Section 8.2, such Party shall be deemed to have waived its right to terminate with respect to the event or events which gave rise to such right to terminate. Section 8.6 Determination of Appraised Value. (a) For purposes of this Agreement, the "Appraised Value" of a business or the interest of a Person in a business shall mean the total amount in U.S. Dollars, determined, unless otherwise specified herein, as of the end of the month immediately preceding the date on which the appraisal is made by an investment banking firm selected in accordance with Section 8.6(b), which a willing buyer would pay to a willing seller for such business or interest, determined as a whole (and, in the case of a business, as a going concern) in an arms' length negotiated transaction without undue time constraints. In determining the Appraised Value, no discounts for lack of control or lack of marketability shall be applied. (b) The Appraised Value shall be determined by an investment banking firm of international standing, jointly selected by the selling Party and the purchasing Party, that is independent of both Rock-Tenn and Sonoco and their respective Affiliates. If the selling Party and the purchasing Party are unable to mutually agree on an investment banking firm, each shall choose an investment banking firm and the two firms so chosen shall, in good faith, select a third investment banking firm of international standing that is independent of both Rock-Tenn and Sonoco and their respective Affiliates. The three firms so appointed shall jointly determine the Appraised Value, provided that if such firms are unable to agree upon the Appraised Value, each firm shall individually propose an Appraised Value, and the Appraised Value shall be deemed to be the average of the two proposed values which are closest together. If either the selling Party or the purchasing 33 40 Party fails to select an investment banking firm within ten (10) Business Days of receipt of a notice specifying such failure from such other Party, such other party may select in its sole discretion an investment banking firm that is independent of both Rock-Tenn and Sonoco and their respective Affiliates to determine the Appraised Value, which determination shall be final and binding on the parties. The Parties shall instruct each investment banking firm so retained to deliver a written opinion (the "Value Opinion") as to the Appraised Value to such parties within sixty (60) days following the selection of such firm. The cost of determining the Appraised Value, including the fees and expenses of such investment banking firms, shall, unless otherwise agreed by the Parties, be borne equally by the selling Party and the purchasing Party; provided that if the Appraised Value of the Joint Venture is being determined because of a Material Default, then the Party which committed such Material Default shall be responsible for all of the costs of determining such Appraised Value, including the fees and expenses of such investment banking firms. For purposes of this Agreement, an investment banking firm shall be deemed to be "independent" if (i) such firm is not an Affiliate of Rock-Tenn or Sonoco and (ii) such firm has not derived any of its revenues within the five (5) years prior to the selection of such investment banking firm from Rock-Tenn, Sonoco or any of their respective Affiliates and at the time of the selection of such investment banking firm it has no active engagement with Rock-Tenn, Sonoco or any of their respective Affiliates. Rock-Tenn and Sonoco agree that they will, and will cause each of their respective Affiliates to, disclose all relationships and engagements and other relevant information about investment banking firms under consideration by the Parties and cooperate with each other in all other respects in the selection of an investment banking firm pursuant to this Section 8.6. Section 8.7 Parties. For purposes of this Article 8, "Party" shall mean Rock-Tenn and Rock-Tenn Partition on the one hand, and Sonoco and Sonoco Partitions on the other hand. ARTICLE 9. DISPUTE RESOLUTION Section 9.1 Dispute Resolution. Each Party to this Agreement irrevocably consents and agrees that any legal action, suit or proceeding by it against any of the other Parties with respect to its rights, obligations or liabilities under or arising out of or in connection with this Agreement shall be brought by such Party only in the United States District Court for the District of Delaware or, in the event (but only in the event) such court does not have subject matter jurisdiction over such action, suit or proceeding, in the courts of the State of Delaware sitting in the City of Wilmington, and each Party to this Agreement hereby irrevocably accepts and submits to the jurisdiction of each of the aforesaid courts in personam, with respect to any such action, suit or proceeding (including, without limitation, claims for interim relief, counterclaims, actions with multiple defendants and actions in which such party is implied). Each party hereto irrevocably and unconditionally waives any right that it may have to a jury trial in any legal action, suite or proceeding with respect to, or arising out of or in connection with this Agreement. Each of the Parties hereby irrevocably designates National Registered Agents, Inc. (in such capacity, the "Process Agent"), with an office 34 41 at 9 East Loockerman Street, Kent County, Dover, Delaware 19901, as its designee, appointee and agent to receive, for and on its behalf service of process in such jurisdiction in any legal action or proceedings with respect to this Agreement, and such service shall be deemed complete upon delivery thereof to the Process Agent, provided that in the case of any such service upon the Process Agent, the Party effecting such service shall also deliver a copy thereof to the other Parties in the manner provided in Section 11.1. The Parties shall take all such action as may be necessary to continue said appointment in full force and effect or to appoint another agent so that the Parties will at all time have an agent for service of process for the above purposes in Delaware. In the event of the transfer of all or substantially all of the assets and business of the process agent to any other corporation by consolidation, merger, sale of assets or otherwise, such other corporation shall be substituted hereunder for the process agent with the same effect as if named herein in place of National Registered Agents, Inc. Each of the Parties further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered airmail, postage prepaid, to such Party at its address set forth in this Agreement, such service of process to be effective upon acknowledgment of receipt of such registered mail. Nothing herein shall affect the right of any Party to serve process in any other manner permitted by Applicable Law. Each of the Parties expressly acknowledges that the foregoing waiver is intended to be irrevocable under the laws of the State of Delaware and of the United States of America. Section 9.2 Equitable Relief. Each Party hereto agrees that money damages would not be a sufficient remedy for the other Parties hereto for any breach of this Agreement by it, and that in addition to all other remedies the other Parties hereto may have, they shall be entitled to specific performance and to injunctive or other equitable relief as a remedy for any such breach. Each Party hereto agrees not to oppose the granting of such relief in the event a court determines that such a breach has occurred, and to waive any requirement for the securing or posting of any bond in connection with such remedy. ARTICLE 10. POST-TERMINATION PROVISIONS Section 10.1 Consequences of Termination. Upon the termination of the Joint Venture in accordance with this Agreement and the Operating Agreement, this Agreement and the other Operative Agreements shall forthwith cease to have effect as between the Parties, except to the extent that any such Operative Agreement shall expressly provide otherwise, and all further obligations of the Parties to each other and to the Joint Venture shall terminate under this Agreement and the other Operative Agreements without further liability, except that: (a) such termination shall not constitute a waiver of any rights that any Party may have by reason of a breach of this Agreement or any other Operative Agreement, subject to any limitations thereon in this Agreement or the other Operative Agreements; and 35 42 (b) the provisions of this Article 10, Sections 1.3, 7.5 and 7.7, and Articles 4, 9 and 11 of this Agreement shall continue in full force and effect. ARTICLE 11. MISCELLANEOUS Section 11.1 Notices. Except as expressly provided herein, notices and other communications provided for herein shall be in writing and shall be delivered by hand or courier service, mailed or sent by telex, graphic scanning or other telegraphic communications equipment of the sending Party, as follows: Rock-Tenn: Rock-Tenn Company 504 Thrasher Street Norcross, Georgia 30071 Attn: Chief Financial Officer Tel: 770-368-7676 Fax: 770-263-3582 with a copy to: Rock-Tenn Company 504 Thrasher Street Norcross, Georgia 30071 Attn: General Counsel Tel: 770-263-4456 Fax: 770-248-4402 Rock-Tenn Partition: Rock-Tenn Partition Company 504 Thrasher Street Norcross, Georgia 30071 Attn: Chief Financial Officer Tel: 770-368-7676 Fax: 770-263-3582 with a copy to: Rock-Tenn Partition Company 504 Thrasher Street Norcross, Georgia 30071 Attn: General Counsel Tel: 770-263-4456 Fax: 770-248-4402 36 43 Sonoco: Sonoco Products Company One North Second Street Hartsville, South Carolina 29550 Attn: President Tel: 803-383-7000 Fax: 803-383-7478 with a copy to: Sinkler & Boyd, P.A. 1426 Main Street, Suite 1200 Columbia, South Carolina 29201 Attn: William C. Boyd, Esquire Tel: 803-779-3080 Fax: 803-540-7878 Sonoco Partitions: One North Second Street Hartsville, South Carolina 29550 Attn: President Tel: 803-383-7000 Fax: 803-383-7478 with a copy to: Sinkler & Boyd, P.A. 1426 Main Street, Suite 1200 Columbia, South Carolina 29201 Attn: William C. Boyd, Esquire Tel: 803-779-3080 Fax: 803-540-7878 or to such other address or attention of such other Person as such Party shall advise the other Parties in writing. All notices and other communications given to the Parties hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. Communications sent by telex, graphic scanning or other telegraphic communications equipment shall be deemed to have been received when confirmation of their delivery is received by the sender. Section 11.2 Applicable Law. The validity, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of law. Section 11.3 Severability. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, the Parties agree that such provision will be enforced to the maximum extent permissible so as to effect the intent of the Parties, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. If necessary to effect the intent of the Parties, the Parties will negotiate in good faith to amend this 37 44 Agreement to replace the unenforceable language with enforceable language which as closely as possible reflects such intent. Section 11.4 Amendments. This Agreement may be modified only by a written amendment signed by all of the Parties. Section 11.5 Waiver. The waiver by a Party of any instance of any other Party's noncompliance with any obligation or responsibility herein shall be in writing and signed by the waiving Party and shall not be deemed a waiver of other instances of such other Party's noncompliance. Section 11.6 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts shall have been signed by each Party and delivered to the other Parties. Section 11.7 Entire Agreement. The provisions of this Agreement set forth the entire agreement and understanding among the Parties as to the subject matter hereof and supersede all prior agreements, oral or written, and all other prior communications between the Parties relating to the subject matter hereof, other than those written agreements executed and delivered contemporaneously herewith. Section 11.8 No Assignment. (a) Except as specifically provided herein and except in connection with a Transfer of a Venture Interest pursuant to Article 10 of the Operating Agreement, no Party shall, directly or indirectly, assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the other Parties. (b) Any attempted assignment of this Agreement in violation of this Section 11.8 shall be void and of no effect. (c) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties and their respective successors and permitted assigns. Section 11.9 Expenses. Except as otherwise provided in this Agreement, all costs and expenses (including the fees and expenses of any attorneys, accountants, investment bankers, brokers, finders or other intermediaries) incurred in connection with this Agreement and the other Operative Agreements and the consummation of the Transactions contemplated by Article 5 to be consummated on the date hereof shall be paid by the Party incurring such cost or expense. Section 11.10 No Third-Party Beneficiaries. This Agreement is for the sole benefit of the Parties and their permitted assigns, and nothing herein express or implied shall give or be construed to give to any Person, other than the Parties and such assigns, any legal or equitable rights hereunder. 38 45 Section 11.11 Publicity. No Party will issue any press release or make any other public announcement relating to the existence of this Agreement or the Transactions contemplated hereby, except that a Party may make any disclosure required to be made under Applicable Law or the rules of the New York Stock Exchange or any other applicable stock exchange if such Party determines in good faith that it is necessary to do so and gives prior notice to the other Parties. Section 11.12 Construction. This Agreement has been negotiated by the Parties and their respective counsel and shall be fairly interpreted in accordance with its terms and without any strict construction in favor of or against any of the Parties. Section 11.13 Disclaimer of Agency. Except for provisions herein expressly authorizing one Party to act for another, this Agreement shall not constitute any Party as a legal representative or agent of any other Party, nor shall a Party have the right or authority to assume, create or incur any liability or any obligation of any kind, expressed or implied, against or in the name or on behalf of any other Party or any of its Subsidiaries or the Joint Venture unless otherwise expressly permitted by such Party. Section 11.14 Fiduciary Duties. Subject to Applicable Law, no Party or any of its Subsidiaries nor any officer, director, employee or former employee of any Party or its Subsidiary shall have any obligation, or be liable, to any Party or the Joint Venture for exercising any of the rights of such Party or such Subsidiary under this Agreement or any other Operative Agreement to which it is or will be a party, for exercising or failing to exercise its rights as a member of the Company or for breach of any fiduciary or other similar duty to any Party or the Joint Venture by reason of such conduct, other than a breach of any Operative Agreement. 39 46 IN WITNESS WHEREOF, Rock-Tenn, Rock-Tenn Partition, Sonoco and Sonoco Partitions have caused their respective duly authorized officers to execute this Agreement as of the day and year first above written. ROCK-TENN COMPANY By: --------------------------------- Name: ---------------------------- Title: --------------------------- ROCK-TENN PARTITION COMPANY By: --------------------------------- Name: ---------------------------- Title: --------------------------- SONOCO PRODUCTS COMPANY By: --------------------------------- Name: ---------------------------- Title: --------------------------- SONOCO PARTITIONS, INC. By: --------------------------------- Name: ---------------------------- Title: --------------------------- 40 47 EXHIBIT A Opinion of King & Spalding King & Spalding shall deliver to Sonoco and Sonoco Partitions their legal opinion under the laws of the State of Georgia and the United States of America to the following effect, based upon and subject to reasonable and customary assumptions and qualifications: 1. Each of Rock-Tenn and Rock-Tenn Partition is a corporation validly existing and in good standing under the laws of the State of Georgia, and has full corporate power and authority to execute and deliver each of the Operative Agreements to which it is a party and to perform its obligations thereunder and to consummate the transactions contemplated thereby. 2. The execution and delivery of each of the Operative Agreements to which Rock-Tenn and Rock-Tenn Partition is a party and of all of the other documents and instruments required thereby and the performance by Rock-Tenn and Rock-Tenn Partition of their respective obligations thereunder, have been duly and validly authorized by the respective Boards of Directors of Rock-Tenn and Rock-Tenn Partition, no other corporate action on the part of Rock-Tenn and Rock-Tenn Partition being necessary. 3. Each of the Operative Agreements to which Rock-Tenn or Rock-Tenn Partition is party has been duly and validly executed and delivered by Rock-Tenn or Rock-Tenn Partition and constitutes the valid and binding obligation of Rock-Tenn or Rock-Tenn Partition, enforceable against Rock-Tenn or Rock-Tenn Partition in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors' rights or by general equity principles, whether considered at law or in equity. 4. The execution and delivery by Rock-Tenn and Rock-Tenn Partition of the Operative Agreements do not, and the performance by Rock-Tenn and Rock-Tenn Partition of their respective obligations under the Operative Agreements and the consummation of the transactions contemplated thereby will not: (i) conflict with or result in a violation or breach of the articles of incorporation and bylaws of Rock-Tenn or Rock-Tenn Partition; or (ii) conflict with or result in a violation or breach of any law of the State of Georgia or the United States of America applicable to Rock-Tenn or Rock-Tenn Partition. 5. No further consent, approval or action of, filing with or notice to any Governmental Authority of the United States of America or the State of Georgia is required on the part of Rock-Tenn or Rock-Tenn Partition in connection with the execution, delivery and performance of each of 41 48 the Operative Agreements to which Rock-Tenn or Rock-Tenn Partition is a party or the consummation of the transactions consummated thereby. 6. To our knowledge, there are no Proceedings pending or threatened against, relating to or affecting Rock-Tenn or Rock-Tenn Partition or any of their respective assets or properties which (i) could reasonably be expected to result in the issuance of an order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by the Operative Agreements, or (ii) could individually or in the aggregate have a Material Adverse Effect on the business or condition of Rock-Tenn or Rock-Tenn Partition. 42 49 EXHIBIT B Opinion of Sinkler & Boyd Sinkler & Boyd shall deliver to Rock-Tenn and Rock-Tenn Partition their legal opinion under the laws of the State of South Carolina and the United States of America to the following effect, based upon and subject to reasonable and customary assumptions and qualifications: 1. Each of Sonoco and Sonoco Partitions is a corporation validly existing and in good standing under the laws of the State of South Carolina, and has full corporate power and authority to execute and deliver each of the Operative Agreements to which it is a party and to perform its obligations thereunder and to consummate the transactions contemplated thereby. 2. The execution and delivery of each of the Operative Agreements to which Sonoco or Sonoco Partitions is a party and of all of the other documents and instruments required thereby and the performance by Sonoco and Sonoco Partitions of their respective obligations thereunder, have been duly and validly authorized by the respective Boards of Directors of Sonoco and Sonoco Partitions, no other corporate action on the part of Sonoco and Sonoco Partition being necessary. 3. Each of the Operative Agreements to which Sonoco or Sonoco Partitions is party has been duly and validly executed and delivered by Sonoco and Sonoco Partitions and constitutes the valid and binding obligation of Sonoco and Sonoco Partitions, enforceable against Sonoco and Sonoco Partition in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors' rights or by general equity principles, whether considered at law or in equity. 4. The execution and delivery by Sonoco and Sonoco Partitions of the Operative Agreements do not, and the performance by Sonoco and Sonoco Partitions of their respective obligations under the Operative Agreements and the consummation of the transactions contemplated thereby will not: (i) conflict with or result in a violation or breach of the articles of incorporation and bylaws of Sonoco or Sonoco Partitions; or (ii) conflict with or result in a violation or breach of any law of the State of South Carolina or the United States of America applicable to Sonoco or Sonoco Partitions. 5. No further consent, approval or action of, filing with or notice to any Governmental Authority of the United States of America or the State of South Carolina is required 43 50 on the part of Sonoco or Sonoco Partitions in connection with the execution, delivery and performance of each of the Operative Agreements to which Sonoco or Sonoco Partitions is a party or the consummation of the transactions consummated thereby. 6. To our knowledge, there are no Proceedings pending or threatened against, relating to or affecting Sonoco or Sonoco Partitions or any of their respective assets or properties which (i) could reasonably be expected to result in the issuance of an order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by the Operative Agreements, or (ii) could individually or in the aggregate have a Material Adverse Effect on the business or condition of Sonoco or Sonoco Partitions. 44 EX-10.9 7 CONTRIBUTION AGREEMENT 1 EXHIBIT 10.9 - ------------------------------------------------------------------------------- CONTRIBUTION AGREEMENT DATED AS OF SEPTEMBER 5, 1997 BY AND AMONG ROCK-TENN COMPANY, ROCK-TENN PARTITION COMPANY AND RTS PACKAGING, LLC - ------------------------------------------------------------------------------ 2 EXHIBITS Exhibit 1.1(a)(i) Real Property Exhibit 1.1(a)(ii) Real Property Leases Exhibit 1.1(a)(iii) Equipment Exhibit 1.1(a)(v) Leases Exhibit 1.1(a)(xi) Intangible Property Exhibit 1.1(a)(xii) Licenses Exhibit 1.2(a)(i) Excluded Real Property Exhibit 1.2(a)(ii) Excluded Equipment Exhibit 1.2(a)(iii) Excluded Intangible Property Exhibit 1.4(a)(2) Certain Assumed Liabilities Exhibit 2.6 Excluded Necessary Intangible Property Exhibit 2.8 Contracts Exhibit 2.11 Permits Exhibit 2.12 Litigation Exhibit 2.13(a) Compliance with Applicable Permits and Law Exhibit 2.13(b) Notice of Failure to Comply with Law Exhibit 2.14 Environmental Matters Exhibit 2.14(g) Fines for Environmental Matters Exhibit 2.15 Customers Exhibit 3.10(c) Sketch of Real Property -i- 3 CONTRIBUTION AGREEMENT THIS CONTRIBUTION AGREEMENT (this "Agreement"), dated as of September 5, 1997 by and among ROCK-TENN COMPANY, a Georgia corporation ("Rock-Tenn"), ROCK-TENN PARTITION COMPANY, a Georgia corporation ("Rock-Tenn Partition"), and RTS PACKAGING, LLC, a Delaware limited liability company (the "Company"); W I T N E S S E T H: WHEREAS, Rock-Tenn is engaged in the solid fiber partition business (the "Solid Fiber Partition Business"); WHEREAS, Rock-Tenn and Rock-Tenn Partition have entered into the Joint Venture Agreement, dated as of the date hereof (the "Joint Venture Agreement"), with Sonoco Products Company and Sonoco Partitions, Inc., providing for the formation of the Company to engage in the Solid Fiber Partition Business on a worldwide basis; and WHEREAS, Rock-Tenn Partition has agreed to contribute to the Company certain of its assets related to the Solid Fiber Partition Business; NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein and in the Joint Venture Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties intending to be legally bound, hereby agree as follows: ARTICLE 1. CONTRIBUTION OF ASSETS BY ROCK-TENN PARTITION Section 1.1 Contribution of the Assets. (a) Subject to the terms and conditions of the Joint Venture Agreement, the Operating Agreement and this Agreement, effective as of the date hereof (the "Contribution Date"), Rock-Tenn Partition hereby assigns, transfers and delivers to the Company, as a contribution to the capital of the Company, free and clear of all title defects, objections, liens, pledges, claims, rights of first refusal, options, charges, security interests, mortgages and other encumbrances of any nature whatsoever (collectively, "Encumbrances"), other than "Permitted Encumbrances" (as defined in Section 1.1(b) of this Agreement), all of the assets, properties and business (excepting only the "Excluded Assets," as defined in Section 1.2 of this Agreement) of every kind and description, wherever located, real, personal or mixed, tangible or intangible, owned or used or held for use primarily in the conduct of the Solid Fiber Partition Business by Rock-Tenn Partition and its Affiliates as the same shall exist on the Contribution Date (collectively, the "Assets"), including, without limitation, all right, title, and interest of Rock-Tenn Partition in, to, and under: 4 (i) Subject to Section 3.10(c) of this Agreement, the parcels of land described in Exhibit 1.1(a)(i) hereto used or held for use primarily in connection with the Solid Fiber Partition Business (collectively, the "Real Property") and all buildings, fixtures and improvements located thereon (collectively, the "Improvements"); (ii) The leases described in Exhibit 1.1(a)(ii) (collectively, the "Real Property Leases") with respect to the parcels of land described therein (the "Leased Real Property") and the Improvements located thereon (the Real Property, the Leased Real Property and the Improvements together with the Tucker Site and the Home Office Site (as such terms are defined in Section 1.2 hereof) and the improvements thereon are hereinafter collectively referred to as the "Subject Property"); (iii) The machinery, equipment, furniture, vehicles and other tangible property (including, without limitation, maintenance and operating supplies, fuel and spare parts for such machinery and equipment) located at the Subject Property or otherwise used or held for use primarily in connection with the Solid Fiber Partition Business and described in Exhibit 1.1(a)(iii) of this Agreement (collectively, the "Equipment"); (iv) The raw materials, finished goods, work-in-process, supplies and inventories located at the Subject Property or otherwise used or held for use primarily in connection with the Solid Fiber Partition Business (collectively, the "Inventory"); (v) The leases described in Exhibit 1.1(a)(v) (collectively, the "Leases") with respect to office equipment, furnishings, furniture and other tangible property located at the Subject Property or otherwise used or held for use primarily in connection with the Solid Fiber Partition Business (collectively, the "Leased Property"); (vi) All rights, claims, credits, causes of action and rights of setoff against third parties relating to the assets used or held for use primarily in connection with the Solid Fiber Partition Business, including, without limitation, unliquidated rights under manufacturers' and vendors' warranties but excluding all amounts representing reimbursements for items paid by Rock-Tenn Partition or its Affiliates (collectively, the "Claims"); (vii) All contracts, agreements, licenses and other instruments, arrangements and commitments primarily relating to the Solid Fiber Partition Business (collectively, the "Contracts"); (viii) All certificates of occupancy and other transferable licenses, permits, registrations, authorizations, use agreements, orders and approvals of governmental and quasi-governmental agencies and authorities (whether federal, state, local, municipal or foreign) or private parties relating to the Solid Fiber Partition Business (collectively, the "Permits"); -2- 5 (ix) All prepaid rentals and other prepaid expenses (other than prepaid insurance premiums) arising from payments made by Rock-Tenn Partition or its Affiliates in the ordinary and usual course of the operation of the Solid Fiber Partition Business for goods and services prior to the close of business on the Contribution Date; (x) Originals or copies of all books, records, files and papers, whether in hard copy or computer format, used or held for use primarily in connection within the Solid Fiber Partition Business, including without limitation, engineering information, manuals and data, sales and advertising materials, sales and purchase correspondence, lists of present and, to the extent available, former suppliers (collectively, "Files and Records"); (xi) All patents, copyrights, trademarks, trade names, technology, know-how, processes, trade secrets, inventions, proprietary data and other intangible properties, and all applications for the same, used or held for use primarily in connection with the Solid Fiber Partition Business and listed in Exhibit 1.1(a)(xi) (collectively, the "Intangible Property"); (xii) All licenses with respect to the Intangible Property and described in Exhibit 1.1(a)(xii) (collectively, the "Licenses"); (xiii) The lists of present and, to the extent available, former customers and goodwill associated with the Solid Fiber Partition Business; and (xiv) All accounts receivable existing on the Contribution Date and arising out of the ordinary and usual course of the operation of the Solid Fiber Partition Business prior to the close of business on the Contribution Date (collectively, the "Accounts Receivable"). (b) For purposes of this Agreement, "Permitted Encumbrances" shall mean (i) the "Assumed Liabilities" (as defined in Section 1.4 of this Agreement); (ii) liens for current "Taxes" (as defined in Section 4.1 of this Agreement) not yet due and payable; (iii) the Real Property Leases and the Leases; and (iv) in the case of the Real Property and the Improvements thereon, items subsequently disclosed pursuant to title reports and surveys to be obtained pursuant to Section 3.10(c) of this Agreement, building and use restrictions and other easements, right of ways, encumbrances or restrictions of any nature whatsoever which do not interfere in any material respect with the current use made of the Real Property or such Improvements in connection with the Solid Fiber Partition Business. Section 1.2 Excluded Assets. (a) The Company expressly understands and agrees that there shall be excluded from the Assets the following assets and properties (or rights with respect thereto) of Rock-Tenn Partition and its Affiliates which are used or held for use in connection with the Solid Fiber Partition Business: -3- 6 (i) The parcels of land described in Exhibit 1.2(a)(i) hereto (the "Tucker Site" and the "Home Office Site" and collectively referred to herein as the "Excluded Real Property") and the buildings, fixtures and improvements erected on the Excluded Real Property (collectively, the "Excluded Improvements") (the Excluded Real Property and Excluded Improvements hereinafter sometimes collectively referred to as the "Excluded Facilities") (ii) All machinery, equipment and other tangible property described in Exhibit 1.2(a)(ii) (collectively, the "Excluded Equipment"); (iii) The trademarks and trade names described in Exhibit 1.2(a)(iii) hereto, and all goodwill associated with such trademarks and trade names (collectively, the "Excluded Intangible Property"); (iv) All claims against third parties relating to the Excluded Assets and the related unliquidated rights under manufacturers' and vendors' warranties, including all amounts representing reimbursements for items paid by Rock-Tenn Partition or its Affiliates; (v) All of the capital stock issued by Rock-Tenn Recycling Company ("Rock-Tenn Recycling"), a corporation organized under the laws of Quebec (formerly known as Dominion Paperboard Product, Ltd.), and all of the assets of Rock-Tenn Recycling; and (vi) Refunds relating to prepaid insurance. (b) The Excluded Facilities, Excluded Equipment, Excluded Intangible Property and other assets described in Section 1.2(a) not being contributed to the Company by Rock-Tenn Partition pursuant to this Agreement are herein collectively referred to as the "Excluded Assets." Section 1.3 Conveyance Instruments. In order to effectuate the contribution of the Assets as contemplated by this Article 1, Rock-Tenn Partition has, or will hereafter, execute and deliver, or cause to be executed and delivered, all such documents or instruments of assignment, transfer or conveyance, in each case dated as of the Contribution Date (collectively, the "Conveyance Instruments"), as the Company and its counsel shall reasonably deem necessary or appropriate to vest in or confirm title to the Assets to the Company. Section 1.4 Assumed Liabilities. (a) General. Subject to the terms and conditions of this Agreement, the Operating Agreement and the Joint Venture Agreement, in reliance on the representations, warranties, covenants and agreements of the parties contained herein, effective as of the Contribution Date, the Company hereby assumes and agrees to pay, discharge or fulfill the following liabilities and obligations relating to the Solid Fiber Partition Business: (1) all of the liabilities and obligations in -4- 7 respect of the Contracts, the Real Property Leases and the Leases; (2) the liabilities and obligations listed in Exhibit 1.4(a)(2); and (3) all of the liabilities and obligations described in Section 1.4(b) (collectively, the "Assumed Liabilities") (b) PIUMPF Withdrawal Liability. (i) General. Rock-Tenn, Rock-Tenn Partition and the Company intend that the contribution of assets by Rock-Tenn and Rock-Tenn Partition to the Company as contemplated in this Agreement in exchange for the ownership interest in the Company described in the Joint Venture Agreement shall constitute a sale of assets by Rock-Tenn and Rock-Tenn Partition to the Company under Section 4204 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and that neither Rock Tenn nor Rock-Tenn Partition shall have a complete withdrawal or a partial withdrawal from the Paper Industry Union-Management Pension Fund ("PIUMPF") by reason of the application of ERISA Section 4204 to such contribution of assets to the Company and the transactions related to such contribution of assets to the Company. (ii) PIUMPF. Rock-Tenn and Rock-Tenn Partition immediately prior to the Contribution Date have terminated the employment of all Rock-Tenn and Rock-Tenn Partition employees who are represented by the United Paperworkers International Union, AFL-CIO, Local Union Number 826 at the Merced, California Plant and Local Union Number 1106 at the Eaton, Indiana Partition Plant ("PIUMPF Participants") and who have been transferred to the Company as part of the contribution of assets contemplated in this Agreement and on whose behalf Rock-Tenn or Rock-Tenn Partition made contributions to PIUMPF, the Company has offered employment to all such PIUMPF Participants effective as of the Contribution Date and the Company has assumed as of the Contribution Date Rock-Tenn's obligation and Rock-Tenn Partition's obligation to make contributions to PIUMPF on and after the Contribution Date for all such PIUMPF Participants who have accepted the Company's offer of employment. (iii) Bond. Subject to the grant of a variance requested under Section 1.4(b)(v), the Company shall purchase and maintain a bond sufficient to satisfy the requirements of ERISA Section 4204(a)(1)(B). (iv) Secondary Liability. Subject to the grant of a variance requested under Section 1.4(b)(v), Rock-Tenn and Rock-Tenn Partition shall remain secondarily liable for any withdrawal liability that either Rock-Tenn or Rock-Tenn Partition would have had to PIUMPF with respect to the transactions described in this Section 1.4(b) if the Company withdraws from PIUMPF in a complete withdrawal during the five plan years of PIUMPF which immediately follow the Contribution Date or has a partial withdrawal with respect to the transaction described in this Section 1.4(b) during such five plan year period if the Company's liability to PIUMPF with respect to any such withdrawal or partial withdrawal is not paid. Further, if the Company withdraws from PIUMPF before the last day of the five -5- 8 plan year period of PIUMPF which begins after the Contribution Date and the Company fails to make any withdrawal liability payment when due, Rock-Tenn and Rock-Tenn Partition shall pay to PIUMPF an amount equal to the payment that would have been due from Rock-Tenn or Rock-Tenn Partition but for the application of ERISA Section 4204 to the transaction described in this Section 1.4(b). (v) Variance. Rock-Tenn and the Company shall decide whether to request a variance from PIUMPF from the bond requirement described in Section 1.4(b)(iii) or the secondary liability requirement described in Section 1.4(b)(iv), or both, and, if a decision is made to request a variance, Rock-Tenn and the Company agree to cooperate in the preparation and filing of any such request and, further, agree to take such further action, if any, as Rock-Tenn and the Company agree is reasonable and appropriate under the circumstances to secure any variance which is requested from PIUMPF. (vi) Interpretation and Implementation. Rock-Tenn, Rock-Tenn Partition and the Company agree that this Section 1.4(b) shall be interpreted and implemented such that ERISA Section 4204 shall apply to the transaction described in this Section 1.4(b). Section 1.5 Excluded Liabilities. Notwithstanding any provision of this Agreement or any Conveyance Instrument to the contrary, the Company is assuming only the Assumed Liabilities and is not assuming any other liability or obligation of Rock-Tenn Partition or any of its Affiliates (or any predecessor owner of all or part of the Solid Fiber Partition Business or the Assets) of whatever nature whether presently in existence or arising hereafter with respect to the Solid Fiber Partition Business, and Rock-Tenn Partition and its Affiliates shall retain responsibility for all of their respective liabilities and obligations accrued as of the date hereof arising from the operation of the Solid Fiber Partition Business prior to the date hereof (all of such liabilities and obligations not being assumed hereinafter referred to as the "Excluded Liabilities"). By way of example only, none of the following shall be "Assumed Liabilities" for purposes of this Agreement: (a) Any liability for "Tax" (as defined in Section 4.1 of this Agreement) arising from or with respect to the Assets or the operation of the Solid Fiber Partition Business, other than as described in Section 1.4(a)(2) hereof, which is incurred in or attributable to the "Tax Indemnification Period" (as defined in Section 4.1 of this Agreement) (the "Excluded Tax Liabilities"); (b) Any liabilities or obligations relating to employee benefits or compensation, including, without limitation, any liabilities or obligations under any employee benefit agreements, plans or other arrangements of Rock-Tenn Partition or any of its Affiliates; or (c) Any liabilities relating to the Excluded Assets (it being understood that any Tax Liability relating to the Excluded Assets shall be an Excluded Tax Liability for purposes of this Agreement). -6- 9 If the Company pays or performs any such Excluded Liability relating to the Solid Fiber Partition Business, then Rock-Tenn and Rock-Tenn Partition, jointly and severally, shall indemnify and hold harmless the Company for such payment or performance and any costs or expenses incurred in connection therewith. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF ROCK-TENN AND ROCK-TENN PARTITION Rock-Tenn and Rock-Tenn Partition hereby jointly and severally represent to the Company as follows: Section 2.1 Sufficiency of Assets. The Assets, together with (i) the assets of Rock-Tenn Recycling, (ii) the assets to be made available to the Company pursuant to the Trademark License Agreement and the Rock-Tenn Services Agreement and (iii) the Excluded Assets, comprise all of the assets (or rights with respect thereto) necessary for the Company to conduct the Solid Fiber Partition Business as it is presently conducted. As a result of the delivery to the Company of the Conveyance Instruments, all of the Assets (or rights with respect thereto) are owned by the Company free and clear of all Encumbrances, except Permitted Encumbrances and except as provided in Section 3.10 with respect to the Real Property. Section 2.2 Condition of Assets. The plants, structures and equipment owned, operated or leased by Rock- Tenn Partition which are included in the Assets are, to the knowledge of Rock-Tenn and Rock-Tenn Partition, structurally sound and in good repair and operating condition, normal wear and tear excepted, have been maintained in accordance with normal industry practice and are, to the knowledge of Rock-Tenn and Rock-Tenn Partition, adequate for the continued conduct of the Solid Fiber Partition Business as it is presently conducted. Section 2.3 Subject Property. With respect to the Subject Property included in the Assets, (i) there are no pending or, to the knowledge of Rock-Tenn and Rock-Tenn Partition, threatened condemnation actions, suits or proceedings relating to the Subject Property or other matters adversely affecting the present use, occupancy or value thereof; (ii) there are no leases, subleases, licenses, concessions or other agreements, written or oral, granting to any person the right of occupancy or use thereof or any part thereof, other than the Real Property Leases and the Leases; (iii) there are no outstanding options or rights of first refusal to purchase the Subject Property or any right therein; and (iv) the Subject Property has water supply, storm and sanitary sewer facilities, access to telephone, gas and electrical connections, fire protection, drainage, means of ingress and egress to and from public highways and, without limitation, other public utilities, all of which are adequate for the continued conduct of the Solid Fiber Partition Business as it is presently conducted. -7- 10 Section 2.4 Accounts Receivable. The Accounts Receivable included in the Assets have arisen from bona fide transactions in the ordinary course of the operation of the Solid Fiber Partition Business and, to the knowledge of Rock-Tenn and Rock-Tenn Partition, are good and collectible in accordance with their terms at the recorded amounts thereof, and are not subject to any counterclaims or set-offs. Section 2.5 Inventory. The Inventory included in the Assets consist of items which are good and merchantable within normal trade tolerances and of a quality and quantity presently usable or salable in the ordinary course of business. To the knowledge of Rock-Tenn and Rock-Tenn Partition, neither Rock-Tenn Partition nor any of its Affiliates is under any liability or obligation with respect to the return of any Inventory in the possession of wholesalers, distributors or other customers other than in the ordinary course of business. Section 2.6 Patents, Trademarks and Trade Names. Except as described in Exhibit 2.6, the patents, trademarks, trade names, copyrights, technology, know-how, processes, trade secrets, inventions, proprietary data and other intangible property included in the Assets constitute all patents, trademarks, trade names, copyrights, technology, know-how, processes, trade secrets, inventions, proprietary data and other intangible property used in or necessary for the continued conduct of the Solid Fiber Partition Business as it is presently conducted. No claims have been asserted during the past year by any person against the use of any such intangible property or any license related thereto, and to the knowledge of Rock-Tenn and Rock-Tenn Partition, there is no valid basis for any such claim. Section 2.7 Real Property Leases and Leases. (a) Rock-Tenn and Rock-Tenn Partition heretofore have delivered to the Company a true and complete copy of each Real Property Lease and Lease. (b) Each of the Real Property Leases and the Leases is valid and in full force and effect in accordance with its terms; no Lease has been modified or amended in writing or otherwise; there are no existing defaults or claims of default by Rock-Tenn Partition or any of its Affiliates under any Real Property Lease or Lease or, to the knowledge of Rock-Tenn and Rock-Tenn Partition, by any other party to any such Real Property Lease or Lease. To the knowledge of Rock-Tenn and Rock-Tenn Partition, no event has occurred which (whether with notice, lapse of time or both) would constitute a default by Rock-Tenn Partition or any of its Affiliates under any Real Property Lease or Lease or, to the knowledge of Rock-Tenn and Rock-Tenn Partition, by any other party to any such Real Property Lease or Lease and, to the knowledge of Rock-Tenn and Rock-Tenn Partition, no party to any such Real Property Lease or Lease intends to cancel, terminate or exercise any option under any such Real Property Lease or Lease. Section 2.8 Contracts. Except as set forth in Exhibit 2.8, with respect to the Solid Fiber Partition Business only: -8- 11 (a) Neither Rock-Tenn nor Rock-Tenn Partition is a party to or subject to any "Material Contract" (as hereinafter defined) (which does not terminate, or is not terminable by the Company or Rock-Tenn Partition or their respective Affiliates without payment of any penalty or other amount to any third party, prior to December 31, 1997); (b) Neither Rock-Tenn nor Rock-Tenn Partition is a party to or subject to any collective bargaining agreement that covers any employee of Rock-Tenn Partition. (c) Neither Rock-Tenn nor Rock-Tenn Partition is a party to or subject to any Contract involving the sharing of profits; (d) Neither Rock-Tenn nor Rock-Tenn Partition is a party to or subject to any Material Contract for the sale of its products or any sales agency, broker, distribution or similar contracts; (e) Neither Rock-Tenn nor Rock-Tenn Partition is bound by any Contract restricting it or otherwise limiting its freedom to compete in any line of business or with any person, or from otherwise carrying on its business anywhere in the world; and (f) There are no persons holding powers of attorney from Rock-Tenn Partition or any of its Affiliates. Rock-Tenn and Rock-Tenn Partition heretofore have delivered to the Company a true and correct copy of each of the Contracts. Each of the Contracts is valid and is in full force and effect in accordance with its terms; no Contract has been modified or amended in writing or otherwise; there are no outstanding defaults or claims of default by Rock-Tenn Partition or any of its Affiliates under any Contract or, to the knowledge of Rock-Tenn and Rock-Tenn Partition, by any other party to any such Contract. To the knowledge of Rock-Tenn and Rock-Tenn Partition, no event has occurred which (whether with notice, lapse of time or both) would constitute a default by Rock-Tenn Partition or any of its Affiliates under any Contract or, to the knowledge of Rock-Tenn and Rock-Tenn Partition, by any other party to any such Contract and, to the knowledge of Rock-Tenn and Rock-Tenn Partition, no party to any such Contract intends to cancel, terminate or exercise any option under any such Contract. As used herein, "Material Contract" shall mean any Contract with respect to the Solid Fiber Partition Business that could reasonably be anticipated to involve sales by Rock-Tenn Partition or any of its Affiliates in any twelve (12) month period in excess of an aggregate of $50,000, or any Contract that by its terms requires Rock-Tenn Partition or any of its Affiliates to make payments thereunder in any twelve (12) month period in excess of an aggregate of $50,000. Section 2.9 Licenses. (a) Rock-Tenn and Rock-Tenn Partition heretofore have delivered to the Company a true and correct copy of each License. -9- 12 (b) Each of the Licenses is valid and in full force and effect in accordance with its terms; no License has been modified or amended in writing or otherwise; there are no existing defaults or claims of default by Rock-Tenn Partition or any of its Affiliates under any License or, to the knowledge of Rock-Tenn and Rock-Tenn Partition, by any other party to any such License. To the knowledge of Rock-Tenn and Rock-Tenn Partition, no event has occurred which (whether with notice, lapse of time or both) would constitute a default by Rock-Tenn Partition or any of its Affiliates under any License or, to the knowledge of Rock-Tenn and Rock-Tenn Partition, by any other party to any such License and, to the knowledge of Rock-Tenn and Rock-Tenn Partition, no party to any such License intends to cancel, terminate or exercise any option under any such License. Section 2.10 Assumed Liabilities. The Assumed Liabilities consist only of liabilities incurred by Rock-Tenn and its Affiliates in the ordinary course of conducting the Solid Fiber Partition Business. Section 2.11 Permits. The Permits listed on Exhibit 2.11 are current and in good standing and constitute all material licenses, permits, registrations, authorizations, use agreements, orders or approvals of Governmental Authorities (whether federal, state, local, municipal or foreign) or third parties necessary for the continued conduct of the Solid Fiber Partition Business as it is presently conducted. Section 2.12 Litigation. Except as set forth in Exhibit 2.12, there are no actions, suits or proceedings before or by any court or Governmental Authority pending or, to the knowledge of Rock-Tenn and Rock-Tenn Partition, threatened by or against or involving Rock-Tenn or any of its Affiliates or any directors, officers or employees thereof in their capacity as such, which question or challenge the validity of this Agreement, the Joint Venture Agreement or any other Operative Agreement or any action taken or to be taken by Rock-Tenn Partition or any of its Affiliates pursuant to this Agreement or which would, if adversely decided, have a material adverse affect on the Solid Fiber Partition Business or affect the ability of the Company to continue to conduct the Solid Fiber Partition Business as it is presently conducted. Section 2.13 Compliance With Applicable Law. Except as and to the extent set forth in Exhibit 2.13(a), with respect to the Solid Fiber Partition Business only, the operations of Rock-Tenn and Rock-Tenn Partition have been and are being conducted in material compliance with (i) all applicable Permits, orders, writs, injunctions, judgments, decrees or awards of all courts and Governmental Authorities, and (ii) to the knowledge of Rock-Tenn and Rock-Tenn Partition, all laws (statutory or otherwise), ordinances, rules, regulations, bylaws and codes of all Governmental Authorities, whether federal, state, local or foreign (collectively, "Laws"), which are applicable to, and have a material effect on, the Solid Fiber Partition Business. Except as and to the extent set forth in Exhibit 2.13(b), neither Rock-Tenn nor Rock-Tenn Partition has received any written notification of any asserted present failure to comply with any Law, except for failures which will not, in the reasonable judgment of Rock-Tenn and Rock-Tenn Partition, have any material adverse effect on the Solid Fiber Partition Business. Rock-Tenn and Rock-Tenn Partition heretofore have -10- 13 delivered to the Company a true and correct copy of each Permit, order, writ, injunction, judgment, decree and award of any court or governmental or regulatory agency applicable to the Solid Fiber Partition Business. Section 2.14 Environmental Matters. Except as set forth in Exhibit 2.14: (a) Rock-Tenn Partition and its Affiliates possess, and are in material compliance with, all permits, licenses and government authorizations and have filed all material notices that are required under any Environmental Law in respect of the Solid Fiber Partition Business of Rock-Tenn, and Rock-Tenn and Rock-Tenn Partition are in material compliance with all applicable limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in those laws or contained in any law, regulation, code, plan, order, decree, judgment, notice, permit or demand letter issued, entered, promulgated or approved thereunder in respect of the Solid Fiber Partition Business of Rock-Tenn; (b) Neither Rock-Tenn Partition nor any of its Affiliates have received notice of actual or threatened liability under "CERCLA" (as hereinafter defined) or any similar state or local statute or ordinance from any Governmental Authority or any third party, and, to the knowledge of Rock-Tenn Partition and its Affiliates, there are no facts or circumstances which would reasonably be expected to form the basis for the assertion of any claim against Rock-Tenn Partition or its Affiliates under any Environmental Laws in respect of the Solid Fiber Partition Business of Rock-Tenn, including, without limitation, the Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or any similar local, state or foreign law with respect to any on-site or off-site location; (c) Neither Rock-Tenn Partition nor any of its Affiliates have entered into, agreed to or contemplates entering into any consent decree or order in respect of the Solid Fiber Partition Business of Rock-Tenn, and neither Rock-Tenn Partition nor any of its Affiliates are subject to any judgment, decree or judicial or administrative order relating to compliance with, or the cleanup of hazardous materials under, any applicable Environmental Laws in respect of the Solid Fiber Partition Business of Rock-Tenn; (d) To the knowledge of Rock-Tenn Partition and its Affiliates, none of the Subject Property is subject to any, and neither Rock-Tenn Partition nor any of its Affiliates is alleged to be in violation of any, administrative or judicial proceeding pursuant to applicable Environmental Laws or regulations; (e) To the knowledge of Rock-Tenn Partition and its Affiliates, none of the Subject Property is subject to any material claim, obligation, liability, loss, damage or expense of whatever kind or nature, contingent or otherwise, incurred or imposed or based upon any provision of any Environmental Law and arising out of any act or omission of Rock-Tenn Partition or its Affiliates or their respective employees, agents or representatives or arising out of the ownership, use, control or operation by any of Rock-Tenn Partition or its Affiliates of any plant, facility, site, -11- 14 area or property (including, without limitation, any plant, facility, site, area or property currently or previously owned or leased by Rock-Tenn Partition or its Affiliates) in respect of the Solid Fiber Partition Business of Rock-Tenn, from which any Hazardous Materials were released into the environment (the term "release" meaning any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment, and the term "environment" meaning any surface or ground water, drinking water supply, soil, surface or subsurface strata or medium, or the ambient air); (f) To the knowledge of Rock-Tenn Partition and its Affiliates, none of the Subject Property contains any friable asbestos, PCBs or underground storage tanks. (g) Exhibit 2.14(g) sets forth the amount of all fines, penalties or assessments paid within the last five years by Rock-Tenn Partition and its Affiliates with respect to environmental matters relating to the Solid Fiber Partition Business of Rock-Tenn, including the date of payment and the basis for the assertions of liability; and Section 2.15 Customers, etc. Except as set forth in Exhibit 2.15, since December 31, 1996, there has not been any adverse change in the business relationship of Rock-Tenn Partition or any of its Affiliates with any customer, distributor or supplier which is material to the Solid Fiber Partition Business. Section 2.16 No Brokers. Neither Rock-Tenn nor Rock-Tenn Partition has incurred or will incur any broker's, finder's, investment banking or similar fee in connection with the transactions contemplated by this Agreement, and neither Rock-Tenn nor Rock-Tenn Partition has made any statement or representation that could form the basis for any claim for any such fee. ARTICLE 3. COVENANTS Section 3.1 Indemnification. (a) Except as provided herein, the remedies provided in Section 7.1 of the Joint Venture Agreement, and the enforcement of such remedies pursuant to Section 9.1 of the Joint Venture Agreement, shall constitute the sole and exclusive remedies for recovery by a Party against the other for any breach of any representation, warranty, covenant or agreement contained in this Agreement by such other Party. (b) All representations, warranties, covenants and agreements contained herein shall survive without limitation as to time, subject to Applicable Law (including any applicable statute of limitations), except that the representations in Section 2.14 shall survive without limitation as to time and without regard to any limitation as to time under Applicable Law. -12- 15 (c) In no event shall either Party be liable for consequential, special, incidental or punitive losses, damages or expenses (including lost profits and opportunity costs). Section 3.2 Tax Indemnification and Other Tax Matters. (a) Notwithstanding Section 3.1, Rock-Tenn and Rock-Tenn Partition jointly and severally shall indemnify and hold harmless each "Indemnitee" (as defined in Section 4.1 of this Agreement) from: (i) Any liability for Tax of Rock-Tenn and Rock-Tenn Partition which is incurred in or attributable to the Tax Indemnification Period; and (ii) Any liability, cost, expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses), loss, damages, assessment, settlement, or judgment arising out of or incident to the imposition, assessment or assertion of any liability described in subclause (i) hereof, including those incurred in the contest in good faith of appropriate proceedings for the imposition, assessment or assertion of any Tax (subject to the provisions of Section 3.2(e) hereof), and any liability of any Indemnitee by reason of being a transferee of the Assets of Rock-Tenn and Rock-Tenn Partition which is incurred or attributable to the Tax Indemnification Period. The sum of (i) and (ii) above is referred to herein as a "Tax Loss." (b) In the case of any Taxes that are imposed, assessed or asserted on a periodic basis and are payable with respect to the Solid Fiber Partition Business or the Assets for a taxable period that includes (but does not end on) the Contribution Date, the portion of such Taxes related to the portion of such taxable period ending on the Contribution Date and the portion of such Taxes that is incurred in or attributable to the Pre-Contribution Tax Period shall (i) in the case of any Tax other than a Tax imposed on, measured by, or related to revenues, gross or net income, receipts, gains or compensation from the operation of the Solid Fiber Partition Business, be deemed to be the amount of such Tax for the entire taxable period multiplied by a fraction, the numerator of which is the number of days in the Pre-Contribution Tax Period and the denominator of which is the number of days in the entire taxable period, and (ii) in the case of any Tax imposed on, measured by, or related to revenues, gross or net income, receipts, gains or compensation from the operation of the Solid Fiber Partition Business, be deemed equal to the amount of such Tax for the entire taxable period multiplied by a fraction, the numerator of which is the revenues, gross or net income, receipts, gains or compensation, as the case may be, attributable to the Tax Indemnification Period and the denominator of which is the total amount of revenues, gross or net income, receipts, gains or compensation for the entire taxable period. (c) Upon the incurrence by any Indemnitee of any Tax Loss or any Loss relating to an "Excluded Tax Liability" (as defined in Section 1.5(a) hereof), Rock-Tenn and Rock-Tenn Partition jointly and severally shall discharge its obligations to indemnify such Indemnitee against -13- 16 such Tax Loss or Loss by paying to the Indemnitee in cash an amount equal to the amount of such Tax Loss or Loss. Any payment pursuant to this Section 3.2(c) relating to an Excluded Tax Liability shall be delivered no later than five (5) days prior to the first date on which such Indemnitee is required (without incurring interest or penalties) under applicable Law to make any payment with respect to or as a result of such Tax Loss or Loss. The Company shall deliver to Rock-Tenn and Rock-Tenn Partition, upon the incurrence of a Tax Loss or any Loss relating to an Excluded Tax Liability by any Indemnitee, written notice describing such Tax Loss or Loss and stating the amount thereof, the amount of the indemnity payment requested, and the first date on which such Indemnitee is required (without incurring interest or penalties) to make any payment with respect to or as a result of such Tax Loss or Loss. Any payment required under this Section 3.2(c) or any Loss relating to an Excluded Tax Liability and not made when due shall bear interest at the federal short-term rate under Section 1274 of the Code for each day until paid. (d) If any Indemnitee receives a refund or reduces its Tax Liability by using a credit of any Tax in respect of the Tax Indemnification Period or any Excluded Tax Liability, such Indemnitee shall pay to Rock-Tenn and Rock-Tenn Partition the amount of such refund or credit within thirty (30) days of the date on which such refund or credit is received or used by such Indemnitee. The Company agrees that, upon the request of Rock-Tenn or Rock-Tenn Partition, the Company shall file, or cause an Indemnitee to file, a claim for refund in such form as Rock-Tenn or Rock-Tenn Partition may reasonably request of any Tax in respect of the Tax Indemnification Period or any Excluded Tax Liability, provided that the Company or an Indemnitee shall not be required to file such a claim if such claim would adversely affect the Tax liability of the Company or any of its Affiliates. The Company agrees that it will cooperate, and cause each Indemnitee to cooperate, fully with Rock-Tenn and Rock-Tenn Partition and its counsel in connection therewith. (e) (i) If any adjustments shall be made to any Tax return relating to Rock-Tenn or Rock-Tenn Partition in respect of the Solid Fiber Partition Business or the Assets for any Pre-Contribution Tax Period which result in any Tax detriment to Rock-Tenn or any Affiliate thereof with respect to such period and any Tax benefit to the Company or any Affiliate thereof for any Taxable period ending after the Contribution Date, Rock-Tenn shall be entitled to the benefit of such Tax benefit, and the Company shall pay to Rock-Tenn and Rock-Tenn Partition the amount of such Tax benefit at such time or times as and to the extent that the Company or any Affiliate thereof actually realizes such benefit through a refund of Tax or reduction in the amount of Tax which the Company or any Affiliate thereof otherwise would have had to pay if such adjustment had not been made. (ii) If any adjustments (including any adjustment arising by reason of a refund claim) shall be made to any Tax return relating to the Company for any Taxable period after the Contribution Date which result in any Tax detriment to the Company or any Affiliate thereof with respect to such period and any Tax benefit to Rock-Tenn or any Affiliate thereof for any Pre-Contribution Tax Period, the Company shall be entitled to the benefit of such Tax benefit, and Rock-Tenn and Rock-Tenn Partition shall be obligated jointly and severally to pay to the Company the amount of such Tax benefit at such time or times as and to the extent that Rock-Tenn or any -14- 17 Affiliate thereof actually realizes such benefit through a refund of Tax or reduction in the amount of Tax which Rock-Tenn or any such Affiliate otherwise would have had to pay if such adjustment had not been made. (f) If the Company or any Affiliate thereof realizes a Tax benefit in a Taxable period as described in Section 3.2(e) ending after the Contribution Date with respect to a Tax Loss through a refund of Tax or reduction in the amount of Tax which the Company or any Affiliate thereof otherwise would have to pay then, (i) if such benefit is actually realized prior to the indemnity payment being made, the amount of such benefit shall reduce the amount of the indemnity payment otherwise required to be made hereunder, and (ii) if such benefit is actually realized subsequent to the indemnity payment or contribution being made, the Company or such Affiliate shall pay the amount of such benefit to Rock-Tenn and Rock-Tenn Partition at such time as such benefit is actually realized. (g) With respect to liability for Tax of Rock-Tenn or any of its Affiliates incurred in or attributable to the Pre-Contribution Tax Period in respect of any item which gave rise to an amount included in the provision for deferred income taxes on Rock-Tenn's consolidated financial statements as of the Contribution Date, Rock-Tenn and Rock-Tenn Partition shall be obligated jointly and severally to pay to an Indemnitee an amount equal to the amount of such Tax liability, minus the present value of (i) any deduction, amortization, exclusion from income, or tax credit allowable to such Indemnitee which would not be allowable but for an adjustment with respect to which Rock-Tenn and Rock-Tenn Partition are obligated to indemnify such Indemnitee ("the Tax Benefit"), multiplied (ii) by the maximum applicable tax rate in effect at such time or, in the case of a credit, by 100 percent (the product of (i) and (ii) in the preceding clause shall be referred to as the "Hypothetical Tax Benefit"). The present value of the Hypothetical Tax Benefit shall be determined based on the federal mid-term rate under Section 1274 of the Code in effect at the time the indemnification payment is made, compounded annually for the number of years between the year to which the adjustment relates and the year on which such Tax Benefit would be allowable under Law whether or not the Indemnitee could derive any actual Tax savings as a result thereof. Section 3.3 Control of Litigation. (a) The Indemnitees agree to give prompt notice to the Indemnitors of the assertion of any claim and the commencement of any suit, action or proceeding in respect of which indemnity may be sought under Section 3 of this Agreement and of any Loss in respect of which indemnity may be sought under Section 3 of this Agreement (specifying with reasonable particularity the basis therefor) and will give the Indemnitors such information with respect thereto as the Indemnitors may reasonably request. The Indemnitors may, at their own expense, participate in and, upon notice to such Indemnitee, assume the defense of any such suit, action or proceeding; provided that the Indemnitors' counsel is reasonably satisfactory to such Indemnitee. The Indemnitors shall thereafter consult with such Indemnitee upon such Indemnitee's reasonable request for such consultation from time to time with respect to such suit, action or proceeding, and the Indemnitors shall not, without such Indemnitee's consent, which consent shall not be unreasonably -15- 18 withheld, settle or compromise any such suit, action or claim. If the Indemnitors assume such defense, such Indemnitees shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at their own expense, separate from the counsel employed by the Indemnitors. For any period during which the Indemnitors have not assumed the defense thereof, the Indemnitors shall be liable for the fees and expenses of counsel employed by any Indemnitee; provided, however, that the Indemnitors shall not be liable for the fees or expenses of more than one counsel employed for all Indemnitees. If the Indemnitees assume the defense thereof, the Indemnitees shall thereafter consult with the Indemnitors upon the Indemnitors' reasonable request for such consultation from time to time with respect to such suit, action or proceeding and the Indemnitees shall not, without the Indemnitors' consent, which consent shall not be unreasonably withheld, settle or compromise any such suit, action or claim. Whether or not the Indemnitors choose to defend or prosecute any claim, all of the parties hereto shall cooperate in the defense or prosecution thereof. (b) The Indemnitors shall not be liable under Section 3.2(a) hereof with respect to any Loss resulting from a claim or demand the defense of which the Indemnitors were not offered the opportunity to assume as provided under Section 3.2(a) hereof to the extent the Indemnitors' liability under Section 3 hereof is prejudiced as a result thereof. No investigation by any Indemnitee prior to the Contribution Date shall relieve any Indemnitor of any liability hereunder. Section 3.4 Transfer Taxes. Rock-Tenn and Rock-Tenn Partition shall be obligated jointly and severally to pay, or cause to be paid, all Taxes or recording fees imposed on any transfers of the Assets contemplated by this Agreement and all sales and use Taxes applicable to transfers by Rock-Tenn or Rock-Tenn Partition of the Assets contemplated by this Agreement. Section 3.5 Cooperation on Tax Matters. Rock-Tenn, Rock-Tenn Partition and the Company shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Company, Rock-Tenn and Rock-Tenn Partition agree (a) to retain all books and records which are relevant to the determination of the Tax liabilities relating to the Solid Fiber Partition Business or the Assets in respect of any Pre-Contribution Tax Period until the expiration of the applicable statute of limitations and to abide by all record retention agreements entered into with any Taxing Authority, and (b) to give the other party reasonable written notice prior to destroying or discarding any such books and records and, if the other party so requests, the Company (on the one hand) or Rock-Tenn or Rock-Tenn Partition (on the other) shall allow the other party to take possession of such books and records. Section 3.6 Elections. Without the prior written consent of the Company, neither Rock-Tenn nor any Affiliate of Rock-Tenn shall surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to an Tax claim or assessment relating -16- 19 to Rock-Tenn or any such Affiliate take any other action, or omit to take any action, if any such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action or omission had (or will have) the effect of increasing the Tax liability of the Company or any Affiliate of the Company. Section 3.7 Reserved. Section 3.8 Tax Returns of Rock-Tenn. With respect to any Tax return required to be filed by the Company for its Taxable period which includes (but does not end on) the Contribution Date, the Company shall provide Rock-Tenn and its authorized representatives with copies of such completed Tax return and a statement (with which the Company will supply supporting schedules and information) setting forth the amount of Tax shown on such Tax return that is allocable to Rock-Tenn pursuant to Section 3.2 hereof (the "Statement") at least forty-five (45) business days prior to the due date (including any extension thereof) for the filing of such Tax return. Reasonable costs, fees and expenses relating to the preparation of such Tax return shall be borne equally by Rock-Tenn and the Company. Rock-Tenn shall have the right at its own expense to review such Tax return and Statement prior to the filing of such Tax return. If Rock-Tenn, within ten (10) business days after delivery of the Statement, notifies the Company in writing that it objects to any items on such Statement, specifying with particularity any such item and stating the specific factual or legal basis for any such objection, the Company and Rock-Tenn shall resolve in good faith and use their best efforts to resolve such items. If the dispute is not resolved within twenty (20) days after receipt by the Company of such notice, the disputed items shall be resolved pursuant to Section 3.9 hereof and such Tax return shall be filed consistently therewith. Not later than the later of five (5) days before the due date for payment of Taxes with respect to such Tax return or, in the event of a dispute, five (5) days after notice to Rock-Tenn of the resolution thereof, Rock-Tenn shall contribute to the Company or the Company shall distribute to Rock-Tenn, as the case may be, an amount equal to the difference between (a) the Taxes shown on the Statement as being allocable to Rock-Tenn pursuant to this Section 3.8 or in such notice (as the case may be) and (b) any payment made by Rock-Tenn or any Affiliate thereof prior to the Contribution Date in respect of such Taxes. Section 3.9 Certain Disputes. To the extent provided in Section 3.8 hereof, disputes arising under such Section and not resolved by mutual agreement as stated therein shall be resolved by a nationally recognized accounting firm with no affiliation or relationship whatsoever with the Company or Rock-Tenn or any of their respective Affiliates (the "Accounting Referee"), chosen and mutually acceptable to both the Company and Rock-Tenn within five (5) days of the date on which the need to choose the Accounting Referee arises. The Accounting Referee shall resolve any disputed items within thirty (30) days of having the item referred to it pursuant to such procedures as it may require. The costs, fees and expenses of the Accounting Referee shall be borne equally by the Company and Rock-Tenn. Section 3.10 Covenants Regarding Certain Assets. -17- 20 (a) Notwithstanding anything contained herein to the contrary, this Agreement does not constitute an agreement by Rock-Tenn or Rock-Tenn Partition to contribute to the Company any Asset to the extent that such contribution would violate Applicable Law, require the consent of a third party or Governmental Authority which has not been obtained as of the date hereof, or require completion of ministerial formalities to perfect the transfer of title to such Asset to the Company until, in any such event, such time as such contribution would not violate Applicable Law or such third party consent or consent of such Governmental Authority shall have been obtained or such ministerial formality shall have been completed. Following the date hereof, Rock-Tenn, Rock-Tenn Partition and the Company shall cooperate with each other to obtain any necessary third party consent or consent of Governmental Authority or to complete any required ministerial formalities at the earliest practicable date. Until any such necessary consent has been obtained or any such required ministerial formalities have been completed, Rock-Tenn shall take all appropriate steps to provide the Company with the benefits of the Assets. (b) From and after the date hereof, Rock-Tenn and Rock-Tenn Partition may notify the Company in writing that an asset which was not intended to be included in the Assets was mistakenly transferred to the Company pursuant to Section 1.1 hereof. The Company shall, within thirty (30) days following the receipt of such notice, take such steps as may be reasonably necessary to transfer such asset to Rock-Tenn or Rock-Tenn Partition (as the case may be), unless, prior to the end of such thirty (30)-day period, the Company delivers a notice to Rock-Tenn, Rock-Tenn Partition stating that such asset should have been included in the Assets that were transferred to the Company on the date hereof. If such a notice is delivered, Rock-Tenn, Rock-Tenn Partition and the Company shall discuss in good faith the appropriate disposition of the matter. It shall not be deemed a breach of this Agreement for Rock-Tenn, Rock-Tenn Partition to fail or otherwise make available any such asset in dispute pursuant to this Section, unless Rock-Tenn or Rock-Tenn Partition and the Company shall have failed to come to an agreement as to the appropriate disposition of such matter within ninety (90) days following the date hereof. The reasonable out-of-pocket expenses incurred by the Company in connection with any such disputed asset shall be reimbursed to the Company by Rock-Tenn and Rock-Tenn Partition. (c) As promptly as practicable after the date hereof, but in any event within ninety (90) days after the date hereof, Rock-Tenn and Rock-Tenn Partition shall deliver to the Company with respect to each of those parcels of Real Property described on Exhibit 1.1(a)(i) hereto and identified as being located in Indiana, Texas, California and Maine (i) a current title report and (ii) a new or recent, as reasonably determined by the Company, survey of each such parcel of the Real Property prepared by a licensed surveyor reasonably acceptable to the Company, which survey shall contain a metes and bounds description of the Real Property. The descriptions of the parcels of Real Property set forth in such title reports and surveys shall conform in all material respects with the descriptions attached hereto as Exhibit 1.1(a)(i) (or with respect to the Real Property located in Eaton, Indiana with the sketch attached hereto as Exhibit 3.10(c)), subject only to such changes in the boundaries of the Real Property and to such encumbrances such as easements or rights of way as do not materially interfere with the conduct of the Solid Fiber Partition Business on the Real Property as it is presently conducted. Promptly after delivery of such title reports and surveys, Rock- -18- 21 Tenn and Rock-Tenn Partition shall deliver to the Company such Conveyance Instruments as are necessary to convey the Real Property to the Company free and clear of all Encumbrances, except Permitted Encumbrances. ARTICLE 4. MISCELLANEOUS PROVISIONS Section 4.1 Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Joint Venture Agreement. As used in this Agreement, the following terms have the meanings specified below: "Affiliate" with respect to any person shall mean (i) any other person directly, or indirectly through one or more intermediaries, controlling, controlled by or under common control with such person; (ii) any officer, director, partner, employer or direct or indirect beneficial owner of any 10% or greater equity or voting interest of such person; or (iii) any other person for which a person described in clause (ii) acts in any such capacity. "Code" means the Internal Revenue Code of 1986, as amended. "Indemnitee" means the Company and the Members other than Rock-Tenn, Rock-Tenn Partition and their respective Indemnitee Affiliates, officers, directors and employees. "Indemnitee Affiliate" means the employees, successors and assigns of each Indemnitee and, with respect to each corporate Indemnitee, its directors, officers and shareholders. "Parties" shall mean Rock-Tenn, Rock-Tenn Partition and the Company, and upon any Transfer of a Venture Interest pursuant to Article 10 of the Operating Agreement, such permitted transferee. "Pre-Contribution Tax Period" means any Tax Period ending on or before the close of business on the Contribution Date or, in the case of any Tax period which includes, but does not end on, the Contribution Date, the portion of such period up to and including the Contribution Date. "Tax" means any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, franchise, capital, paid-up capital, profits, greenmail, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall profit tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Authority (a "Taxing Authority") responsible for the imposition of any such tax (domestic or foreign). -19- 22 "Tax Asset" means any net operating loss or other Tax loss, net capital loss, investment Tax credit, foreign Tax credit, charitable deduction or any other credit or Tax attribute of Rock-Tenn or any of its Affiliates which could reduce Taxes (including, without limitation, deductions and credits related to alternative minimum Taxes) with respect to the Solid Fiber Partition Business or the Assets. "Tax Indemnification Period" means (i) any Pre-Contribution Tax Period and (ii) with respect to any Tax described in clause (ii) of the definition of "Tax" in this Section 4.1, the survival period of the indemnification obligation under the applicable contract. Section 4.2 Notices. Except as expressly provided herein, notices and other communications provided for herein shall be in writing and shall be delivered by hand or courier, service, mail or sent by telex, graphics scanning or other telegraphic communications equipment of the sending Party, as follows: If to Rock-Tenn or Rock-Tenn Company Rock-Tenn Partition: 504 Thrasher Street Norcross, GA 30071 Attn: Chief Financial Officer Tel: 770-368-7676 Fax: 770-263-3582 with a copy to: Rock-Tenn Company 504 Thrasher Street Norcross, GA 30071 Attn: General Counsel Tel: 770-263-4456 Fax: 770-248-4402 If to the Company: RTS Packaging, LLC 504D Thrasher Street Norcross, GA 30071 Attn: Chief Executive Officer Tel: 800/558-6984 Fax: 770/368-7651 with a copy to: Sonoco Products Company One North Second Street Hartsville, South Carolina 29550 Attn: President Tel: 803-383-7000 Fax: 803-383-7478 -20- 23 or to such other address or attention of such other Person as such Party shall advise the other Parties in writing. All notices and other communications given to the Parties hereto and accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. Communications sent by telex, graphics scanning or other telegraphic communications equipment shall be deemed to have been received when confirmation of their delivery is received by the sender. Section 4.3 Applicable Law. The validity, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of law. Section 4.4 Severability. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, the Parties agree that such provision will be enforced to the maximum extent permissible so as to effect the intent of the Parties, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. If necessary to affect the intent of the Parties, the Parties will negotiate in good faith to amend this Agreement to replace the unenforceable language with enforceable language which as closely as possible reflects such intent. Section 4.5 Amendments. This Agreement may be modified only by a written amendment signed by all of the Parties. Section 4.6 Waiver. The waiver by a Party of any instance of any other Party's non-compliance with any obligation or responsibility herein shall be in writing and signed by the waiving Party and shall not be deemed a waiver of other instances of such other Party's non-compliance. Section 4.7 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts shall have been signed by each Party and delivered to the other Parties. Section 4.8 Entire Agreement. The provisions of this Agreement set forth the entire agreement and understanding among the Parties as to the subject matter hereof and supersede all prior agreements, oral or written, and all other prior communications between the Parties relating to the subject matter hereof, other than those written agreements executed and delivered contemporaneously herewith. Section 4.9 No Assignment. (a) Except as specifically provided herein, no Party shall, directly or indirectly, assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the other Parties. (b) Any attempted assignment of this Agreement in violation of this Section 4.9 shall be void and of no effect. -21- 24 (c) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties and their respective successors and permitted assigns. Section 4.10 Expenses. Except as otherwise provided in this Agreement, all costs and expenses (including the fees and expenses of any attorneys, accountants, investment bankers, brokers, finders or other intermediaries) incurred in connection with this Agreement and the other Operative Agreements and the consummation of the transactions contemplated by Article 5 of the Joint Venture Agreement to be consummated on the date hereof shall be paid by the Party incurring such cost or expense. Section 4.11 Further Assurances. From time to time, at the request of Rock-Tenn or Rock-Tenn Partition or the Company and without further consideration, each party, at its own expense, will execute and deliver such other documents, and take such other action, as Rock-Tenn or Rock-Tenn Partition or the Company may reasonably request in order to consummate more effectively the transactions contemplated hereby and to vest in the Company good and marketable title to the Assets (or rights with respect thereto). Section 4.12 Publicity. No Party will issue any press release or make any other public announcement relating to the existence of this Agreement or the transactions contemplated by this Agreement or any of the Operative Agreements, except that a Party may make any disclosure required to be made under Applicable Law or the rules of the New York Stock Exchange or any other applicable stock exchange if such Party determines in good faith that it is necessary to do so and gives prior notice to the other Parties. Section 4.13 Construction. This Agreement shall be interpreted and construed in accordance with Section 1.3 of the Joint Venture Agreement. Section 4.14 Specific Performance. Each of the Parties acknowledge that money damages would not be a sufficient remedy for any breach of this Agreement and that irreparable harm would result if this Agreement were not specifically enforced. Therefore, the rights and obligations of the Parties under this Agreement shall be enforceable by a decree of specific performance issued by any court of competent jurisdiction, and appropriate injunctive relief may be applied for and granted in connection therewith. A Party's right to specific performance shall be in addition to all other legal or equitable remedies available to such Party. Section 4.15 Headings. The article and section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 4.16 Inconsistency or Conflict. In the event of any inconsistency or conflict between any provision of this Agreement and any provision of the Operating Agreement, the provision of the Operating Agreement shall govern. -22- 25 Section 4.17 Exhibits. All Exhibits attached hereto are hereby incorporated in and made a part as if set forth in full herein. Section 4.18 No Third-Party Beneficiaries. This Agreement is for the sole benefit of the Parties and their permitted assigns, and nothing herein expressed or implied shall give or be construed to give to any Person, other than the Parties and such assigns, any legal or equitable rights hereunder. -23- 26 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. ROCK-TENN COMPANY By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- ROCK-TENN PARTITION COMPANY By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- RTS PACKAGING, LLC By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- -24- EX-10.10 8 AMENDED & RESTATED OPERATING AGREEMENT 1 EXHIBIT 10.10 - ------------------------------------------------------------------------------ AMENDED AND RESTATED OPERATING AGREEMENT DATED AS OF SEPTEMBER 5, 1997 BETWEEN ROCK-TENN PARTITION COMPANY AND SONOCO PARTITIONS, INC. - ------------------------------------------------------------------------------ 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.2. Interpretation and Construction of this Agreement. . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 2 THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 2.1. Formation of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 2.2. Name and Place of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 2.3. Purpose of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 2.4. Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 2.5. Powers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 2.6. Title to Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 2.7. Business Dealings with the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 3 CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.1. Contributions to the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.2. Assumed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.3. Additional Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.4. Withdrawal of Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.5. Interest on Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.6. Loans by Members to the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 4 DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.1. Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.2. Amounts Withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 5 ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.1. Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.2. Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.2A Special Adjustments for Depreciation and Section 1231 Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3 Section 5.3. Special Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5.4. Curative Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 5.5. Loss Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 5.6. Other Allocation Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 5.7. Tax Allocations: Code Section 704(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 6 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.1. Managing Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.2. Board Meetings; Quorum; Voting; Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.3. Removal; Resignation; Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 6.4. No Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 6.5. Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 7 ROLE OF MEMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 7.1. Rights or Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 7.2. Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 7.3. Meetings of Members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 7.4. Withdrawal/Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 7.5. Member Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 7.6. Partition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 7.7. Other Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 8 MATTERS REQUIRING APPROVAL OF THE MANAGING BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 8.1. Matters Requiring the Consent of the Managing Board. . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 9 BUSINESS PLAN, ACCOUNTING, TAXATION AND CERTAIN OTHER OPERATIONAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 9.1. Business Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 9.2. Accrual Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 9.3. Maintenance of Books of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 9.4. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 9.5. Other Reports and Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 9.6. Deposit of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 9.7. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 9.8. Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
-ii- 4 Section 9.9. Attorneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 9.10. Preparation of Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 9.11. Partnership Tax Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE 10 TRANSFERS OF VENTURE INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 10.1. No Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 10.2. Transfer to Wholly Owned Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 10.3. Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 10.4. Buy-Out Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE 11 INDEMNIFICATION OF OFFICERS AND MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 11.1. Right to Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 11.2. Prepayment of Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 11.3. Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 11.4. Nonexclusivity of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 11.5. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 11.6. Other Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 11.7. Amendment or Repeal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE 12 DISSOLUTION AND LIQUIDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 12.1. Liquidating Events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 12.2. Distributions Upon Liquidation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 12.3. Deficit Capital Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 12.4. Rights of Members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE 13 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 13.1. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 13.2. Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 13.3. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 13.4. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 13.5. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 13.6. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 13.7. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 13.8. No Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 13.9. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-iii- 5 Section 13.10. No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 13.11. Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 13.12. Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 13.13. Disclaimer of Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 13.14. Further Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 13.15. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 13.16. Settlement of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
-iv- 6 AMENDED AND RESTATED OPERATING AGREEMENT THIS AMENDED AND RESTATED OPERATING AGREEMENT (this "Agreement") of RTS PACKAGING, LLC (the "Company") is entered into and shall be effective as of September 5, 1997, by and between ROCK-TENN PARTITION COMPANY, a Georgia corporation ("Rock-Tenn Partition"), and SONOCO PARTITIONS, INC., a South Carolina corporation ("Sonoco Partitions"), as Members; W I T N E S S E T H: WHEREAS, Rock-Tenn Company ("Rock-Tenn"), Rock-Tenn Partition, Sonoco Products Company ("Sonoco") and Sonoco Partitions, Inc. have entered into that certain Joint Venture Agreement dated as of the date hereof (the "Joint Venture Agreement"); WHEREAS, under the terms of the Joint Venture Agreement, Rock-Tenn Partition and Sonoco Partitions have agreed to form the Joint Venture to jointly conduct their respective solid fiber partition businesses; WHEREAS, under the terms of the Joint Venture Agreement, Rock-Tenn Partition and Sonoco Partitions have agreed to form a Delaware limited liability company for the purpose of conducting the business of the Joint Venture; and WHEREAS, in contemplation of the formation of the Joint Venture, Rock-Tenn Partition and Sonoco Partitions have formed the Company as a Delaware limited liability company; and WHEREAS, pursuant to Section 2.2 of the Joint Venture Agreement, Rock-Tenn Partition and Sonoco Partitions have agreed to enter into this Agreement for the purpose of setting forth certain of the rights and obligations of Rock-Tenn Partition and Sonoco Partitions with respect to various organizational, governance and operational matters relating to the Company; and WHEREAS, the parties intend that this Agreement will amend and restate entirely any prior agreement of the parties regarding the formation of the Company; NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein and in the other Operative Agreements and the Joint Venture Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members, intending to be legally bound, hereby agree as follows: 7 ARTICLE 1 DEFINITIONS AND CONSTRUCTION Section 1.1. Certain Definitions Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Joint Venture Agreement. As used in this Agreement, the following terms shall have the meaning specified below; "Accountants" shall have the meaning provided in Section 9.8. "Act" shall mean the Delaware Limited Liability Company Act, 6 Del. C Section 18-101, et seq., as amended from time to time. "Adjusted Capital Account Deficit" shall mean, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Allocation Year, after giving effect to the following adjustments: (i) Credit to such Capital Account any amounts which such Member is deemed to be obligated to restore pursuant to the penultimate sentences in Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and (ii) Debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704- 1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. "Agreement" shall have the meaning provided in the introductory paragraph. "Allocation Year" shall mean (i) the period commencing on the date of this Agreement and ending on September 30, 1997, (ii) any subsequent twelve (12) month period commencing on October 1 and ending on September 30 or (iii) any portion of the period described in clauses (i) or (ii) for which the Company is required to allocate Profits, Losses and other items of Company income, gain, loss or deduction pursuant to Section 5 hereof. "Capital Account" shall mean, with respect to any Member, the Capital Account maintained for such Member in accordance with the following provisions: (i) To each Member's Capital Account there shall be credited (A) such Member's Capital Contributions, (B) such Member's distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Section 5.2A, 5.3 or 5.4 hereof, and (C) the amount of any Company liabilities assumed by such Member or which are secured by any 2 8 Property distributed to such Member. The principal amount of a promissory note which is not readily traded on an established securities market and which is contributed to the Company by the maker of the note (or a Member related to the maker of the note within the meaning of Regulations Section 1.704-1(b)(2)(ii)(c)) shall not be included in the Capital Account of any Member until the Company makes a taxable disposition of the note or until (and to the extent) principal payments are made on the note, all in accordance with Regulations Section 1.704-1(b)(2)(iv)(d)(2); (ii) To each Member's Capital Account there shall be debited (A) the amount of money and the Gross Asset Value of any Property distributed to such Member pursuant to any provision of this Agreement, (B) such Member's distributive share of Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Section 5.2A, 5.3 or 5.4 hereof, and (C) the amount of any liabilities of such Member assumed by the Company or which are secured by any Property contributed by such Member to the Company; and (iii) In determining the amount of any liability for purposes of subparagraphs (i) and (ii) above there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the Managing Board shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Company or any Members) are computed in order to comply with such Regulations, the Managing Board may make such modification, provided that it is not likely to have a material effect on the amounts distributed to any Person pursuant to Section 12 hereof upon the dissolution of the Company. The Managing Board also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of capital reflected on the Company's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). "Capital Contributions" shall mean, with respect to any Member, the amount of money and the initial Gross Asset Value of any Property (other than money) contributed to the Company, including any Capital Contributions made after the date of this Agreement. "CEO" shall have the meaning provided in Section 6.5(a). "CFO" shall have the meaning provided in Section 6.5(c). "COO" shall have the meaning provided in Section 6.5(b). 3 9 "Class A Managers" shall have the meaning provided in Section 6.1(b). "Class A Member" shall mean Rock-Tenn Partition or any permitted transferee of Rock-Tenn Partition to which Rock-Tenn Partition's interest in the capital accounts of the Company is transferred in accordance with this Agreement. "Class B Managers" shall have the meaning provided in Section 6.1(b). "Class B Member" shall mean Sonoco Partitions or any permitted transferee of Sonoco Partitions to which Sonoco Partitions' interest in the capital accounts of the Company is transferred in accordance with this Agreement. "Code" shall mean the United States Internal Revenue Code of 1986, as amended from time to time. "Come Along Right" shall have the meaning provided in Section 10.3(b). "Company" shall have the meaning provided in the introductory paragraph. "Company Minimum Gain" has the meaning assigned to the term "partnership minimum gain" in Section 1.704-2(d) of the Regulations. "Contribution Agreement" shall mean (i) the Contribution Agreement dated the date hereof among Rock- Tenn, Rock-Tenn Partition and the Company and (ii) the Contribution Agreement dated the date hereof among Sonoco, Sonoco Partitions and the Company. "Depreciation" shall mean, for each Allocation Year, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such Allocation Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Allocation Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such Allocation Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Allocation Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managing Board. "Excluded Liabilities" shall have the meaning provided in Section 3.2. "Fiscal Quarter of the Company" shall mean the quarterly periods in each Fiscal Year of the Company commencing on October 1, January 1, April 1 and July 1 and ending on September 4 10 30, December 31, March 31 and June 30, respectively, except that the first Fiscal Quarter of the Company shall commence on the date of this Agreement and end on September 30, 1997. "Fiscal Year of the Company" shall mean the period commencing October 1 in any year and ending on September 30 in such year, except that the first Fiscal Year of the Company shall commence on the date of this Agreement and end on September 30, 1997. "Gross Asset Value" shall mean with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the Managing Board, provided that the initial Gross Asset Values of the assets contributed to the Company pursuant to Section 3.1 hereof shall be as set forth in such section; (ii) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking Code Section 7701(g) into account), as determined by the Managing Board as of the following times: (A) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (B) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for an interest in the Company; and (C) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), provided that an adjustment described in clauses (A) and (B) of this paragraph shall be made only if the Managing Board reasonably determines that such adjustment is necessary to reflect the relative economic interests of the Members in the Company; (iii) The Gross Asset Value of any item of Company assets distributed to any Member shall be adjusted to equal the gross fair market value (taking Code Section 7701(g) into account) of such asset on the date of distribution as determined by the Managing Board; and (iv) The Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and subparagraph (vi) of the definition of "Profits" and "Losses" or Section 3.3(c) hereof; provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (iv) to the extent that an adjustment pursuant to subparagraph (ii) is required in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraph (ii) or (iv), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Profits and Losses. 5 11 "Initial Business Plan" shall mean the strategic business plan of the Company in the form attached as Schedule A to the Joint Venture Agreement. "Issuance Items" shall have the meaning provided in Section 5.3(h). "Joint Venture Agreement" shall have the meaning provided in the first recital. "LLC Constituent Documents" shall mean the certificate of formation filed with the Secretary of State to form the Company and this Agreement. "License Agreement" shall mean the Trademark License Agreement dated the date hereof between Rock-Tenn and the Company. "Liquidating Event" shall have the meaning provided in Section 12.1. "Managers" shall have the meaning provided in Section 6.1(b). "Managing Board" shall mean the Governing Board of the Company established pursuant to Section 6.1. "Members" shall mean the Class A Member and the Class B Member. "Member Nonrecourse Debt" shall have the same meaning as the term "partner nonrecourse debt" in Section 1.704-2(b)(4) of the Regulations. "Member Nonrecourse Debt Minimum Gain" shall mean an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations. "Member Nonrecourse Deductions" shall have the same meaning as the term "partner nonrecourse deductions" in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations. "Net Cash Flow" shall mean, as of any date, the gross cash proceeds of the Company as of such date less the portion thereof used to pay or establish reserves for all Company expenses, debt payments, capital improvements, replacements, and contingencies, all as determined by the Managing Board. "Net Cash Flow" shall not be reduced by depreciation, amortization, cost recovery deductions, or similar allowances, but shall be increased by any reductions of reserves previously established pursuant to the first sentence of this definition. "Nonrecourse Deductions" shall have the meaning set forth in Section 1.704-2(b)(1) of the Regulations. 6 12 "Nonrecourse Liability" shall have the meaning set forth in Section 1.704-2(b)(3) of the Regulations. "Non-Transferring Member" shall have the meaning provided in Section 10.3(a). "Notice of Exercise" shall have the meaning provided in Section 10.3(a). "Offer" shall have the meaning provided in Section 10.3(a). "Operative Agreements" shall mean this Agreement, the License Agreement, the Supply Agreement, the Services Agreements, the Joint Venture Agreement, the Contribution Agreements and the Assignment Agreements. "Percentage Interest" shall mean (a) in the case of the Class A Member, 65%, and (b) in the case of the Class B Member, 35%. "Profits" and "Losses" shall mean, for each Allocation Year, an amount equal to the Company's taxable income or loss for such Allocation Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication): (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition of "Profits" and "Losses" shall be added to such taxable income or loss; (ii) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition of "Profits" and "Losses" shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraphs (ii) or (iii) of the definition of Gross Asset Value, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; 7 13 (v) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Allocation Year, computed in accordance with the definition of Depreciation; (vi) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) is required, pursuant to Regulations Section 1.704-(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member's interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; and (vii) Notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Section 5.3 or Section 5.4 hereof shall not be taken into account in computing Profits or Losses. The amounts of the items of Company income, gain, loss or deduction available to be specially allocated pursuant to Sections 5.3 and 5.4 hereof shall be determined by applying rules analogous to those set forth in subparagraphs (i) through (vi) above. "Property" shall mean all real and personal property acquired from time to time by the Company, including cash, and any improvements thereto, and shall include both tangible and intangible property. "Regulations" shall mean the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations are amended from time to time. "Regulatory Allocations" shall have the meaning set forth in Section 5.4 hereof. "Right of First Refusal Option" shall have the meaning provided in Section 10.3(a). "Rock-Tenn" shall mean Rock-Tenn Company, a Georgia corporation. "Rock-Tenn Partition" shall mean Rock-Tenn Partition Company, a Georgia corporation. "Secretary of State" shall mean the Secretary of State of the State of Delaware. "Section 1231 Gains" shall mean any gains realized from the sale or exchange of Property by the Company which are treated as "section 1231 gain" under Code Section 1231(a)(3)(A), except that such gains shall be determined without regard to the holding period thereof and shall be computed with reference to the Gross Asset Value of the Property disposed of rather than the adjusted tax basis of such property. 8 14 "Sonoco" shall mean Sonoco Products Company, a South Carolina corporation. "Sonoco Partitions" shall mean Sonoco Partitions, Inc., a South Carolina corporation. "Special Depreciation Adjustment" shall have the meaning for each Allocation Year as provided in Section 5.2A(a). "Transfer" shall mean to sell, exchange, assign, transfer, pledge, hypothecate or otherwise dispose of. "Transferring Partner" shall have the meaning provided in Section 10.3(a). Section 1.2. Interpretation and Construction of this Agreement. The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." All references herein to Articles, Sections, Exhibits and Schedules shall be deemed to be references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. The table of contents and the headings of the Articles and Sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. Unless the context shall otherwise require, any reference to any agreement, or other instrument or statute or regulation is to such agreement, instrument, statute or regulation as amended and supplemented from time to time (and, in the case of a statute or regulation, to any successor provision). Any reference in this Agreement to a "day " or number of "days" (without the explicit qualification of "Business") shall be interpreted as a reference to a calendar day or number of calendar days. If any action or notice is to be taken or given on or by a particular calendar day, and such calendar day is not a Business Day, then such action or notice shall be deferred until, or may be taken or given on the next Business Day. ARTICLE 2 THE COMPANY Section 2.1. Formation of the Company. The Company has been formed as a limited liability company under the laws of the State of Delaware by the filing of a certificate of formation with the Secretary of State in accordance with the provisions of the Act. Section 2.2. Name and Place of Business. The name of the Company shall be RTS Packaging, LLC. If required by Applicable Law, (i) the Company shall cause appropriate certificates or fictitious or assumed business name certificates to be filed with the appropriate Governmental Authorities, and (ii) the Company shall as expeditiously as possible qualify to do business in all 9 15 appropriate jurisdictions. The principal place of business of the Company initially shall be located at 504D Thrasher Street, Norcross, Georgia 30071. The principal place of business of the Company may be changed from time to time by the Managing Board. The Parties hereby agree that the Company shall be permitted to refer to the Company by the name "RTS Packaging, LLC, a Joint Venture Between Rock-Tenn Company and Sonoco Products Company." Section 2.3. Purpose of the Company. The purpose of the Company shall be to conduct the Venture Business in accordance with the Business Plan and the Joint Venture Agreement. The Company shall have the following additional purposes: (a) to perform the agreements and arrangements referred to in this Agreement and the other Operative Agreements; (b) to engage in any other lawful activity, business conduct or transaction as approved by the Managing Board. Section 2.4. Term. The term of the Company shall be indefinite, unless earlier liquidated and dissolved in accordance with the provisions of this Agreement or the Joint Venture Agreement. Section 2.5. Powers of the Company. Subject to the restrictions set forth in this Agreement, the Company shall have the power to exercise all of the powers and privileges granted by this Agreement and by the laws of the State of Delaware concerning limited liability companies formed under such laws, together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the purpose and scope of the Company. Section 2.6. Title to Property. All property owned by the Company shall be owned by the Company as an entity and no Member shall have any ownership interest in such property in its individual name, and each Member's interest in the Company shall be personal property for all purposes. The Company shall hold title to all of its property in the name of the Company and not in the name of any Member. Section 2.7. Business Dealings with the Company. Rock-Tenn Partition, Sonoco Partitions or any of their respective Affiliates may enter into any contract with the Company or otherwise enter into any transaction or dealing with the Company on terms and conditions that, in the aggregate, are not less favorable to the Company than those the Company could obtain from an unrelated third party, and derive and retain profits therefrom; provided, however, that any such contract or other transaction or dealing is approved by the Managing Board. The validity of any such contract or transaction or dealing shall not be affected by any relationship between the Company and Rock-Tenn Partition, Sonoco Partitions or any of their respective Affiliates. 10 16 ARTICLE 3 CAPITAL CONTRIBUTIONS Section 3.1. Contributions to the Company. Concurrently with the execution and delivery of this Agreement, (a) the Class A Member and the Class B Member have contributed, and have caused each of their respective Subsidiaries to contribute, to the Company the Rock-Tenn Contributed Assets, the Sonoco Contributed Assets and the Sonoco Contributed Sub Assets pursuant to the Contribution Agreements, which contributions will result in the Members having initial Capital Accounts in proportion to their respective Percentage Interests; and (b) the Class A Member has licensed, and has caused its Subsidiaries to license, to the Company the Rock-Tenn Licensed Assets pursuant to the License Agreement. Section 3.2. Assumed Liabilities. Concurrently with the execution and delivery of this Agreement, the Company has assumed and agreed to be responsible for the Assumed Liabilities pursuant to the Assignment Agreements. The Company shall not assume, in connection with the Joint Venture, any liability or obligation of the Class A Member or any Subsidiary of the Class A Member or any liability or obligation of the Class B Member or any Subsidiary of the Class B Member, other than the Assumed Liabilities, and the Members and their respective Subsidiaries shall retain responsibility for all of their respective liabilities and obligations accrued as of the date hereof arising from the operation of their respective Solid Fiber Partition Business prior to the date hereof (collectively, the "Excluded Liabilities"), except the Assumed Liabilities. If the Company pays or performs any Excluded Liability, then the Member responsible for such Excluded Liability shall indemnify and hold harmless the Company for such payment or performance and any costs or expenses incurred in connection therewith. Section 3.3. Additional Capital Contributions. The CEO may, without any further action by the Managing Board, request that the Members make additional capital contributions that are specifically provided for in the approved Business Plan of the Company in effect at such time. All other additional capital contributions may be authorized from time to time by the Managing Board. Except as otherwise provided herein or in the Business Plan, additional capital contributions shall be provided by the Members in proportion to their respective Percentage Interests. Section 3.4. Withdrawal of Capital Contributions. Except as otherwise provided herein or in the Joint Venture Agreement, no portion of a Member's capital contributions to the Company may be withdrawn by that Member without the prior written consent of the other Member. Section 3.5. Interest on Capital Contributions. No Member shall be entitled to interest on its capital contributions or otherwise in respect of the capital of the Company. 11 17 Section 3.6. Loans by Members to the Company. The Managing Board may, from time to time, decide to seek additional funds to support the Company's activities through loans or debt financings (including, but not limited to, lines of credit and credit support) from the Members, their respective Parents or third parties. Payments of principal of and interest on any loan by a Member to the Company shall not be considered distributions for purposes of Article 4. ARTICLE 4 DISTRIBUTIONS Section 4.1. Distributions. To the extent permissible under the Act, the Company shall distribute cash from operations in proportion to the Percentage Interests of the Members in such amounts and at such times as provided for in the Business Plan or as otherwise determined by the Managing Board; provided, however, that the Company shall distribute, in respect of each Fiscal Year, an amount not less than 75% of the Net Cash Flow determined as of the end of such Fiscal Year. Section 4.2. Amounts Withheld. All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any distribution or allocation to the Member shall be treated as amounts distributed to the Members pursuant to Section 4.1 for all purposes under this Agreement. The Company is authorized to withhold from such distributions or allocations and to pay over to any federal, state or local government any amounts required to be so withheld pursuant to the Code or any provisions of any other federal, state or local law and shall allocate such amounts to the Members with respect to which such amount was withheld. ARTICLE 5 ALLOCATIONS Section 5.1. Profits. After giving effect to the special allocations set forth in Sections 5.3 and 5.4, Profits for any Allocation Year shall be allocated to the Members in proportion to their Percentage Interests, subject to the special adjustments provided in Section 5.2A. Section 5.2. Losses. After giving effect to the special allocations set forth in Sections 5.3 and 5.4 and subject to Section 5.5, Losses for any Allocation Year shall be allocated to the Members in proportion to their Percentage Interests, subject to the special adjustments provided in Section 5.2A. 12 18 Section 5.2A Special Adjustments for Depreciation and Section 1231 Gains. (a) Special Depreciation Adjustment. Following the initial allocation of Profits and Losses for each Allocation Year as provided in Sections 5.1 and 5.2, deductions allowable to the Company under Code Sections 167 and 168 for such Allocation Year in an amount equal to the Special Depreciation Adjustment for such Allocation Year shall be reallocated from Sonoco Partition to Rock-Tenn Partition. The "Special Depreciation Adjustment" for each Allocation Year shall be an amount equal to the excess, if any, of (i) the deductions that would have been allowable to Rock-Tenn Partition for such Allocation Year under Code Sections 167 and 168 with respect to Property contributed by Rock-Tenn Partition to the Company as a Capital Contribution, determined as if such Property has not been so contributed, over (ii) the aggregate amount of deductions under Code Sections 167 and 168 with respect to all Property contributed to the Company as Capital Contributions by all Members that are effectively passed through to Rock-Tenn Partition under this Article 5 for such Allocation Year, determined without regard to the special allocation under this Section 5.2A(a). In the event that the Company makes a taxable sale or exchange of any Property contributed by Rock-Tenn Partition, the Special Depreciation Adjustment shall be appropriately reduced to reflect the fact that the adjusted basis of such property for income tax purposes shall have been taken into account in determining the taxable gain allocated to Rock-Tenn Partition pursuant to Section 5.7 (b) Section 1231 Gains. Following the initial allocation of Profits and Losses for each Allocation Year as provided in Sections 5.1 and 5.2, Section 1231 Gains for such Allocation Year shall be reallocated from Sonoco Partition to Rock-Tenn Partition in an amount equal to (i) the aggregate amount of deductions reallocated from Sonoco Partition to Rock-Tenn Partition under Section 5.2A(a) for such Allocation Year and all previous Allocation Years over (ii) the aggregate amount of Section 1231 Gains reallocated from Sonoco Partition to Rock-Tenn Partition under this Section 5.2A(b) for all previous Allocation Years. Section 5.3. Special Allocations. The following special allocations shall be made in the following order: (a) Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this Section 5, if there is a net decrease in Company Minimum Gain during any Allocation Year, each Member shall be specially allocated items of Company income and gain for such Allocation Year (and, if necessary, subsequent Allocation Years) in an amount equal to such Member's share of the net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(f) (6) and 1.704-2(j) (2) of the Regulations. This Section 5.3(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith. 13 19 (b) Member Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i) (4) of the Regulations, notwithstanding any other provision of this Section 5, if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any Allocation Year, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i) (5) of the Regulations, shall be specially allocated items of Company income and gain for such Allocation Year (and, if necessary, subsequent Allocation Years) in an amount equal to such Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain, determined in accordance with Regulations Section 1.704-2(i) (4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) (4) and 1.704-2(j) (2) of the Regulations. This Section 5.3(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i) (4) of the Regulations and shall be interpreted consistently therewith. (c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704- 1(b)(2)(ii)(d)(6) of the Regulations, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of the Member as quickly as possible, provided that an allocation pursuant to this Section 5.3(c) shall be made only if and to the extent that the Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section 5 have been tentatively made as if this Section 5.3(c) were not in the Agreement. (d) Gross Income Allocation. In the event any Member has a deficit Capital Account at the end of any Allocation Year which is in excess of the amount such Member is obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 5.3(d) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Section 5 have been made as if Section 5.3(c) and this Section 5.3(d) were not in the Agreement. (e) Nonrecourse Deductions. Nonrecourse Deductions for any Allocation Year shall be specially allocated to the Members in proportion to their respective Percentage Interests. (f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any Allocation Year shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i) (1). 14 20 (g) Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Company asset, pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of such Member's interest in the Company, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in accordance with their interests in the Company in the event Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Member to whom such distribution was made in the event Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies. (h) Allocations Relating to Taxable Issuance of Ownership Interests. Any income, gain, loss or deduction realized by the Company as a direct or indirect result of the issuance of ownership interests by the Company to a Member (the "Issuance Items") shall be allocated among the Members so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Member shall be equal to the net amount that would have been allocated to each such Member if the Issuance Items had not been realized. Section 5.4. Curative Allocations. The allocations set forth in Sections 5.3(a), 5.3(b), 5.3(c), 5.3(d), 5.3(e), 5.3(f), 5.3(g) and 5.5 (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Section 5.4. Therefore, notwithstanding any other provision of this Section 5 (other than the Regulatory Allocations), the Managing Board shall make such offsetting special allocations of Company income, gain, loss or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Sections 5.1, 5.2, and 5.3(h). Section 5.5. Loss Limitation. Losses allocated pursuant to Section 5.2 hereof shall not exceed the maximum amount of Losses that can be allocated without causing any Member to have an Adjusted Capital Account Deficit at the end of any Allocation Year. In the event some but not all of the Members would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 5.2 hereof, the limitation set forth in this Section 5.5 shall be applied on a Member by Member basis and Losses not allocable to any Member as a result of such limitation shall be allocated to the other Members in accordance with the positive balances in such Member's Capital Accounts so as to allocate the maximum permissible Losses to each Member under Section 1.704-1(b)(2)(ii)(d) of the Regulations. 15 21 Section 5.6. Other Allocation Rules. (a) For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Managing Board using any permissible method under Code Section 706 and the Regulations thereunder. (b) The Members are aware of the income tax consequences of the allocations made by this Section 5 and hereby agree to be bound by the provisions of this Section 5 in reporting their shares of Company income and loss for income tax purposes. (c) Solely for purposes of determining a Member's proportionate share of the "excess nonrecourse liabilities" of the Company within the meaning of Regulations Section 1.752-3(a) (3), the Members' interests in Company profits are in proportion to their Percentage Interests. To the extent permitted by Section 1.704-2(h) (3) of the Regulations, the Managing Board shall endeavor to treat distributions of Net Cash Flow as having been made from the proceeds of a Nonrecourse Liability or a Member Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Member. Section 5.7. Tax Allocations: Code Section 704(c). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any Property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such Property to the Company for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition of Gross Asset Value) using the traditional method with curative allocations described in Section 1.704-3(c) of the Regulations. In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraph (ii) of the definition of Gross Asset Value, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the Managing Board in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 5.7 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. 16 22 ARTICLE 6 MANAGEMENT Section 6.1. Managing Board. (a) Except as provided herein or in the Joint Venture Agreement, the Managing Board shall have full and complete authority, power and discretion to manage and control the business, affairs and properties of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities which the Managing Board deems necessary, useful or appropriate for the management and conduct of the Company's business and affairs. (b) The Managing Board shall consist of five members, three of which shall be designated "Class A Managers" and two of which shall be designated "Class B Managers." The Class A Managers and the Class B Managers are collectively referred to as the "Managers." The Class A Member shall appoint the Class A Managers, and the Class B Member shall appoint the Class B Managers. (c) The Class A Member agrees to cause the Class A Managers, and the Class B Member agrees to cause the Class B Managers, in each case to act in accordance with this Agreement and the Joint Venture Agreement. (d) On the Closing Date and annually thereafter, the Managing Board shall elect a Chairman in accordance with procedures agreed to from time to time by the Members. (e) The Managing Board shall take all actions which may be necessary or appropriate (i) for the continuation of the Company's valid existence as a limited liability company under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Members or to enable the Company to conduct the business in which it is engaged and (ii) for the accomplishment of the Company's purposes. (f) Each Manager shall be under a fiduciary duty to conduct the affairs of the Company in the best interests of the Company and of the Members, except that no Manager shall be deemed in violation of such fiduciary duty solely by causing the Company to fulfill its obligations under any of the Operative Agreements. Section 6.2. Board Meetings; Quorum; Voting; Notice. (a) The Chairman of the Managing Board shall prepare or direct the preparation of the agenda for, and preside over, meetings of the Managing Board. The Chairman shall deliver such agenda to each other Manager at least two Business Days prior to the giving of notice of a regular or special meeting, and any Manager may add items to such agenda. 17 23 (b) Unless otherwise agreed by the Members, regular meetings of the Managing Board shall be held once every three months at such places and at such times as the Managing Board may from time to time determine. Special meetings of the Managing Board may be called by the Chairman and shall be called promptly by the Chairman at the request of any Manager and shall be held at such place as may be determined by the Managing Board. Written notice of the time and place of each regular and special meeting of the Managing Board shall be given by, or at the direction of, the Chairman to each other Manager, in the case of a regular or special meeting, at least two Business Days before such meeting. The required notice to any Manager may be waived by such Manager in writing. Attendance by a Manager at a meeting shall constitute a waiver of any required notice of such meeting by such Manager, except when such Manager attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not properly called or convened. (c) The presence (in person or by proxy) of at least one of the Class A Managers and at least one of the Class B Managers shall be required to constitute a quorum for the transaction of any business by the Managing Board; provided, however, that if a quorum is not obtained because at least one Class B Manager fails to attend a meeting of the Managing Board after two (2) proper notices, then a quorum shall be deemed upon the attendance of the three (3) Class A Managers. Each Member shall use its reasonable efforts to ensure the existence of a quorum at any duly convened meeting of the Managing Board. Except as provided in Section 8.1, all actions taken by the Managing Board shall be effective upon the affirmative vote of a simple majority of the Managers present at a duly constituted meeting. The Class A Member shall cause each Class A Manager to grant a revocable proxy to each other Class A Manager to vote at any meeting of the Managing Board at which such Class A Manager is not present or is present but cannot vote with respect to such matter. The Class B Member shall cause each Class B Manager to grant a revocable proxy to each other Class B Manager to vote at any meeting of the Managing Board at which such Class B Manager is not present or is present but cannot vote with respect to such matter. (d) While the Members intend that the Managers shall attend meetings of the Managing Board in person, the Members acknowledge that Managers may from time to time be prevented from doing so due to various circumstances. Managers may, therefore, participate in a meeting of the Managing Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 6.2(d) shall constitute presence in person at such meeting, except where a Manager participates in the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not properly called or convened. (e) Any action required or permitted to be taken at a meeting of the Managing Board may be taken without a meeting if a written consent, setting forth the action so taken, is signed by the number of Class A Managers and/or Class B Managers required by the Act or this Agreement in order to take such action, and is filed with the minutes of the proceedings of the Managing Board; provided, however, that if the Managers take any action by less than unanimous written consent, the 18 24 Company shall provide notice of the taking of such action to the non-consenting Manager(s) promptly thereafter in accordance with the Act. Section 6.3. Removal; Resignation; Vacancies. The Class A Member may at any time, by written notice to the Class B Member and to the Managing Board, remove (with or without cause) any Class A Manager and appoint a new Class A Manager. The Class B Member may at any time, by written notice to the Class A Member and to the Managing Board, remove (with or without cause) any Class B Manager and appoint a new Class B Manager. Any Class A Manager may resign at any time by giving written notice to the Class A Member and to the Managing Board. Any Class B Manager may resign at any time by giving written notice to the Class B Member and to the Managing Board. Any such resignation shall take effect on the date of, or date specified in, such notice or, if such notice is not dated and the date of resignation is not specified in such notice, on the date of the receipt of such notice by the Managing Board. No acceptance of such resignation shall be necessary to make it effective. Upon any such resignation as a Class A Manager, the Class A Member shall appoint a new Class A Manager. Upon any such resignation by a Class B Manager, the Class B Member shall appoint a new Class B Manager. Section 6.4. No Remuneration. No person shall be entitled to any fee, remuneration or compensation in connection with his service as a Manager. The Company shall bear the cost and expenses of the Managers appointed by such Member in connection with such Managers' participation on the Managing Board. Section 6.5. Officers. (a) Subject to the voting requirements set forth in Article 8, the Managing Board shall select the Chief Executive Officer ("CEO") of the Company. The CEO shall report to the Managing Board periodically on the business and affairs of the Company and, subject to the direction of the Managing Board, shall have general supervision over the business and affairs of the Company. (b) The Managing Board shall select the Chief Operating Officer (the "COO") of the Company. The COO shall report to the CEO of the Company and shall generally oversee the operations of the Company. (c) The Managing Board shall select the Chief Financial Officer (the "CFO") of the Company. The CFO shall report to the CEO periodically on the financial condition of the Company and, subject to the direction of the CEO, shall have general supervision over the financial affairs of the Company and shall serve as its principal accounting officer. (d) Except as otherwise provided herein, the Managing Board, after due consideration of the recommendations of Rock-Tenn Partition and Sonoco Partitions shall have the right at any time to designate, remove and replace all officers and designate permanent or temporary replacements for such officers as may be determined by the Managing Board from time to time as 19 25 necessary or advisable in the conduct of the business and affairs of the Company. All officers of the Company shall (i) have the powers and duties set forth in this Section 6.5 or as otherwise prescribed by the Managing Board and (ii) serve for the term designated by the Managing Board, subject to removal as provided above. The initial officers of the Company shall have the power and authority to execute and deliver in the name and on behalf of the Company each of the Operative Agreements to which the Company is a party. ARTICLE 7 ROLE OF MEMBERS Section 7.1. Rights or Powers. The Members shall not have any right or power to take part in the management or control of the Company or its business and affairs or to act for or bind the Company in any way. Notwithstanding the foregoing, the Members have all of the rights and powers specifically set forth in this Agreement and, to the extent not inconsistent with this Agreement, in the Act. Section 7.2. Voting Rights. The Members shall have voting rights with respect solely to matters for which the approval of the Members is affirmatively required by the Act. Section 7.3. Meetings of Members. (a) Meetings of the Members may be called by the Chairman of the Managing Board and shall be called upon the written request of any Member. Notice of any such meeting shall be given to all Members not less than ten (10) Business Days nor more than thirty (30) days prior to the date of such meeting and shall state the nature of the business to be conducted at such meeting. Members may vote in person, by proxy or by telephone at such meeting and may at any time waive advance notice of such meeting. (b) Each Member may authorize any Person or Persons to act for it by proxy on all matters in which a Member is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Member or its attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Member executing it. (c) Any action required or permitted to be taken at a meeting of the Members may be taken without a meeting if a written consent, setting forth the action so taken, is signed by all of the Members and is filed with the minutes of the proceedings of the Members. Such consent shall have the same force and effect as a unanimous affirmative vote of the Members. 20 26 Section 7.4. Withdrawal/Resignation. Except as otherwise provided herein, no Member shall demand or receive a return on or of its capital contributions or withdraw or resign from the Company without the consent of all Members. If any Member resigns or withdraws from the Company in breach of this Section 7.4, such resigning or withdrawing Member shall not be entitled to receive any distribution under this Agreement. Under circumstances requiring a return of any capital contributions, no Member has the right to receive property other than cash except as may be specifically provided herein. Section 7.5. Member Compensation. No Member shall receive any interest, salary or drawing with respect to its capital contributions or its capital account or for services rendered on behalf of the Company, or otherwise, in its capacity as a Member, except as otherwise provided in this Agreement. Section 7.6. Partition. While the Company remains in effect or is continued, each Member agrees and waives its rights to have any Company property partitioned, or to file a complaint or to institute any suit, action or proceeding at law or in equity to have any Company property partitioned, and each Member, on behalf of itself, its successors and its assigns hereby waives any such right. Section 7.7. Other Instruments. Each Member hereby agrees to execute and deliver to the Company within five (5) days after receipt of a written request therefor, such other and further documents and instruments, statements of interest and holdings, designations, powers of attorney and other instruments and to take such other action as the Managing Board deems necessary, useful or appropriate to comply with any laws, rules or regulations as may be necessary to enable the Company to fulfill its responsibilities under this Agreement. ARTICLE 8 MATTERS REQUIRING APPROVAL OF THE MANAGING BOARD Section 8.1. Matters Requiring the Consent of the Managing Board. Except as otherwise provided herein or in the Business Plan, no action may be taken by the Company or any Subsidiary of the Company in connection with any of the following matters without the approval of at least four (4) Managers of the Managing Board: (a) the appointment and replacement of the CEO; provided, however, that in the event that two candidates who have been presented to the Managing Board do not receive the requisite vote, then upon the presentation of any additional candidate or candidates, such candidate shall be approved upon the vote of three Managers of the Managing Board; 21 27 (b) the acquisition of any Property or interest therein which requires an investment by the Company in excess of twenty percent (20%) of the market value of the total assets of the Company, and the disposition of any Property or interest therein which has a value in excess of twenty percent (20%) of the market value of the total assets of the Company; (c) the approval for each year's Business Plan (and amendments thereto); provided, however, that in the event that such Business Plan does not receive the requisite vote, the Business Plan for the immediately prior year shall automatically be approved and be effective as provided in Section 9.1; (d) the issuance of additional equity interests which would dilute the ownership interests of any Member (other than equity interests and options for equity interests issued to employees of the Company); and (e) except for (i) contracts entered into on the date hereof pursuant to the Joint Venture Agreement and (ii) loans between the Company and a Member on at least market terms, any contract between a Member and the Company. Except as noted above, if the Managing Board fails to agree by the requisite vote upon any proposal relating to the any of the matters set forth above, the Company shall continue to operate after such proposal as if such matter had been rejected by the Managing Board. ARTICLE 9 BUSINESS PLAN, ACCOUNTING, TAXATION AND CERTAIN OTHER OPERATIONAL PROVISIONS Section 9.1. Business Plans. (a) The Initial Business Plan for the Fiscal Year ended September 30, 1998 is attached to the Joint Venture Agreement as Schedule A. Not later than sixty (60) days prior to the beginning of each succeeding Fiscal Year, a proposed business plan relating to such succeeding Fiscal Year shall be prepared in compliance with this Section 9.1 under the direction of the CEO, the COO and the CFO of the Company and shall be submitted to the Managing Board for approval. Each Member shall cause the Managers on the Managing Board appointed by such Member to cooperate in good faith to approve any proposed business plan not later than thirty (30) days prior to the beginning of the Fiscal Year to which such proposed business plan relates. When a proposed business plan for a Fiscal Year has been approved as the Business Plan by the Managing Board, the Company, the Managers and the officers and employees of the Company shall implement such Business Plan. No Business Plan shall be deemed an amendment of this Agreement. To the extent that any provision of the Business Plan deals with the same matter 22 28 as any Operative Agreement, the provisions of such Operative Agreement shall control, unless the Members shall otherwise agree. The Company shall furnish to each Manager on the Managing Board any other budget or plan that the Company may prepare and any revisions of previously furnished budgets or plans (including any Business Plan) promptly upon preparation or revision of such budgets, plans or revisions thereto. If, on October 1 of any Fiscal Year, the Managers have not approved any required portion of the proposed business plan as the Business Plan for such Fiscal Year, the portion of the proposed business plan which has been approved by the Managers, together with that portion of the Business Plan for the prior Fiscal Year which relates to the portion of the proposed business plan which has not been approved, adjusted (without duplication) to reflect increases or decreases resulting from the following events, shall govern until such time as the Managing Board approves a complete Business Plan for such Fiscal Year, including the portion of the proposed business plan which was not approved by October 1: (i) increases or decreases in commitments under contracts of the Company which will be outstanding during such Fiscal Year; (ii) increases or decreases in expenses attributable to the number of employees expected to be employed by the Company during such Fiscal Year and increases and decreases in salaries and other benefits payable to employees covered by union contracts expected to be employed by the Company during such Fiscal Year; (iii) increases or decreases in interest expense attributable to loans of the Company which will be outstanding during such Fiscal Year; (iv) increases or decreases in costs and expenses attributable to non-recurring items in the Business Plan for the prior Fiscal Year; (v) increases or decreases in paperboard costs and the costs of other raw materials used in the Company's business to reflect current market prices for such materials; and (vi) increases or decreases in partition prices. All other expenses in the Business Plan for the prior Fiscal Year shall be increased by the increase in the Consumer Price Index for the twelve (12) month period ending on the July 31 preceding each such October 1. (b) Each Business Plan shall contain at a minimum (i) a quarterly and annual operating budget for the Company for the succeeding Fiscal Year, containing projections of sales, profit and loss, cash flow and ending balance sheets for each quarter of such Fiscal Year, (ii) a business plan for the Company relating to the succeeding Fiscal Year, and (iii) long-range plans for the next three succeeding Fiscal Years. 23 29 (c) The senior officers of the Company shall at all times use their best efforts to conduct the operations of the Company within the Business Plan adopted by the Managing Board. Following the end of each Fiscal Year, the CEO and the CFO of the Company will analyze any variance between the actual and planned performance under the Business Plan and report to the Managing Board the results of such analysis. Section 9.2. Accrual Basis. The books and records of the Company shall be kept on an accrual basis. Section 9.3. Maintenance of Books of Account. The Company shall keep or cause to be kept full and complete books of account in accordance with Rock-Tenn's accounting policies and procedures in effect from time to time at its principal office or at such other location as the Managing Board designates. The books of accounts shall be maintained in a manner that provides sufficient assurance that transactions of the Company are reported so as to comply with all Applicable Laws and to permit the preparation of the Company's financial statements in accordance with GAAP. Section 9.4. Financial Statements. (a) As soon as practicable following the end of each Fiscal Year (and in any event not later than ninety (90) days after the end of each such Fiscal Year), the Company shall prepare and deliver to each Member and the Managing Board a consolidated balance sheet of the Company and its consolidated subsidiaries as of the end of such Fiscal Year and the related statements of results of operations, Members' capital accounts and cash flow of the Company for such Fiscal Year (or similar statements if such statements change as a result of changes in GAAP), together with appropriate notes to such financial statements, and in each case setting forth in comparative form the corresponding figures for the preceding Fiscal Year. Such financial statements shall be approved by the Managing Board and, if requested by any two members of the Managing Board, shall be audited by the Accountants and accompanied by a report stating that such financial statements have been prepared in accordance with GAAP applied on a basis consistent with prior years (except for the initial year of the Company or as otherwise specified in such report). The Company shall conduct its business so that any such report of the Accountants shall not contain any qualifications as to the scope of the audit or with respect to the Company's compliance with GAAP, except for the initial year of the Company or for changes in methods of accounting. (b) As soon as practicable following the end of each Fiscal Quarter (and in any event not later than thirty (30) days after the end of such Fiscal Quarter), the Company shall prepare and deliver to each Member and the Managing Board an unaudited consolidated income statement of the Company and its consolidated subsidiaries as of the end of such Fiscal Quarter and the related unaudited statements of results of operations, Members' capital accounts and cash flow of the Company for such Fiscal Quarter and for the Fiscal Year to date (or similar statements if such statements change as a result of changes in GAAP), in each case setting forth in comparative form the corresponding figures for the preceding Fiscal Quarter, or the Fiscal Quarter corresponding to 24 30 the Fiscal Quarter just completed and for the budget for such Fiscal Quarter and for the Fiscal Year to date, which statement shall be approved by the Managing Board. Such financial statements shall be accompanied by certificate of the CFO of the Company to the effect that such financial statements have been prepared under the CFO's supervision and that, although such financial statements do not contain the footnotes and other disclosures required to be presented in interim financial statements by GAAP, such financial statements, in the CFO's judgment, fairly present the financial condition and results of operations of the Company as of the date and for the periods indicated, subject to normal recurring year-end audit adjustments. (c) As soon as practicable following the end of each calendar month (and in any event not later than thirty (30) days after the end of such month), the Company shall prepare and deliver to each Member and the Managing Board unaudited statements of results of operations for such month and for the Fiscal Year to date. Section 9.5. Other Reports and Inspections. The Company shall furnish promptly to either Member such financial data and information as such Member may reasonably request, including monthly, quarterly and annual projections of results of operations and financial position. The Company shall, upon reasonable prior notice and during normal business hours without unreasonably interfering with the normal day-to-day activities of the Company and its employees, make available to either Member or its representatives or designees all books of account and other financial records of the Company for inspection and, in the case of books of account, copying and shall use its best efforts to make available to such Member and the officers, employees and independent accounts of the Company for reviews to verify any information furnished hereunder. Section 9.6. Deposit of Funds. All funds of the Company not otherwise employed shall be promptly (a) deposited from time to time to its credit in such banks or trust companies or other depositories or (b) invested in such other short-term investments as the Managing Board shall select, or as may be selected by any authorized officer of the Company. The funds of the Company shall not be commingled with the funds of either Member or any Affiliate of either Member. Section 9.7. Fiscal Year. The Fiscal Year of the Company shall be the Fiscal Year of Rock-Tenn, which currently is the twelve-month period ending September 30. Section 9.8. Accountants. The independent auditors of the Company shall be, for the first Fiscal Year, Ernst & Young LLP and thereafter the Managing Board shall approve the appointment of the independent auditors on an annual basis (the "Accountants"). Section 9.9. Attorneys. The Company shall be represented by such counsel as may be selected from time to time by the Managing Board. 25 31 Section 9.10. Preparation of Tax Returns. (a) The Managing Board shall, at the expense of the Company, cause to be prepared and delivered to the Members, in a timely fashion after the end of each Fiscal Year, copies of all federal and state income tax returns for the Company for such Fiscal Year, one copy of which shall be filed by the Managing Board. Such returns shall be prepared on the accrual basis, and shall accurately reflect the results of operations of the Company for such Fiscal Year. The Class A Member is designated as the "tax matters partner" (as defined in the Code) of the Company and is authorized and required to represent the Company (at the expense of the Company) in connection with all examinations of the affairs of the Company by any federal, state, or local tax authorities, including any resulting administrative and judicial proceedings, and to expend funds of the Company for professional services and costs associated therewith. (b) The "tax matters partner" shall keep all Members fully informed of the progress of any such examination, audits or other proceeding. Each Member agrees to cooperate with the Managing Board and the "tax matters partner" and to do or refrain from doing any or all things reasonably required by the Managing Board in connection with the conduct of such proceedings. Section 9.11. Partnership Tax Election. The Company shall be classified as a partnership for federal, state and local tax purposes and shall make all filings and elections necessary to obtain such classification as a partnership pursuant to Section 301.7701-3 of the Regulations and any other applicable provisions of state or local law. ARTICLE 10 TRANSFERS OF VENTURE INTEREST Section 10.1. No Transfer. Except as provided herein, a Member shall not Transfer its Venture Interest in whole or in part, directly or indirectly, and any purported Transfer of all or any part of a Member's Venture Interest (including such Member's interest in the capital accounts of the Company) shall be void and of no effect against the Company, the other Member, any creditor of the Company or any person claiming against the Company, unless: (a) The Member proposing to make a Transfer of all (but not less than all) of its Venture Interest has made full disclosure of the identity of the proposed transferee and the terms and conditions of the proposed Transfer to the other Member and has received the prior written consent of the other Member; (b) The Member proposing the Transfer of all (but not less than all) of its Venture Interest has complied with its obligations under Section 10.3 and the other Member has not exercised either of its rights under Section 10.3; 26 32 (c) All (but not less than all) of such Member's Venture Interest (including such Member's interest in the capital accounts of the Company) are Transferred simultaneously to the Transferee of the Venture Interest; and (d) If requested by the Company, the Member proposing to make such Transfer shall unconditionally guarantee the obligations of the proposed transferee in respect of such Member's transferred Venture Interest; provided, however, that, notwithstanding this Section 10.1, neither Member shall be permitted to make any Transfer of its Venture Interest to any competitor of Rock-Tenn or Sonoco in the Solid Fiber Partition Business without the prior written consent of the other Member after full disclosure of the terms and conditions of the proposed Transfer. Section 10.2. Transfer to Wholly Owned Subsidiary. Notwithstanding the provisions of Section 10.1, a Member may, without complying with the provisions of Section 10.1, Transfer all (but not less than all) of its Venture Interest (including such Member's interest in the capital accounts of the Company) to any Wholly Owned Subsidiary of such Member if (i) such Subsidiary becomes a party to this Agreement, (ii) such Member guarantees the obligations under this Agreement of such Subsidiary and its successors and assigns, (iii) such Subsidiary agrees in writing to reassign its Venture Interest to such Member in the event that such Subsidiary is no longer a Wholly Owned Subsidiary of such Member, (iv) such Member simultaneously Transfers to such Subsidiary all of such Member's interest in the capital accounts of the Company, and (v) if the proposed Transfer would cause a termination of the Company for federal income tax purposes under Section 708 of the Code, obtains the prior written consent of the other Member. Section 10.3. Right of First Refusal. (a) If a Member (the "Transferring Partner") desires to Transfer all (but not less than all) of its Venture Interest to an unrelated third party on the basis of that third party's binding, bona fide written offer providing for an all-cash purchase price to acquire all (but not less than all) of the Transferring Members' Venture Interest (including such Member's interest in the capital accounts of the Company) (an "Offer"), the other Member (the "Non-Transferring Member") shall have the rights set forth in this Section 10.3. A copy of the Offer shall be provided by the Transferring Member to the Non-Transferring Member and the Non-Transferring Member shall give a "Notice of Exercise" to the Transferring Member within sixty (60) days of receipt of the Offer if the Non-Transferring Partner wishes to exercise its right (the "Right of First Refusal Option") to buy all but not less than all of the Transferring Member's Venture Interest by matching the price, terms and conditions of the Offer (including the simultaneous purchase of all of the Transferring Member's interest in the capital accounts of the Company). If the Non-Transferring Member provides the Transferring Member with a Notice of Exercise, the Non-Transferring Member must complete the purchase of the Venture Interest of the Transferring Member within sixty (60) days of the Transferring Member's receipt of the Notice of Exercise (or, if the Transferring Member was required for any reason to receive Government Approval of such transfer, then within thirty (30) 27 33 days following the receipt of such required Governmental Approval), solely in accordance with the price, terms and conditions of the Offer (including the simultaneous purchase of all of the Transferring Member's interest in the capital accounts of the Company). (b) The Non-Transferring Partner shall also have the alternative right (the "Come Along Right") exercisable by giving a Notice of Exercise within sixty (60) days after receipt of a copy of the Offer, to require that the Non-Transferring Member's Venture Interest also be sold to the offeror of the Offer at the same price (per percentage point of the Transferring Member's Venture Interest), terms and conditions of the Offer (including the simultaneous purchase of all of the Non-Transferring Member's interest in the capital accounts of the Company). If the Non-Transferring Member elects to exercise the Come Along Right, the Transferring Member shall not be entitled to make any Transfer of its Venture Interest except simultaneously with the Non-Transferring Member's Transfer of this Venture Interest pursuant to the Offer (including the simultaneous Transfer of all of the Non-Transferring Partner's interest in the capital accounts of the Company). (c) If the Non-Transferring Member fails to give a Notice of Exercise under Section 10.3(a) or (b) within the applicable sixty (60) day period described therein, the Transferring Member will be permitted to Transfer its entire Venture Interest; provided, however, that (i) such Transfer is made to the Transferee and solely in accordance with the price, terms and conditions described in the Offer, (ii) such Transfer is consummated one hundred and twenty (120) days following the date of delivery of the Offer to the Non-Transferring Member, (iii) the Transferee takes all necessary steps to become a substitute Member under this Agreement, and (iv) the Transferring Member simultaneously Transfers all of its interest in the capital accounts of the Company to the Transferee. Section 10.4. Buy-Out Rights. The ownership interests of the Parties and their permitted successors and assigns in the Company are subject to the buy-out rights provided for in Article 8 of the Joint Venture Agreement. ARTICLE 11 INDEMNIFICATION OF OFFICERS AND MANAGERS Section 11.1. Right to Indemnification. (a) The Company shall indemnify and hold harmless, to the fullest extent permitted by Applicable Law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter, a "proceeding") by reason of fact that he or she, or a person for whom he or she is the legal representative, is or was a Manager or officer of the Company or is or was serving at the request of the Company as a director, 28 34 officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe his or her action was unlawful; provided that the Company shall not indemnify any person for any liability resulting or arising from the gross negligence or willful misconduct of any such person. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interests of the Company or, that he or she was grossly negligent or that he or she engaged in wilful misconduct, and, with respect to any criminal proceeding, had reasonable cause to believe that his or her conduct was unlawful. The Company shall be required to indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Managing Board. In the event a Manager or officer of the Company shall serve as a director, officer, employee or agent of any corporation, partnership, joint venture, trust, enterprise or nonprofit entity in which the Company maintains an investment, it shall be conclusively presumed for purposes of the indemnification provided for in this Section 11.1 that such service has been undertaken at the request of the Company. The foregoing presumption shall apply regardless of whether such Manager, or officer is serving such entity at the request of a third party or that his or her service with such entity was commenced prior to the effectiveness of this Article 11 or prior to his or her becoming a Manager or officer of the Company. The Company may, by action of the Managing Board, provide indemnification to employees or agents of the Company with the same scope and effect as the foregoing indemnification of Managers and officers provided for in this Section 11.1. (b) The right to indemnification conferred by this Section 11.1 shall be a contract right based upon an offer from the Company which shall be deemed to be accepted and acknowledged by each person who becomes a Manager or officer of the Company or who serves at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust enterprise or nonprofit entity by accepting such position. (c) Any indemnification made under this Section 11.1 (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that such indemnification is proper in the circumstances because the person seeking indemnification has met the applicable standard of conduct set forth in Section 11.1(a). Such determination shall be made by (i) a majority vote of the Managers who are not parties to such proceeding, even though less than a quorum, (ii) if there are no such Managers, or if such Managers so direct, by independent legal counsel in a written opinion, or (iii) by the Members. Section 11.2. Prepayment of Expenses. The Company may, in its discretion, pay the expenses (including attorneys' fees) incurred by such Manager or officer in defending any such proceeding in advance of its final disposition, provided that such advance payment shall be made 29 35 only upon receipt of an undertaking, by or on behalf of such Manager or officer, to repay all amounts so advanced if it shall ultimately be determined that such Manager or officer is not entitled to be indemnified under this Article 11 or otherwise. Section 11.3. Claims. If a claim for indemnification or payment of expenses under this Article 11 is not paid in full by the Company within thirty (30) days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expenses (including attorneys' fees) of prosecuting such claim. Section 11.4. Nonexclusivity of Rights. The rights conferred on any person by this Article 11 shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the LLC Constituent Documents, this Agreement or any other agreement, vote of the Members or otherwise. Section 11.5. Insurance. The Company may maintain insurance, at its expense, to protect itself and any Manager, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust, enterprise or nonprofit entity against any such expense, liability or loss, whether or not the Company would have the power to indemnify such person against expense, liability or loss under Applicable Law. Section 11.6. Other Indemnification. The Company's obligation, if any, to indemnify any person who was or is serving at its request as director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or nonprofit entity. Section 11.7. Amendment or Repeal. Any repeal or modification of this Article 11 by the Members shall not adversely affect any right or protection of a Manager or officer existing at the time of such repeal or modification. ARTICLE 12 DISSOLUTION AND LIQUIDATION Section 12.1. Liquidating Events. Upon the first to occur of any of the following ("Liquidating Events"): (a) the sale of all or substantially all of the assets of the Company; 30 36 (b) the written consent of the Members to dissolve, wind up and liquidate the Company; (c) the happening of any event that makes it unlawful or impossible to carry on the business of the Company; or (d) any event which causes there to be only one Member; the Company shall dissolve and commence winding up and liquidating in accordance with Section 12.2. Section 12.2. Distributions Upon Liquidation. Upon the dissolution of the Company, the Company shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Members, and no Member shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Company's business and affairs. To the extent not inconsistent with the foregoing, all covenants and obligations in this Agreement shall continue in full force and effect until such time as the Company's assets have been distributed pursuant to this Section 12.2 and the existence of the Company has been terminated in accordance with the Act. The Managing Board shall be responsible for overseeing the winding up and dissolution of the Company, shall take full account of the Company's liabilities and assets, shall cause the assets to be liquidated as promptly as is consistent with obtaining the fair value thereof unless it elects to make distributions of all or any part of the assets in kind and except as otherwise provided in this Section 12.2, and shall cause the assets or the proceeds therefrom, to the extent sufficient therefor, to be applied, first, to creditors (including, to the extent permitted by law, Members who are creditors) in satisfaction of all of the Company's debts and liabilities (whether by payment or the making of reasonable provision for payment thereof), other than liabilities for which reasonable provision or payment has been made. Section 12.3. Deficit Capital Accounts. If any Member has a deficit balance in its capital account (after giving effect to all contributions, distributions and allocations for all allocation years, including the allocation year during which such liquidation occurs), such Member shall have no obligation to make any contribution to the capital of the Company with respect to such deficit, and such deficit shall not be considered a debt owed to the Company or to any other Person for any purpose whatsoever. Section 12.4. Rights of Members. Except as otherwise provided in this Agreement, (a) each Member shall look solely to the assets of the Company for the return of its Capital Contribution and shall have no right or power to demand or receive property other than cash from the Company, and (b) no Member shall have priority over any other Member as to the return of its Capital Contributions, distributions or allocations. 31 37 ARTICLE 13 MISCELLANEOUS Section 13.1. Notices. Except as expressly provided herein, notices and other communications provided for herein shall be in writing and shall be delivered by hand or courier service, mailed or sent by telex, graphic scanning or other telegraphic communications equipment of the sending Member, as follows: Rock-Tenn Partition: Rock-Tenn Company 504 Thrasher Street Norcross, Georgia 30071 Attn: Chief Financial Officer Tel: 770-368-7676 Fax: 770-263-3582 with a copy to: Rock-Tenn Partition Company 504D Thrasher Street Norcross, Georgia 30071 Attn: General Counsel Tel: 770-263-4456 Fax: 770-248-4402 Sonoco Partitions: Sonoco Partitions, Inc. One North Second Street Hartsville, South Carolina 29550 Attn: President Tel: 803-383-7000 Fax: 803-383-7478 with a copy to: Sinkler & Boyd, P.A. 1426 Main Street, Suite 1200 Columbia, South Carolina 29201 Attn: William C. Boyd, Esquire Tel: 803-779-3080 Fax: 803-540-7878 or to such other address or attention of such other Person as such Member shall advise the other Members in writing. All notices and other communications given to the Members hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. Communications sent by telex, graphic scanning or other telegraphic communications equipment shall be deemed to have been received when confirmation of their delivery is received by the sender. 32 38 Section 13.2. Applicable Law. The validity, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of law. Section 13.3. Severability. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, the Members agree that such provision will be enforced to the maximum extent permissible so as to effect the intent of the Members, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. If necessary to effect the intent of the Members, the Members will negotiate in good faith to amend this Agreement to replace the unenforceable language with enforceable language which as closely as possible reflects such intent. Section 13.4. Amendments. This Agreement may be modified only by a written amendment signed by all of the Members. Section 13.5. Waiver. The waiver by a Member of any instance of any other Member's noncompliance with any obligation or responsibility herein shall be in writing and signed by the waiving Member and shall not be deemed a waiver of other instances of such other Member's noncompliance. Section 13.6. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts shall have been signed by each Member and delivered to the other Members. Section 13.7. Entire Agreement. The provisions of this Agreement set forth the entire agreement and understanding among the Members as to the subject matter hereof and supersede all prior agreements, oral or written, and all other prior communications between the Members relating to the subject matter hereof, other than (i) the Joint Venture Agreement, (ii) the other Operative Agreements and (iii) any other written agreements executed and delivered contemporaneously herewith. Section 13.8. No Assignment. (a) Except as specifically provided herein or in the Joint Venture Agreement and except in connection with a Transfer of a Venture Interest pursuant to Article 10, no Member shall, directly or indirectly, assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the Members. (b) Any attempted assignment of this Agreement in violation of this Section 13.8 shall be void and of no effect. 33 39 (c) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Members and their respective successors and permitted assigns. Section 13.9. Expenses. Except as otherwise provided in this Agreement, the Joint Venture Agreement or the other Operative Agreements, all costs and expenses (including the fees and expenses of any attorneys, accountants, investment bankers, brokers, finders or other intermediaries) incurred in connection with this Agreement, the other Operative Agreements and the consummation of the transactions contemplated by Article 5 of the Joint Venture Agreement to be consummated on the date hereof shall be paid by the Member incurring such cost or expense. Section 13.10. No Third-Party Beneficiaries. This Agreement is for the sole benefit of the Members and their permitted assigns, and nothing herein express or implied shall give or be construed to give to any Person, other than (i) the Members and their permitted assigns and (ii) the persons entitled to indemnification pursuant to Section 11.1 hereof, any legal or equitable rights hereunder. Section 13.11. Publicity. No Member will issue any press release or make any other public announcement relating to the existence of this Agreement or the matters contemplated hereby, except that a Member may make any disclosure required to be made under Applicable Law or the rules of the New York Stock Exchange or any other applicable stock exchange if such Member determines in good faith that it is necessary to do so and gives prior notice to the other Members. Section 13.12. Construction. This Agreement has been negotiated by the Members and their respective counsel and shall be fairly interpreted in accordance with its terms and without any strict construction in favor of or against any of the Members. Section 13.13. Disclaimer of Agency. Except for provisions herein expressly authorizing one Member to act for another, this Agreement shall not constitute any Member as a legal representative or agent of any other Member, nor shall a Member have the right or authority to assume, create or incur any liability or any obligation of any kind, express or implied, against or in the name or on behalf of any other Member or any of its Affiliates unless otherwise expressly permitted by such Member. Section 13.14. Further Actions. The Members hereby agree to vote their Percentage Interests in favor of, and cause the Managing Board to approve, any proposal or action necessary to implement any of the provisions of this Agreement. Section 13.15. Indemnification. The remedies provided in Section 7.1 of the Joint Venture Agreement constitute the sole and exclusive remedies for recovery against another Member for breaches of any of the representations, warranties, covenants and agreements in this Agreement. 34 40 Section 13.16. Settlement of Disputes. Any and all disputes arising out of or in connection with the execution, interpretation, performance and nonperformance of this Agreement shall be solely and finally resolved as provided in Article 9 of the Joint Venture Agreement. 35 41 IN WITNESS WHEREOF, Rock-Tenn Partition and Sonoco Partitions have caused their respective duly authorized officers to execute this Agreement as of the day and year first above written. ROCK-TENN PARTITION COMPANY By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- SONOCO PARTITIONS, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 36 EX-10.11 9 CONSULTING AGREEMENT 1 EXHIBIT 10.11 CONSULTING AGREEMENT THIS AGREEMENT ("Agreement"), made and entered into this ___ day of January, 1997, by and between EUGENE U. FREY, an individual resident of the State of Florida ("Consultant"); and ROCK-TENN COMPANY, a Georgia corporation ("Company"); W I T N E S S E T H: WHEREAS, Consultant has significant experience in the paper and packaging business in the United States and Canada; WHEREAS, Company acknowledges that Consultant is engaged in other business and personal activities that comprise his primary business activities; and WHEREAS, Company desires to engage Consultant as a consultant on behalf of Company and its subsidiaries, including Waldorf Corporation (collectively, the "Rock-Tenn Group"), and Consultant desires to be engaged by Company on the terms and conditions set forth in this Agreement; and NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Engagement. Subject to the terms hereof, Company hereby engages Consultant as a consultant, and Consultant hereby accepts such engagement. Throughout the term hereof, Consultant shall provide consulting and advisory services to the Rock-Tenn Group as Company shall reasonably request. The consulting and advisory services provided by Consultant shall be rendered at such times and from such locations as are mutually agreeable to Company and Consultant. Section 2. Term of Engagement. The engagement of Consultant hereunder shall commence as of the date hereof and continue until the third anniversary of the date hereof. During the Term of Engagement, Consultant will not be required by Company to provide consulting services for more than 20 hours per month, or for more than such hours per month as are mutually agreeable to Company and Consultant. 2 Section 3. Consulting Fees; Expenses. In consideration of the consulting services to be rendered by Consultant under this Agreement, Consultant shall be paid a consulting fee of Two Hundred Sixty-Four Thousand Dollars ($264,000) per year, which fee shall be payable in equal monthly installments on or before the 15th day of each month during the term hereof. Consultant shall also be reimbursed for any reasonable business expenses incurred by him on behalf of, and at the request of, Company, subject to Company's expense reimbursement policies and procedures in effect from time to time. Section 4. Consulting Payments. Company and Consultant hereby acknowledge that the compensation payable to Consultant hereunder has been fully negotiated and represents fair consideration for the consulting services to be rendered by Consultant. Consultant further acknowledges that he is aware of the federal and state income tax consequences which are applicable to income received for consulting services. Neither Consultant nor Company shall report the compensation received by Consultant hereunder on any federal or state income tax return in any manner other than as payment for consulting services, and neither Consultant nor Company shall assert in connection with any claim for a refund for income taxes paid, in connection with any administrative or judicial proceeding, or in connection with any proposed or actual assessments of additional income taxes that the compensation received by Consultant hereunder was paid by Company other than in consideration for the consulting services which Consultant is to render hereunder. Section 5. Independent Contractor. In rendering services hereunder, Consultant shall be acting as an independent contractor. This Agreement is not an employment agreement and Consultant is not and will not become by performance of services hereunder an employee of Company. Contractor acknowledges that, as a consultant, he shall not be entitled to any employee benefits, retirement benefits, stock option benefits, health benefits, or other benefits which are customarily made available to employees of Company. Section 6. Partial Restrictive Covenants. 6.1 Definitions. For the purposes of this Agreement: (a) "Company Activities" means the manufacture, distribution and sale of paper and packaging products and other activities engaged in by the Rock-Tenn Group for which Consultant provides consulting services hereunder; (b) "Confidential Information" means any data or information of the Rock- Tenn Group other than Trade Secrets, which is valuable to the Rock-Tenn Group and not generally known to competitors, including, without limitation, general business information, 2 3 industry information, analysis and other information of a proprietary nature that relates to the Rock-Tenn Group or was developed or compiled by the Rock-Tenn Group; (c) "Noncompetition Period" or "Nonsolicitation Period" means the period beginning the date hereof and ending on the second anniversary of the end of the term of engagement of Consultant under this Agreement; (d) "Territory" means the United States of America (excluding the states of Alaska and Hawaii) and the province of Ontario, Canada and all provinces in Canada east of Ontario, such area being where customers and actively sought prospective customers of the Rock-Tenn Group are located; and (e) "Trade Secrets" means information of the Rock-Tenn Group, without regard to form, including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers which is not commonly known by or available to the public and which information: (1) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 6.2 Trade Secrets and Confidential Information. (a) Trade Secrets. Except in the course of providing consulting services hereunder, Consultant will not use or disclose any Trade Secrets for so long as the pertinent information remains Trade Secret information, regardless of whether the Trade Secrets are in written or tangible form. Nothing in this Agreement shall diminish the rights of Company or the Rock-Tenn Group regarding the protection of Trade Secrets and other intellectual property pursuant to applicable law. (b) Confidential Information. Consultant agrees that during the Noncompetition Period, Consultant will hold in confidence all Confidential Information and will not will disclose, publish or make use of Confidential Information except in the course of providing consulting services hereunder. 6.3 Noncompetition. (a) Acknowledgment. Consultant acknowledges that the Rock-Tenn Group conducts Company Activities throughout the Territory and that to adequately protect the interests of Company in the business and goodwill of the Rock-Tenn Group, it is essential that any noncompetition covenant with respect thereto cover all Company Activities and the entire Territory for the duration of the Noncompetition Period. 3 4 (b) Trade Name. Consultant agrees that during the Noncompetition Period, Consultant will not, directly or by assisting others, own, manage, operate, join, control or participate in the ownership, management, operation or control of any business conducted under any corporate, product or trade name or trademark of, the Rock-Tenn Group, or name or mark similar thereto, without the prior written consent of Company. Notwithstanding anything in this Agreement to the contrary, Consultant may use the trade name "Wabash" in any business or venture not engaged in Company Activities. (c) Noncompetition Covenant. Consultant agrees that Consultant will not, during the Noncompetition Period, directly or by assisting others, conduct Company Activities in the Territory or otherwise engage in, have an equity or profit interest in, or render services (of an executive, marketing, manufacturing, research and development, administrative, financial or consulting nature) to any business that conducts any of the Company Activities in the Territory. Notwithstanding anything in this Agreement to the contrary, Consultant may acquire, collectively (directly or indirectly, through trusts or otherwise), up to two percent (2%) of any company whose common stock is publicly traded on a national securities exchange or in the over-the-counter market. (d) Nonsolicitation. Consultant will not, during the Nonsolicitation Period, directly or by assisting others, except in the course of providing consulting services hereunder: (i) solicit or attempt to solicit, any business from any of the Rock-Tenn Group's customers, including actively sought prospective customers, for purposes of providing products or services that are competitive with those provided by the Rock-Tenn Group, or (ii) recruit or solicit or attempt to recruit or solicit, on Consultant's behalf or on behalf of any other person, firm or corporation, any employee of the Rock-Tenn Group. 6.4 Severability. If a judicial or arbitral determination is made that any of the provisions of this Agreement constitutes an unreasonable or otherwise unenforceable restriction against Consultant, the provisions of this Agreement shall be rendered void only to the extent that such judicial or arbitral determination finds such provisions to be unreasonable or otherwise unenforceable with respect to Consultant. In this regard, Consultant hereby agrees that any judicial authority construing this Agreement shall be empowered to sever any portion of the Territory, any prohibited business activity or any time period from the coverage of this Agreement and to apply the provisions of this Agreement to the remaining portion of the Territory, the remaining business activities and the remaining time period not so severed by such judicial or arbitral authority. Moreover, notwithstanding the fact that any provision of this Agreement is determined not to be specifically enforceable, Company shall nevertheless be entitled to recover monetary damages as a result of the breach of such provision by Consultant. 4 5 6.5 Injunctive Relief. Consultant hereby agrees that any remedy at law for any breach of the provisions contained this Agreement shall be inadequate and that Company shall be entitled to injunctive relief in addition to any other remedy Company might have under this Agreement. Consultant agrees that any court of competent jurisdiction should immediately enjoin any breach of this Agreement upon the request of Company, and Consultant specifically releases Company from the requirement of posting bond in connection with temporary or interlocutory injunctive relief, to the extent permitted by law. Section 7. Miscellaneous. 7.1 Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon Consultant and his executor, administrator, heirs, personal representative and assigns, and Company and its successors and assigns; provided, however, that Consultant shall not be entitled to assign or delegate any of his rights or obligations hereunder without the prior written consent of Company. 7.2 No Conflict or Breach. Consultant represents and warrants that neither this Agreement nor the performance by Consultant of the consulting services hereunder breaches any agreement to which Consultant is bound or infringes upon the intellectual property rights, including trade secrets, of any person. 7.3 Governing Law. This Agreement shall be deemed to be made in, and in all respects shall be interpreted, construed and governed by and in accordance with, the laws of the State of Minnesota. 7.4 Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7.5 Notices. Unless otherwise agreed to in writing by the parties hereto, all communications provided for hereunder shall be in writing and shall be deemed to be given when delivered if delivered in person, on the next business day if delivered by telecopy, or five business days after being sent by first-class mail, registered or certified, return receipt requested, with proper postage prepaid, and (a) If to Consultant, addressed to: Mr. Eugene U. Frey 4351 Gulf Shore Boulevard North Unit No. 6, South Naples, Florida 34103 Telecopy No.: (941) 434-2879 5 6 with a copy to: Mr. Morris M. Sherman Leonard, Street and Deinard Suite 2300 150 South Fifth Street Minneapolis, Minnesota 55402 Telecopy No.: (612) 335-1500 (b) If to Company, addressed to: Rock-Tenn Company 504 Thrasher Street Norcross, Georgia 30071 Attention: Chief Financial Officer Telecopy No.: (770) 263-3582 with a copy to: Rock-Tenn Company 504 Thrasher Street Norcross, Georgia 30071 Attention: General Counsel Telecopy No.: (770) 248-4402 or to such other person or address as shall be furnished in writing by any party to the other prior to the giving of the applicable notice or communication. 7.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 7.8 Entire Agreement. This Agreement is intended by the parties hereto to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement may be modified only by a written instrument signed by each of the parties hereto. 7.9 Dispute Resolution. Any dispute arising in connection with this Agreement shall be resolved in the manner set forth in Section 13.12 of the Stock Purchase Agreement dated the date hereof, by and among the Company, Consultant and the other shareholders of Wabash Corporation, a Delaware corporation, relating to the sale of the capital stock of Wabash Corporation. 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ROCK-TENN COMPANY By: /s/ Bradley Currey, Jr. -------------------------------------- Bradley Currey, Jr. Chief Executive Officer CONSULTANT /s/ Eugene U. Frey ------------------------------------------ Eugene U. Frey 7 EX-11 10 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 ROCK-TENN COMPANY COMPUTATION OF EARNINGS PER SHARE (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended September 30, ------------------------------------------------ 1997 1996 1995 ------------------------------------------------ Primary: Average shares outstanding......................................... 33,514 33,201 33,281 Net effect of dilutive stock options - based on the treasury stock method using average market price.................................... 830 813 885 ---------- --------- --------- Total................................................. 34,344 34,014 34,166 ========== ========= ========= Net income available to common shareholders........................ $ 16,101 $ 51,125 $ 41,432 ========== ========= ========= Per share amount................................................... $ .47 $ 1.50 $ 1.21 ========== ========= ========= Fully diluted: Average shares outstanding......................................... 33,514 33,201 33,281 Net effect of dilutive stock options - based on the treasury stock method using the year-end market price if higher than the average market price.......................... 923 918 902 ---------- --------- --------- Total................................................. 34,437 34,119 34,183 ========== ========= ========= Net income available to common shareholders........................ $ 16,101 $ 51,125 $ 41,432 ========== ========= ========= Per share amount................................................... $ .47 $ 1.50 $ 1.21 ========== ========= =========
EX-12 11 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHANGES 1 EXHIBIT 12 ROCK-TENN COMPANY STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Amounts in thousands, except ratios)
Years Ended September 30, ---------------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- -------- ---------- ---------- Fixed Charges: Interest expense............................... $ 3,917 $ 2,736 $ 8,122 $ 10,772 $ 26,466 Amortization of debt issuance costs............ 75 91 265 206 320 Interest capitalized during period............. -- -- -- -- 1,214 Portion of rent expenses representative of interest.................................. $ 1,216 $ 1,035 $ 1,443 $ 2,316 $ 2,584 ------- ------- ------- -------- -------- Fixed Charges.................................. $ 5,208 $ 3,862 $ 9,830 $ 13,294 $ 30,584 ======= ======= ======= ======== ======== Earnings: Pretax income from continuing operations....... $41,470 $60,978 $67,922 $ 82,469 $ 37,756 Fixed charges.................................. 5,208 3,862 9,830 13,294 30,584 ------- ------- ------- -------- -------- Earnings....................................... $46,678 $64,840 $77,752 $ 95,763 $ 68,340 ======= ======= ======= ======== ======== Ratio of Earnings to Fixed Charges...................... 8.96 16.79 7.91 7.20 2.23 ======= ======= ======= ======== ========
EX-13 12 ANNUAL REPORT MD&A 1 FIVE YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS EXHIBIT 13 ROCK-TENN COMPANY
Years ended September 30, (In Thousands, Except Ratios and Per Share Amounts) 1997(B),(C) 1996 1995(d) 1994(e) 1993(f) - ---------------------------------------------------------------------------------------------------------------------- Net sales $1,109,693 $876,111 $902,878 $705,849 $650,673 Income before income taxes 37,756 82,469 67,922 60,978 41,470 Net income 16,101 51,125 41,432 37,501 25,460 - ---------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 106,377 123,530 77,604 57,955 58,428 Capital expenditures 87,016 71,795 73,844 71,672 53,151 Cash paid for purchases of businesses 301,287 - 61,579 34,978 - - ---------------------------------------------------------------------------------------------------------------------- Total assets 1,113,686 581,688 555,254 413,748 355,092 Long-term debt and redeemable preferred stock (debt) 492,340 139,344 144,245 52,090 51,617 Shareholders' equity 371,212 349,155 307,898 281,959 235,030 Ratio of debt to debt plus equity 57.0% 28.5% 31.9% 15.6% 18.0% - ---------------------------------------------------------------------------------------------------------------------- Earnings per common share(a) $ .47 $ 1.50 $ 1.21 $ 1.10 $ .76 Dividends paid per common share(a) .30 .27 .27 .15 .07 Book value per common share(a) 10.80 10.54 9.29 8.46 7.40 - ----------------------------------------------------------------------------------------------------------------------
Notes: (a) Gives effect to a 10% stock dividend paid on November 15, 1996. (b) Effective October 1, 1996, the Company changed its method of depreciation for assets placed in service after September 30, 1996 to the straight-line method. This change was applied on a prospective basis to such assets acquired after that date. The effect of this change was to increase net income by $3,011,000 or $.09 per share in fiscal 1997. (c) Reflects (i) the results of operations of Waldorf Corporation, Rite Paper Products, Inc. and The Davey Company beginning from the respective dates of acquisition, (ii) the results of operations of RTS Packaging, LLC from the date of formation and (iii) a $16.2 million charge to earnings ($14.9 million after tax) for plant closing and other costs. (d) Reflects the results of operations of Olympic Packaging, Inc., beginning January 17, 1995, and Alliance Display and Packaging, beginning January 31, 1995, the dates on which the Company acquired all of the outstanding stock of Olympic and substantially all of the net assets of Alliance, respectively. (e) Reflects the results of operations of Les Industries Ling, Inc., beginning December 3, 1993, the date on which the Company acquired the assets of this business. (f) Income amounts shown are net of $11.8 million of pretax ($7.2 million after tax) of unusual expenses incurred by the Company in connection with certain employee stock option and other transactions. ROCK-TENN COMPANY 17 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY GENERAL - ------------------------------------------------------------------------------- The Company's core businesses are somewhat seasonal with the first fiscal quarter experiencing generally lower sales and earnings due to reduced demand from customers during the period. See Note 11 of Notes to Consolidated Financial Statements. The converted products and paperboard industries are also somewhat cyclical due to industry supply and demand factors and tend to fluctuate with the general business cycle of the U.S. economy. The Company's operations are fixed cost intensive. The Company's converting operations do not have the ability to mitigate the effects of high fixed costs. As a result, unit production costs and earnings from converted products generally vary significantly with shipment levels. However, as a result of its vertical integration, the Company can maintain operating rates at the Company's paperboard mills during periods of reduced demand for recycled paperboard because the Company's paperboard mills can supply an increased portion of the recycled paperboard consumed by the Company's converting operations. The Company's strategy has been to operate its paperboard mills at high operating rates in order to lower unit production costs. During fiscal 1997, 1996 and 1995, the Company's paperboard mills ran at operating rates of 88.8%, 85.72% and 96.72%, respectively. Historically, costs of recovered paper, virgin paperboard and containerboard, the Company's principal raw materials, and the Company's selling prices have fluctuated significantly due to market conditions. The Company is not able to predict whether these costs or selling prices will rise or fall in the future. The Company seeks to manage its raw materials costs through the following measures. First, the Company's ongoing modernization of its manufacturing facilities has reduced waste, which has helped reduce raw materials costs. Second, the Company has sought to maximize its use of the expertise developed by the Recycled Fiber Division's recovered paper buyers in order to purchase recovered paper at lower costs. Third, the Company has invested in equipment that has enabled it to use lower cost grades of recovered paper in the production of its recycled paperboard while maintaining the quality of the end product. On January 21, 1997, the Company acquired all of the outstanding capital stock of the parent of Waldorf Corporation ("Waldorf"), a manufacturer of folding cartons and 100% recycled paperboard and a manufacturer of corrugating medium. On June 9, 1997, the Company acquired substantially all of the assets of Rite Paper Products, Inc. ("Rite Paper"), a manufacturer of laminated paperboard components primarily for the ready-to-assemble furniture industry. On July 9, 1997, the Company acquired substantially all of the assets and certain of the liabilities of The Davey Company ("Davey"), a manufacturer of recycled paperboard used by the book manufacturing industry for book covers. On September 5, 1997, the Company and Sonoco Products Company combined their respective fiber partition businesses into a new entity named RTS Packaging, LLC ("RTS Packaging") which is owned 65% by the Company. See Note 2 of Notes to Consolidated Financial Statements. ROCK-TENN COMPANY 18 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY SEGMENT DATA - ------------------------------------------------------------------------------- The Company operates in two industry segments: converted products and paperboard. See Note 10 of Notes to Consolidated Financial Statements. The converted products segment is comprised of facilities that produce folding cartons, laminated paperboard products, fiber partitions, corrugated containers, corrugated displays and thermoformed plastic products. The paperboard segment consists of facilities that manufacture 100% recycled clay-coated and uncoated paperboard and recycled corrugating medium and that collect recovered paper. Intersegment sales are accounted for at prices that approximate market prices.
Fiscal Years Ended September 30, (In Millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------- Net sales (aggregate): Converted products $ 938.7 $ 779.7 $ 757.7 Paperboard 391.8 281.4 329.4 - ---------------------------------------------------------------------------------------- Total $ 1,330.5 $ 1,061.1 $ 1,087.1 - ---------------------------------------------------------------------------------------- Net sales (intersegment): Converted products $ 1.2 $ 0.4 $ 0.4 Paperboard 219.6 184.6 183.8 - ---------------------------------------------------------------------------------------- Total $ 220.8 $ 185.0 $ 184.2 - ---------------------------------------------------------------------------------------- Net sales (unaffiliated customers): Converted products $ 937.5 $ 779.3 $ 757.3 Paperboard 172.2 96.8 145.6 - ---------------------------------------------------------------------------------------- Total $ 1,109.7 $ 876.1 $ 902.9 - ---------------------------------------------------------------------------------------- Operating income: Converted products $ 26.4 $ 35.2 $ 31.2 Paperboard 46.4 64.4 51.4 - ---------------------------------------------------------------------------------------- 72.8 99.6 82.6 Corporate expense (8.6) (7.5) (6.6) - ---------------------------------------------------------------------------------------- Income from operations 64.2 92.1 76.0 Interest expense (26.8) (10.9) (8.4) Interest income 0.7 1.3 0.3 Minority interest in income of consolidated subsidiary (0.4) - - - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Income before income taxes $ 37.7 $ 82.5 $ 67.9 - ---------------------------------------------------------------------------------------- RESULTS OF OPERATIONS - ----------------------------------------------------------------------------------------
FISCAL 1997 COMPARED TO FISCAL 1996 Net Sales (Unaffiliated Customers). Net sales for fiscal 1997 increased 26.7% to $1,109.7 million from $876.1 million for fiscal 1996. Net sales increased primarily as a result of the Waldorf acquisition. Net Sales (Aggregate) - Converted Products Segment. Net sales of converted products before intersegment eliminations for fiscal 1997 increased 20.4% to $938.7 from $779.7 for fiscal 1996. The increase was primarily the result of the Waldorf acquisition. Net Sales (Aggregate) - Paperboard Segment. Net sales of paperboard before intersegment eliminations for fiscal 1997 increased 39.2% to $391.8 million from $281.4 million for fiscal 1996. The ROCK-TENN COMPANY 19 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY increase was primarily the result of the Waldorf acquisition. Cost of Goods Sold. Cost of goods sold for fiscal 1997 increased 32.4% to $832.2 million from $628.6 million for fiscal 1996. Cost of goods sold as a percentage of net sales for fiscal 1997 increased to 75.0% from 71.7% for fiscal 1996. The increase in cost of goods sold as a percentage of net sales is primarily the result of lower average selling prices during fiscal 1997 and a higher cost of goods sold as a percentage of net sales for the business acquired in the Waldorf acquisition compared to the Company's existing business. In addition, the corrugating medium business acquired in the Waldorf acquisition incurred losses during fiscal 1997. Substantially all U.S. inventories of the Company are valued at the lower of cost or market with cost determined on the last-in, first-out (LIFO) inventory valuation method, which management believes generally results in a better matching of current costs and revenues than under the first-in, first-out (FIFO) inventory valuation method. In periods of decreasing costs, the LIFO method generally results in lower cost of goods sold than under the FIFO method. In periods of increasing costs, the results are generally the opposite. Since some of the Company's competitors principally use the FIFO method, the following supplemental data is presented to illustrate the comparative effect of LIFO and FIFO accounting on the Company's results of operations. Cost of goods sold determined under the LIFO method was the same as it would have been and $5.9 million lower than it would have been under the FIFO method for fiscal 1997 and 1996, respectively. Net income was the same as it would have been and $3.7 million higher than it would have been under the FIFO method for fiscal 1997 and 1996, respectively. These supplemental FIFO earnings reflect the after tax effect of LIFO each year. Gross Profit. Gross profit for fiscal 1997 increased 12.1% to $277.5 million from $247.5 million for fiscal 1996. Gross profit as a percentage of net sales decreased to 25.0% for fiscal 1997 from 28.3% for fiscal 1996. The decrease in gross profit as a percentage of net sales for fiscal 1997 was primarily the result of reductions in average selling prices and the impact of the Waldorf acquisition discussed above. Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 1997 increased 29.8% to $197.1 million from $151.8 million for fiscal 1996. Selling, general and administrative expenses as a percentage of net sales for fiscal 1997 increased to 17.8% from 17.3% for fiscal 1996. The increase in selling, general and administrative expenses as a percentage of net sales for fiscal 1997 resulted from decreased average selling prices and increased freight costs, increased salary and benefit costs and an increase in goodwill amortization expense resulting from the Waldorf acquisition. Plant Closings and Other Costs. In connection with the Waldorf acquisition, the Company reviewed the combined operations of Rock-Tenn and Waldorf in order to most efficiently serve its markets, eliminate geographic overlaps and coordinate production. In connection with this review, management decided to close the Company's existing folding carton plant at Mundelein, Illinois. The Mundelein facility was acquired in the acquisition of Olympic Packaging in 1995. In connection with this closing and considering the impact of the Waldorf acquisition, the Company incurred a charge to net income of approximately $12.8 million during fiscal 1997 which consisted primarily of the non-cash write-off of goodwill associated with the Company's Olympic Packaging subsidiary. The write-off of goodwill was required based upon the decision to close the Mundelein facility and the determination that such goodwill would not be recoverable. The Company incurred additional costs of approximately $1.6 million ($1.0 million after tax) during fiscal 1997 principally for ROCK-TENN COMPANY 20 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY employee termination and related charges associated with closing the Mundelein facility. In June of 1997, management decided to close a plastics recycling facility located in Indianapolis, Indiana. As a result, the Company recorded charges of approximately $1.8 million ($1.1 million after tax) related to the estimated losses on disposal of the machinery and equipment. SEGMENT OPERATING INCOME Operating Income - Converted Products Segment. Operating income attributable to the converted products segment for fiscal 1997 decreased 25.0% to $26.4 million from $35.2 million for fiscal 1996. Operating margin for fiscal 1997 was 2.8% and was 4.5% for fiscal 1996. Excluding $16.2 million of plant closing and other related costs, operating income attributable to the converted products segment for fiscal 1997 increased 21.0% to $42.6 million from $35.2 million for fiscal 1996. Excluding the effect of $16.2 million of plant closing and other related costs, operating margin for fiscal 1997 and fiscal 1996 was 4.5%. The converted products business acquired in the Waldorf acquisition experienced a lower operating margin in fiscal 1997 than the Company's converted products segment in fiscal 1996. The Company's folding carton (excluding those facilities acquired in the Waldorf acquisition), partition and plastics businesses experienced a higher operating margin in fiscal 1997 than in fiscal 1996. The higher operating margin achieved in these businesses was primarily the result of increased productivity and higher volumes which resulted in better absorption of fixed overhead costs. During the fourth quarter of fiscal 1997, the Company began implementing price increases with respect to most of its converted products to recover cost increases in paperboard. Historically, the Company's Lynchburg converting facility has incurred significant operating losses. During the fourth quarter of fiscal 1996, the laminated recycled paperboard book cover panels operation at this facility was closed and relocated to other manufacturing facilities. A second converting operation which manufactures laminated recycled paperboard furniture panels continues to operate in Lynchburg. This remaining operation continues to incur significant operating losses. The Company is currently evaluating alternatives to reduce these losses, including relocation of this operation to other manufacturing facilities. While the Company has not yet determined which alternative to pursue, the cost of some alternatives may have a significant one-time negative effect on the results of operations of the converted products segment. Operating Income - Paperboard Segment. Operating income attributable to the paperboard segment for fiscal 1997 decreased 28.0% to $46.4 million from $64.4 million for fiscal 1996. Operating margins for fiscal 1997 declined to 11.8% from 22.9% in fiscal 1996. The decrease in operating income and margin for fiscal 1997 was primarily the result of significant losses incurred by the corrugating medium business acquired in the Waldorf acquisition, an increase in the weighted average cost of recovered paper, the segment's primary raw material, and lower average selling prices, which were partially offset by higher volumes shipped. Weighted average paperboard net selling prices (excluding corrugating medium) decreased to $397 per ton for fiscal 1997 from $425 per ton for fiscal 1996. The Company's weighted average cost per ton of recovered paper during fiscal 1997 increased to $56 per ton compared to $51 per ton during fiscal 1996. Tons of paperboard shipped (excluding corrugating medium) increased to 864,000 for fiscal 1997 from 627,000 for fiscal 1996, primarily as a result of the Waldorf acquisition. In July 1997, the Company announced price increases for coated and uncoated recycled paperboard averaging $45 per ton. These price increases will generally become effective in the first and second fiscal quarters of 1998. During fiscal 1997, the Company shipped 98,000 tons of corrugating medium at a weighted average net selling price of $247. A majority of the Company's recycled corrugating medium is sold under contracts under which prices are based on the price published in an industry publication, Pulp and Paper Week ("PPW Price"). The applicable PPW Price increased by $40 in July 1997, $50 in August 1997 and $50 in October 1997. ROCK-TENN COMPANY 21 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY Interest Expense. Interest expense for fiscal 1997 increased to $26.8 million from $10.9 million for fiscal 1996. The increase in interest expense was primarily due to an increase in the average outstanding borrowings resulting from the Waldorf acquisition and the Rite Paper acquisition. Provision for Income Taxes. Provision for income taxes for fiscal 1997 decreased to $21.7 million from $31.4 million for fiscal 1996. Excluding the effect of the $12.8 million non-cash write-off of the goodwill associated with the Olympic Packaging acquisition, which is not deductible for income tax purposes, the Company's effective tax rate increased to 42.8% for fiscal 1997 compared to 38.0% for fiscal 1996. This increase in the effective tax rate was primarily due to the effect of amortization of goodwill associated with the Waldorf acquisition that is not deductible for income tax purposes. Net Income and Earnings Per Common and Common Equivalent Share. Net income for fiscal 1997 decreased 68.5% to $16.1 million from $51.1 million for fiscal 1996. Net income as a percentage of net sales decreased to 1.5% for fiscal 1997 from 5.8% for fiscal 1996. Earnings per common and common equivalent share for fiscal 1997 decreased to $.47 from $1.50 for fiscal 1996. FISCAL 1996 COMPARED TO FISCAL 1995 Net Sales (Unaffiliated Customers). Net sales for fiscal 1996 decreased 3.0% to $876.1 million from $902.9 million for fiscal 1995. This decrease resulted from reduced customer demand and reduced selling prices, which were offset partially by sales increases resulting from the acquisitions of Olympic Packaging, Inc. ("Olympic") and Alliance Display and Packaging ("Alliance") during January 1995. See Note 2 of Notes to Consolidated Financial Statements. Net Sales (Aggregate) - Converted Products Segment. Net sales of converted products before intersegment eliminations for fiscal 1996 increased 2.9% to $779.7 million from $757.7 million for fiscal 1995. This increase was primarily the result of the acquisitions of Alliance and Olympic during January 1995, which was partially offset by reduced customer demand for converted products. Net Sales (Aggregate) - Paperboard Segment. Net sales of paperboard before intersegment eliminations for fiscal 1996 decreased 14.6% to $281.4 million from $329.4 million for fiscal 1995. This decrease resulted from a 10.2% decrease in tons shipped and a 1.3% decrease in average selling prices for fiscal 1996. The decrease in tons shipped was primarily the result of (i) a reduction by several outside customers of their purchases of paperboard manufactured by the Company as they increased consumption of internally manufactured paperboard and (ii) reduced customer demand. Average paperboard prices decreased throughout fiscal 1996 and increased throughout fiscal 1995. Cost of Goods Sold. Cost of goods sold for fiscal 1996 decreased 8.6% to $628.6 million from $687.4 million for fiscal 1995. Cost of goods sold as a percentage of net sales for fiscal 1996 decreased to 71.7% from 76.1% for fiscal 1995. The decrease in cost of goods sold and cost of goods sold as a percentage of net sales was primarily the result of a decrease in the cost of raw materials including recovered paper. Substantially all U.S. inventories of the Company are valued at the lower of cost or market with cost determined on the last-in, first-out (LIFO) inventory valuation method, which management believes generally results in a better matching of current costs and revenues than under the first-in, first-out (FIFO) inventory valuation method. In periods of decreasing costs, the LIFO method generally results in lower cost of goods sold than under the FIFO method. In periods of increasing costs, the results are generally the opposite. Since some of the Company's competitors principally use the FIFO method, the following supplemental data is presented to illustrate the comparative effect of LIFO and FIFO accounting on the Company's results of operations. Cost of goods sold determined under the LIFO method was ROCK-TENN COMPANY 22 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY $5.9 million lower and $9.4 million higher than it would have been under the FIFO method for fiscal 1996 and 1995, respectively. Net income was $3.7 million ($.11 per share) higher and $5.7 million ($.17 per share) lower than it would have been under the FIFO method for fiscal 1996 and 1995, respectively. These supplemental FIFO earnings reflect the after tax effect of LIFO each year. Gross Profit. Gross profit for fiscal 1996 increased 14.8% to $247.5 million from $215.5 million for fiscal 1995. Gross profit as a percentage of net sales increased to 28.3% for fiscal 1996 from 23.9% for fiscal 1995. The increase in gross profit as a percentage of net sales was primarily the result of the decreased cost of recovered paper, the Company's primary raw material, and increased manufacturing efficiencies in the Company's laminated paperboard products converting division and at the Company's Missisquoi mill in Vermont, which were partially offset by the impact of reduced volumes in several divisions. Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 1996 increased 8.8% to $151.8 million from $139.5 million for fiscal 1995. Selling, general and administrative expenses as a percentage of net sales for fiscal 1996 increased to 17.3% from 15.5% for fiscal 1995. This increase in selling, general and administrative expenses as a percentage of net sales resulted primarily from an increase in selling and personnel costs as well as a decrease in net sales for fiscal 1996 as compared to fiscal 1995. SEGMENT OPERATING INCOME Operating Income - Converted Products Segment. Operating income attributable to the converted products segment for fiscal 1996 increased 12.8% to $35.2 million from $31.2 million for fiscal 1995. Operating margin for fiscal 1996 was 4.5% compared to 4.1% for fiscal 1995. The increases in operating income and operating margin were primarily the result of (i) improvements in productivity and efficiency in the production of laminated paperboard products as a result of further implementation of equipment with new technology, (ii) an increase in customer demand for converted products in the fourth quarter and (iii) increases in operating income earned at the Alliance facility, all of which were partially offset by nonrecurring expenses of approximately $3.6 million ($.07 per share after taxes) consisting primarily of employee severance, employee relocation and training costs, asset impairment, equipment and inventory relocation costs and lease termination costs related to a facility closure and consolidation plan. This plan involved the closing of the Company's laminated recycled paperboard book cover panels operation in Lynchburg, Virginia and the relocation of such operations to other Rock-Tenn manufacturing facilities, the conversion of the Company's Vineland, New Jersey recycled paperboard partition plant to a manufacturer of book cover panels and other recycled paperboard products, the closing of the Macon, Georgia partition plant and the start-up of a recently purchased partition plant in Hartwell, Georgia to absorb some of the Vineland, New Jersey and most of the Macon, Georgia partition production. See Note 2 of Notes to Consolidated Financial Statements. Operating Income - Paperboard Segment. Operating income attributable to the paperboard segment for fiscal 1996 increased 25.3% to $64.4 million from $51.4 million for fiscal 1995. Operating margin for fiscal 1996 was 22.9% compared to 15.6% for fiscal 1995. The increase in operating income and margin was the result of decreases in the cost of recovered paper, the primary raw material utilized in this segment, which were partially offset by decreases in tons of paperboard shipped. The Company's weighted average cost per ton of recovered paper during fiscal 1996 was $51 compared to $132 for fiscal 1995. Interest Expense. Interest expense for fiscal 1996 increased 29.8% to $10.9 million from $8.4 million for fiscal 1995. The increase in interest expense is primarily due to an increase in the Company's average borrowing rate and an increase in average borrowings. ROCK-TENN COMPANY 23 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY Provision for Income Taxes. Provision for income taxes increased 18.1% to $31.4 million for fiscal 1996 from $26.5 million for fiscal 1995. The Company's effective tax rate decreased to 38.0% for fiscal 1996 compared to 39.0% for fiscal 1995. This decrease is partially attributable to a lower estimated effective state income tax rate during fiscal 1996. Net Income and Earnings Per Common and Common Equivalent Share. Net income for fiscal 1996 increased 23.4% to $51.1 million from $41.1 million for fiscal 1995. Net income as a percentage of net sales increased to 5.8% for fiscal 1996 from 4.6% for fiscal 1995. Earnings per common and common equivalent share for fiscal 1996 increased 24.0% to $1.50 from $1.21 for fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------------------------------------------------------- The Company has funded its working capital requirements and capital expenditures (including acquisitions) 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. In January 1997, the Company entered into a new revolving credit facility, which it amended in June 1997 to increase the aggregate borrowing availability thereunder to $450.0 million. At September 30, 1997, the Company had $386.0 million outstanding under its new revolving credit facility. Cash and cash equivalents, $3.3 million at September 30, 1997, decreased from $50.9 million at September 30, 1996. Net cash provided by operating activities for fiscal 1997 was $106.4 million compared to $123.5 million for fiscal 1996. This decrease was primarily the result of decreased earnings before depreciation and amortization and less significant decreases in net operating asset requirements than compared to fiscal 1996. Net cash provided by financing activities aggregated $233.7 million for fiscal 1997 and consisted primarily of borrowings under the Company's $450.0 million revolving credit facility, net of scheduled repayments of long-term debt, repayments of certain acquired indebtedness of Waldorf and Davey and dividend payments. Net cash used for financing activities aggregated $26.4 million for fiscal 1996 and consisted primarily of repayments of long-term debt and dividend payments. Net cash used for investing activities was $387.5 million for fiscal 1997 compared to $67.8 million for fiscal 1996 and consisted primarily of cash paid for the Waldorf acquisition, the Rite Paper acquisition and capital expenditures for fiscal 1997 and capital expenditures for fiscal 1996. Net cash provided by operating activities for fiscal 1996 was $123.5 million compared to $77.6 million for fiscal 1995. This increase was primarily the result of reduced net operating asset requirements as well as increased earnings before depreciation and amortization. Net cash used for financing activities aggregated $26.4 million including $17.9 million for repayment of scheduled maturities of term notes and $9.1 million for dividends paid on outstanding capital stock. The Company's capital expenditures aggregated $87.0 million for fiscal 1997. These expenditures were used primarily for the purchase and upgrading of certain machinery and equipment in essentially all of the Company's divisions, warehouse expansions and facility relocations in two of the Company's divisions and a new building at the Company's home office. The Company estimates that its capital expenditures will aggregate approximately $75.0 million in fiscal 1998. These expenditures will be used for the purchase and upgrading of certain machinery and equipment in essentially all of the Company's divisions and building expansions and improvements in two of the Company's divisions. The Company historically has expanded its business through the acquisition of other related businesses. The recycled paperboard and converted paperboard products industries have undergone significant consolidation in recent years, and the Company believes it will be able to capitalize on this trend in the future. ROCK-TENN COMPANY 24 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY The Company, however, is currently in the process of integrating the operations it acquired during fiscal 1997 into the Company's other operations and rationalizing the operations contributed to RTS Packaging. Consequently, although the Company cannot predict the extent to which it will pursue future acquisitions, the Company currently expects that it will be less likely to pursue additional acquisitions in the near term. On January 21, 1997, the Company completed the Waldorf acquisition for approximately $239.0 million in cash. In addition, in connection with the Waldorf acquisition, the Company (i) made certain payments on the closing date aggregating $32.6 million relating to the settlement of a contingent interest agreement with a former creditor of Waldorf and the termination of Waldorf's Stock Appreciation Rights Plan and (ii) accrued as a cost of the purchase $4.9 million in connection with the planned termination of approximately 120 employees of Waldorf, principally certain senior executives and other employees at the Waldorf corporate office. The Waldorf acquisition was financed with available cash and borrowings under the Company's $450.0 million revolving credit facility. On June 9, 1997, the Company completed the Rite Paper acquisition. This acquisition was financed with borrowings under the Company's $450.0 million revolving credit facility. On July 9, 1997, the Company completed the Davey acquisition. The acquisition was financed through the issuance of 863,500 shares of the Company's Class A common stock subject to certain final adjustments. On September 5, 1997, the Company and Sonoco Products Company combined their respective fiber businesses into a new entity named RTS Packaging, LLC. No cash was contributed by the Company. Pursuant to the agreement, the Company owns 65% of the entity and supplies at least 65% of the entity's paperboard needs. The Board of Directors has authorized the Company to repurchase from time to time prior to July 31, 1998 up to 1.5 million shares of Class A common stock in open market transactions on the New York Stock Exchange. In addition, the Board has authorized the Company to repurchase from time to time shares of Class B common stock pursuant to certain first offer rights contained in the Company's Restated and Amended Articles of Incorporation, provided that the aggregate number of shares of Class A and Class B common stock purchased under these programs may not exceed 1.5 million shares. During fiscal 1997, the Company did not repurchase any shares of Class A or Class B common stock. As of September 30, 1997, an aggregate of 716,500 shares had been repurchased under these programs. The Company anticipates that it will be able to fund its capital expenditures, acquisitions, interest expense, stock repurchases, dividends and working capital needs for the foreseeable future from cash generated from operations, borrowings under its revolving credit facility, proceeds from the issuance of debt or equity securities or other additional long-term debt financing. The Company is utilizing both internal and external resources to evaluate the potential impact of the situation commonly referred to as the "Year 2000 problem." The Year 2000 problem, which is common to most businesses, concerns the inability of computer systems and devices to properly recognize and process date-sensitive information when the year changes to 2000. The Company currently believes it will be able to modify, upgrade or replace its affected systems and devices in time to minimize any detrimental effects on operations. While it is not possible at present to give an accurate estimate of the cost of this work, the Company expects that such costs may be material to the Company's results of operations in one or more fiscal quarters or years, but will not have a material adverse impact on the long-term results of operations, liquidity or financial position of the Company. EXPENDITURES FOR ENVIRONMENTAL COMPLIANCE - ------------------------------------------------------------------------------- The Company does not believe that future compliance with environmental and health and safety laws and regulations will have any material adverse effect on its results of operations or financial con- ROCK-TENN COMPANY 25 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY dition. However, environmental, health and safety laws and regulations are becoming increasingly stringent. Consequently, unforeseen expenditures required to comply with such laws and regulations, including remediation costs, or unforeseen environmental liabilities could have a material adverse effect on the Company's financial condition or results of operations. In addition, the Company cannot with certainty assess at this time the impact upon its operations or capital expenditure requirements of the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act. However, although there can be no assurance, the Company believes that any such impact or capital expenditures will not have a material adverse effect on the Company's financial condition or results of operations. The Company may choose to modify or replace the coal fired boilers at two of its facilities in order to operate cost effectively while complying with emissions regulations under the Clean Air Act. The Company estimates these improvements will cost approximately $3.0 million; however, the Company may spend more on these improvements to reduce its energy costs at such facilities. In addition, the Company estimates that it will spend an additional $0.5 million for capital expenditures during fiscal 1998 in connection with other matters relating to environmental compliance. The Company has been identified as a potentially responsible party ("PRP") at ten Superfund sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or comparable state statutes. Except with respect to the Muncie Racetrack site ("Muncie Site"), no remediation costs or allocations have been determined with respect to such sites. With respect to the Muncie Site, approximately $3.2 million has been spent to date by certain PRPs other than the Company in connection with soil remediation activities and studies. The Company was notified of its final allocation of liability of approximately $9,300 on September 23, 1996 for the surface contamination at the site. This amount represents 0.3% of the site remediation costs. The Company believes that no further soil remediation activities will be required. However, additional costs may be required in connection with the investigation and remediation of groundwater contamination, and the Company does not currently have sufficient information to estimate such costs. In addition, a water treatment lagoon at one of the Company's facilities is included with an adjacent former landfill owned by a third party that is being investigated as a CERCLA site for potential addition to the National Priority List ("NPL"). Based upon information currently available, the Company believes that it has no material liability at this site. However, there can be no assurance that such lagoon, together with the landfill, will not be added to the NPL as a Superfund site or that the Company will not be required to conduct some remediation in the future. 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 the Company's financial condition or results of operations. On December 1, 1995, a suit was filed by a private party against, among others, the Company in the United States District Court for the Western District of Michigan alleging that the Company is jointly and severally liable under federal and state law for the release of certain hazardous materials at the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site. No specific amounts have been asserted by the plaintiff with respect to this matter, however, the eventual amounts could be material. The Company has responded to and denies any liability with respect to this matter and is vigorously defending against these claims. The Company cannot currently predict whether the plaintiff will prevail on its claims or the magnitude of any potential recovery, if any. ROCK-TENN COMPANY 26 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY NEW ACCOUNTING STANDARDS AND DEPRECIATION METHOD - ------------------------------------------------------------------------------- DEPRECIATION CHANGE Effective October 1, 1996, the Company changed its method of depreciation for machinery and equipment placed in service after September 30, 1996 to the straight-line method. This change was applied on a prospective basis to such assets acquired after that date. The Company's previous policy of depreciation for additions of machinery and equipment was the 150% declining balance method. Assets placed in service prior to the effective date of the change continue to be depreciated using accelerated methods. The Company changed its method of depreciation based upon 1) management's shift in operating style over the last several years to focus on capital and technological improvements and related changes in maintenance, 2) management's belief that straight-line provides a better matching of costs and revenues and 3) the fact that the straight-line method is the predominant industry practice. Given these circumstances, management believes the straight-line method is preferable. There is no cumulative effect of this change. The effect of this change on net income for fiscal 1997 was to increase net income by approximately $3,011,000, or $.09 per share. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 128 ("SFAS 128") establishes accounting standards for computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock. The Company is required to adopt this statement in fiscal 1998. See Note 1 of Notes to Consolidated Financial Statements for the disclosure of the pro forma effect of SFAS 128 on the periods presented. Statement of Financial Accounting Standards No. 130 ("SFAS 130") establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Statement of Financial Accounting Standards No. 131 ("SFAS 131") establishes standards for disclosures of segment information about products and services, geographic areas, major customers and certain interim disclosures of segment information which is not required by accounting standards currently applied by the Company. These statements are required to be adopted as of October 1, 1998. The Company does not anticipate that SFAS 130 will have a material impact on the Company's consolidated financial statements. The Company is currently evaluating SFAS 131 and has not yet determined its impact on the Company's consolidated financial statements. In October 1996, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 96-1 ("SOP 96-1"). SOP 96-1 provides accounting guidance on issues relating to the recognition, measurement and disclosure of environmental liabilities. The Company is required to adopt this statement in the first quarter of fiscal 1998. The Company does not anticipate that SOP 96-1 will have a material impact on the Company's consolidated financial statements. FORWARD-LOOKING STATEMENTS - ------------------------------------------------------------------------------- Statements herein regarding, among other things, estimated capital expenditures for fiscal 1998, expected expenditures for environmental, health and safety law compliance and the expected impact of announced price increases for the Company's converted products and paperboard 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 such 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, health and safety laws, the expected resolution of various pending environmental matters and the extent and timing of, and customer response to, announced price increases. Such statements are subject to certain risks including, among others, that the amount of necessary capital expenditures has been underestimated, the cost of compliance with environmental, health and safety laws has been underestimated, expected outcomes of various pending environmental matters are inaccurate and that announced price increases will not be fully realized. In addition, the Company's performance in future periods is subject to other risks including, among others, decreases in demand for the Company's products, increases in raw material costs, fluctuations in selling prices and adverse changes in general market and industry conditions. Management believes these estimates are reasonable; however, undue reliance should not be placed on such estimates, which are based on current expectations. ROCK-TENN COMPANY 27 12 CONSOLIDATED STATEMENTS OF INCOME ROCK-TENN COMPANY
Years Ended September 30, (In Thousands, Except Per Share Data) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Net sales $1,109,693 $ 876,111 $ 902,878 Cost of goods sold 832,157 628,622 687,377 - ---------------------------------------------------------------------------------------------------------------------- Gross profit 277,536 247,489 215,501 Selling, general and administrative expenses 197,109 151,752 139,534 Plant closing and other costs 16,251 3,580 - - ---------------------------------------------------------------------------------------------------------------------- Income from operations 64,176 92,157 75,967 Interest expense (26,787) (10,978) (8,387) Interest income 718 1,290 342 Minority interest in income of consolidated subsidiary (351) - - - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 37,756 82,469 67,922 Provision for income taxes (Note 6) 21,655 31,344 26,490 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 16,101 $ 51,125 $ 41,432 - ---------------------------------------------------------------------------------------------------------------------- Earnings per common and common equivalent share (Note 1) $ .47 $ 1.50 $ 1.21 - ----------------------------------------------------------------------------------------------------------------------
See accompanying notes. ROCK-TENN COMPANY 28 13 CONSOLIDATED BALANCE SHEETS ROCK-TENN COMPANY
September 30, (In Thousands, Except Share and Per Share Data) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 3,345 $ 50,876 Accounts receivable (net of allowances of $3,632 and $3,094) 115,162 78,041 Inventories (Note 1) 94,035 58,505 Other current assets 5,073 1,908 - ---------------------------------------------------------------------------------------------------------------------- Total current assets 217,615 189,330 Property, plant and equipment, at cost (Note 1): Land and buildings 163,528 113,059 Machinery and equipment 696,039 478,181 Transportation equipment 13,636 12,106 Leasehold improvements 4,117 4,049 - ---------------------------------------------------------------------------------------------------------------------- 877,320 607,395 Less accumulated depreciation and amortization (326,146) (272,541) - ---------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 551,174 334,854 Goodwill (net of accumulated amortization of $10,321 and $5,015) 325,697 48,632 Other assets 19,200 8,872 - ---------------------------------------------------------------------------------------------------------------------- $1,113,686 $ 581,688 - ---------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 54,471 $ 28,555 Accrued compensation and benefits 34,500 21,838 Current maturities of long-term debt (Note 4) 41,282 7,260 Other current liabilities 21,892 11,296 - ---------------------------------------------------------------------------------------------------------------------- Total current liabilities 152,145 68,949 Long-term debt due after one year (Note 4) 492,340 139,344 Deferred income taxes (Note 6) 78,288 23,136 Other liabilities 6,296 1,104 Commitments and contingencies (Notes 5 and 9) Minority interest 13,405 - Shareholders' equity (Note 3): Preferred stock, $.01 par value; 50,000,000 shares authorized; no shares outstanding at September 30, 1997 and 1996 - - Class A common stock, $.01 par value; 175,000,000 shares authorized; 22,582,976 outstanding at September 30, 1997 and 21,178,313 outstanding at September 30, 1996, Class B common stock, $.01 par value; 60,000,000 shares authorized; 11,791,350 outstanding at September 30, 1997 and 11,949,097 outstanding at September 30, 1996 344 331 Capital in excess of par value 126,363 109,879 Retained earnings 245,592 239,561 Other (1,087) (616) - ---------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 371,212 349,155 - ---------------------------------------------------------------------------------------------------------------------- $ 1,113,686 $ 581,688 - ----------------------------------------------------------------------------------------------------------------------
See accompanying notes. ROCK-TENN COMPANY 29 14 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ROCK-TENN COMPANY
Class A and Class B common stock Capital in ------------------- excess of Retained (In Thousands, Except Share and Per Share Data) Shares Amount par value earnings Other Total - ----------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1994 30,278,837 $303 $ 47,377 $234,710 $ (431) $281,959 Net income - - - 41,432 - 41,432 Cash dividends - $.27 per share - - - (9,078) - (9,078) Sales of common stock 314,370 3 1,696 - - 1,699 Purchases of Class A common stock (459,500) (5) (728) (6,812) - (7,545) Purchases of Class B common stock (13,446) - (214) - - (214) Income tax benefit from exercise of stock options - - 551 - - 551 Foreign currency translation adjustments - - - - 317 317 Pension adjustments - - - - (1,223) (1,223) - ----------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 30,120,261 301 48,682 260,252 (1,337) 307,898 Net income - - - 51,125 - 51,125 Cash dividends - $.27 per share - - - (9,064) - (9,064) Sales of common stock 212,566 2 2,489 - - 2,491 Purchases of Class A common stock (217,000) (2) (364) (3,650) - (4,016) Foreign currency translation adjustments - - - - (658) (658) Pension adjustments - - - - 1,379 1,379 Effect of 10% stock dividend paid on November 15, 1996 3,011,583 30 59,072 (59,102) - - - ----------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1996 33,127,410 331 109,879 239,561 (616) 349,155 Net income - - - 16,101 - 16,101 Cash dividends - $.30 per share - - - (10,070) - (10,070) Sales of common stock 383,416 4 4,055 - - 4,059 Income tax benefit from exercise of stock options - - 272 - - 272 Stock issued in conjunction with acquisition 863,500 9 12,157 - - 12,166 Foreign currency translation adjustments - - - - (520) (520) Pension adjustments - - - - 49 49 - ----------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1997 34,374,326 $344 $126,363 $245,592 $(1,087) $371,212 - -----------------------------------------------------------------------------------------------------------------------
See accompanying notes. ROCK-TENN COMPANY 30 15 CONSOLIDATED STATEMENTS OF CASH FLOWS ROCK-TENN COMPANY
Years Ended September 30, (In Thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 16,101 $ 51,125 $ 41,432 Items in income not affecting cash: Depreciation and amortization 62,117 48,564 43,191 Plant closing and other costs 14,686 - - Deferred income taxes 5,017 5,105 6,398 (Gain) loss on sale of property, plant and equipment (373) (459) 66 Minority interest in income of consolidated subsidiary 351 - - Change in operating assets and liabilities (excluding acquisitions): Accounts receivable (7,343) 10,043 (10,760) Inventories (253) 4,990 3,593 Other assets 17,408 5,657 (9,676) Accounts payable 7,484 (1,238) 1,761 Accrued liabilities (8,818) (257) 942 Income taxes payable - - 657 - ---------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 106,377 123,530 77,604 FINANCING ACTIVITIES: Net additions to revolving credit facilities 385,570 432 - Additions to long-term debt 5,000 1,933 105,106 Repayment of long-term debt (150,775) (17,863) (22,685) Debt issuance costs (124) (281) (627) Sales of common stock 4,059 2,491 1,699 Purchases of common stock - (4,016) (7,759) Cash dividends paid (10,070) (9,064) (9,078) - ---------------------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities 233,660 (26,368) 66,656 INVESTING ACTIVITIES: Cash paid for purchases of businesses, net of cash received (301,287) - (61,579) Capital expenditures (87,016) (71,795) (73,844) Proceeds from sale of property, plant and equipment 1,364 2,172 1,721 (Increase) decrease in unexpended industrial revenue bond proceeds (610) 2,210 (2,067) Cash paid for intangibles - (356) (2,280) - ---------------------------------------------------------------------------------------------------------------------- Cash used for investing activities (387,549) (67,769) (138,049) Effect of exchange rate changes on cash (19) (49) 94 - ---------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (47,531) 29,344 6,305 Cash and cash equivalents at beginning of year 50,876 21,532 15,227 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 3,345 $ 50,876 $ 21,532 - ---------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes, net of refunds $ 784 $ 22,288 $ 23,810 Interest, net of amounts capitalized 29,249 10,719 7,213 Supplemental disclosure of noncash investing and financing activities: Indebtedness assumed in connection with acquisitions 147,226 - 25,616 Fair value of common stock issued to acquire assets 12,166 - - Assets contributed by minority interest 13,054 - -
See accompanying notes. ROCK-TENN COMPANY 31 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------------------------------------- DESCRIPTION OF BUSINESS. The Company manufactures and distributes 100% recycled paperboard, converted paperboard products 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 services 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. 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 will differ from those estimates and the differences could be material. REVENUE RECOGNITION POLICY. The Company recognizes revenue when title to the goods sold passes to the buyer, which is generally at the time of shipment. 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 stated 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 12.2% and 10.5% of FIFO cost at September 30, 1997 and 1996, respectively. Inventories at September 30, 1997 and 1996 are as follows (in thousands):
September 30, 1997 1996 ---------------------------------------------------------------------- Finished goods and work in process $ 64,933 $ 46,796 Raw materials 37,474 26,583 Supplies 12,318 5,816 ---------------------------------------------------------------------- Inventories at FIFO cost 114,725 79,195 LIFO reserve (20,690) (20,690) ---------------------------------------------------------------------- Net inventories $ 94,035 $ 58,505 ----------------------------------------------------------------------
It is impracticable to segregate the LIFO reserve between raw materials, finished goods and work in process. ROCK-TENN COMPANY 32 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY 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 and interest costs associated with significant capital additions. For the year ended September 30, 1997, the Company capitalized interest of approximately $1,214,000 and none in fiscal years 1996 and 1995. For financial reporting purposes, depreciation and amortization is 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 Leasehold improvements Term of lease Transportation equipment 3-8 years -------------------------------------------------------------
Depreciation expense for the years ended September 30, 1997, 1996 and 1995 was approximately $53,698,000, $44,889,000 and $40,069,000, respectively. Effective October 1, 1996, the Company changed its method of depreciation for machinery and equipment placed in service after September 30, 1996 to the straight-line method. This change was applied on a prospective basis to assets acquired after that date. The Company's previous policy of depreciation for additions of machinery and equipment was the 150% declining balance method. Assets placed in service prior to the effective date of the change continue to be depreciated using accelerated methods. The Company changed its method of depreciation based upon 1) management's shift in operating style over the last several years to focus on capital and technological improvements and related changes in maintenance, 2) management's belief that the straight-line method provides a better matching of costs and revenues and 3) the fact that the straight-line method is the predominant industry practice. Given the Company's circumstances, management believes the straight-line method is preferable. There is no cumulative effect of this change. The effect of this change on net income for the year ended September 30, 1997 was to increase net income by approximately $3,011,000 or $.09 per share. EARNINGS PER SHARE. Earnings per common and common equivalent share are based on the weighted average number of common and common equivalent shares outstanding during the periods. Because fully diluted earnings per common and common equivalent share are not materially different than primary earnings per common and common equivalent share, such amounts have not been presented. The following amounts reflect the effect of a 10% stock dividend paid on November 15, 1996.
Years Ended September 30, 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Average number of shares outstanding 33,513,557 33,201,461 33,281,092 Assumed exercise of options with proceeds used to repurchase shares 829,841 812,597 884,522 ---------------------------------------------------------------------------------------------------- Total common and common equivalent shares 34,343,398 34,014,058 34,165,614 ----------------------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS. The Company has classified as goodwill the excess of the acquisition cost over the fair value of the net assets of businesses acquired. Goodwill is amortized on a straight-line basis over periods ranging from 20 to 40 years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, the Company's carrying value of the goodwill will be reduced. Accumulated amortization relating to goodwill at September 30, 1997 and 1996 was $10,321,000 and $5,015,000, respectively. ROCK-TENN COMPANY 33 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY 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 $3,440,000 and $2,032,000 at September 30, 1997 and 1996, respectively. 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. 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 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"). SFAS 128 establishes accounting standards for computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock. The Company is required to adopt this statement in fiscal 1998. Earnings per common and common equivalent shares for the years ended September 30, 1997, 1996 and 1995 under this new standard are the following:
Years Ended September 30, 1997 1996 1995 ---------------------------------------------------------------------------- Basic earnings per common share $.48 $1.54 $1.24 Diluted earnings per common and common equivalent share $.47 $1.50 $1.21
In 1997, the FASB issued Statement of Financial Accounting Standards No. 130 ("SFAS 130") and Statement of Financial Accounting Standards No. 131 ("SFAS 131"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 131 establishes standards for disclosures of segment information about products and services, geographic areas, major customers and certain interim disclosures of segment information which is not required by accounting standards currently used by the Company. These statements are required to be adopted in fiscal 1998. The Company does not anticipate that SFAS 130 will have a material impact on the Company's consolidated financial statements. The Company is currently evaluating SFAS 131 and has not yet determined its impact on the Company's consolidated financial statements. In October 1996, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 96-1 ("SOP 96-1"). SOP 96-1 provides accounting guidance on issues relating to the recognition, measurement and disclosure of environmental liabilities. The Company is required to adopt this statement in the first quarter of fiscal 1998. The Company does not anticipate that SOP 96-1 will 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. 2. ACQUISITIONS OF BUSINESSES AND OTHER MATTERS - ------------------------------------------------------------------------------- FISCAL 1997 On January 21, 1997, the Company acquired all of the outstanding capital stock of the parent of Waldorf Corporation ("Waldorf"), a manufacturer of folding cartons and 100% recycled paperboard and a manufacturer of corrugating medium, for approximately $239,000,000, financed primarily with borrowings under the Company's credit facility. In addition, the Company (i) made certain payments aggregating $32,600,000 in connection with the settlement of a contingent interest ROCK-TENN COMPANY 34 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY agreement with a former creditor of Waldorf and the termination of Waldorf's Stock Appreciation Rights Plan and (ii) accrued as a cost of the purchase $4,893,000 in connection with the planned termination of approximately 120 employees of Waldorf, principally certain senior executives and other employees at the Waldorf corporate office. On June 9, 1997, the Company acquired substantially all of the assets of Rite Paper Products, Inc. ("Rite Paper"), a manufacturer of component paperboard pieces primarily for the ready-to-assemble furniture industry. On July 9, 1997, the Company acquired substantially all of the assets and certain of the liabilities of The Davey Company ("Davey"), a manufacturer of recycled paperboard book covers used by the book manufacturing industry. The acquisition was financed through the issuance of 863,500 shares of the Company's Class A common stock subject to certain final adjustments. On September 5, 1997, the Company and Sonoco Products Company combined their respective fiber partition businesses into a new entity named RTS Packaging, LLC ("RTS Packaging"). The Company owns 65% of RTS Packaging. The consolidated statements of income for fiscal 1997 include the results of operations of Waldorf, Rite Paper, Davey and RTS Packaging from the respective dates of acquisition or formation, as the case may be, and all of the transactions have been accounted for under the purchase method of accounting. The assets acquired and liabilities assumed are as follows (in thousands): ----------------------------------------------------- Net working capital $ 35,180 Property, plant, equipment and other 185,145 Goodwill 296,803 Other intangible assets 7,028 Deferred tax liabilities (50,423) Long-term debt assumed (147,226) ----------------------------------------------------- Net purchase price $ 326,507 -----------------------------------------------------
The following pro forma information gives effect to the acquisitions of Waldorf and Davey as if each had occurred at the beginning of the years presented below. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results of operations that would have occurred had such acquisitions actually occurred at the beginning of such years nor is it necessarily indicative of future results of operations of the combined enterprise (in thousands, except per share data, unaudited):
Years Ended September 30, 1997 1996 ---------------------------------------------------------------------------------------------------- Net sales $1,231,215 $1,252,797 Net income 14,402 57,811 Earnings per common and common equivalent share .41 1.66 ----------------------------------------------------------------------------------------------------
The Rite Paper and RTS Packaging transactions are immaterial for pro forma presentation purposes and are not reflected in the aforementioned pro forma financial information. In connection with the Waldorf acquisition, the Company reviewed the combined operations of Rock-Tenn and Waldorf in order, most efficiently, to serve its markets, eliminate geographic overlaps and coordinate production. In connection with this review, management decided to close the Company's existing folding carton plant at Mundelein, Illinois. The Mundelein facility was acquired in the acquisition of Olympic Packaging in 1995. In connection with this closing and considering the impact of the Waldorf acquisition, the Company charged to net income approximately $12,784,000 ($.37 per share) during fiscal 1997, which consisted primarily of the non-cash write- ROCK-TENN COMPANY 35 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY off of goodwill associated with the Company's Olympic Packaging subsidiary. The write-off of goodwill was required based upon the decision to close the Mundelein facility and the determination that such goodwill would not be recoverable. For the year ended September 30, 1997, the Company incurred additional costs of approximately $1,622,000 ($989,000 or $.03 per share after tax), principally for the termination of approximately 150 employees and other related charges associated with closing the Mundelein facility. During fiscal 1997, management decided to close a plastics recycling facility located in Indianapolis, Indiana. For the year ended September 30, 1997, the Company recorded costs of approximately $1,750,000 ($1,068,000 or $.03 per share after tax) related to this closing, primarily relating to the estimated losses on disposal of the equipment. As of September 30, 1997, the Company had a remaining liability of approximately $2,297,000 related to the Mundelein and Indianapolis plant closings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements." FISCAL 1996 On June 24, 1996, the Company announced a facility closing and consolidation plan. This plan was developed to reduce the operating losses historically incurred at the Company's Lynchburg converting facility and is intended to optimize the utilization of certain other Company assets. As part of this plan, the Company closed two fiber partition plants, opened one new fiber partition plant and relocated a laminated paperboard book cover panels operation from Lynchburg to one of the closed plants. In connection with this plan, the Company incurred expenses of approximately $3,600,000 ($2,232,000 or $.07 per share after taxes) consisting primarily of employee severance, employee relocation and training costs, operating losses in excess of amounts normally expected to occur, asset impairment, equipment and inventory relocation costs and lease termination costs. All such expenses were charged to income from operations. All amounts accrued as of September 30, 1997 related to this plan were immaterial. The employment of approximately 150 employees was terminated in connection with these closures and consolidation. FISCAL 1995 On January 17, 1995, the Company acquired all of the outstanding capital stock of Olympic Packaging, Inc. ("Olympic"), a folding carton manufacturer. On January 31, 1995, the Company acquired substantially all of the assets of Alliance Display and Packaging ("Alliance"), a corrugated display and packaging manufacturer located in Winston-Salem, North Carolina. These acquisitions were financed with borrowings under the Company's revolving credit facilities and the issuance of an $18,500,000 promissory note to a seller. Both acquisitions were accounted for under the purchase method. The consolidated statement of income for fiscal 1995 includes the results of operations of Olympic and Alliance from the respective dates of acquisition. The detail of the net assets acquired is as follows (in thousands): Net working capital $15,152 Property, plant, equipment and other 21,140 Intangible assets 43,787 ------------------------------------------------------------ Net assets acquired $80,079 ============================================================
ROCK-TENN COMPANY 36 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY 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 10 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. 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 OPTION PLANS The Company's 1993 Stock Option Plan 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. 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 value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 1997: risk-free interest rate of 6.3%, a dividend yield of 2.0%, volatility factor of the expected market price of the Company's common stock of .28, and an expected life of the option of 10 years. 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 value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
1997 1996 ------------------------------------------------------------- Pro forma net income $14,979 $50,434 Pro forma earnings per share Primary $ .44 $ 1.48 Fully diluted .43 1.48
ROCK-TENN COMPANY 37 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY The table below summarizes the changes in all stock options during the periods indicated:
Class B Common Class A Common Shares Price Range Shares Price Range ------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 1994 349,063 $2.77-8.20 1,211,216 $ 1.79-16.75 Exercised (38,628) $3.58-6.70 (215,416) $ 1.79-6.70 Granted - - 269,000 $17.00-18.25 ------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 1995 310,435 $2.77-8.20 1,264,800 $ 2.75-18.25 Exercised (23,200) $3.60-8.20 (42,000) $ 4.75-8.20 Effect of stock dividend issued November 15, 1996 28,724 $2.52-7.45 122,280 $ 2.50-16.59 ------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 1996 315,959 $2.52-7.45 1,345,080 $ 2.50-16.59 Exercised or forfeited (14,080) $2.52-3.27 (124,520) $ 2.50-18.30 Granted - - 757,100 $17.50-20.31 ------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING AT SEPTEMBER 30, 1997 301,879 $2.52-7.45 1,977,660 $ 2.50-20.31 OPTIONS EXERCISABLE AT SEPTEMBER 30, 1997 301,879 $2.52-7.45 1,224,585 $ 2.50-18.30 OPTIONS AVAILABLE FOR FUTURE GRANT AT SEPTEMBER 30, 1997 - - 834,600 - -------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning options outstanding and exercisable at September 30, 1997:
CLASS B COMMON CLASS A COMMON ---------------------- ----------------------------------------------- WEIGHTED AVERAGE NUMBER WEIGHTED WEIGHTED WEIGHTED REMAINING RANGE OF OUTSTANDING AVERAGE AVERAGE AVERAGE CONTRACTUAL EXERCISE AND EXERCISE NUMBER EXERCISE NUMBER EXERCISE LIFE (BOTH PRICES EXERCISABLE PRICE OUTSTANDING PRICE EXERCISABLE PRICE CLASSES) ----------------------------------------------------------------------------------------------------- $2.50-$4.33 176,880 $ 3.60 377,300 $ 3.43 377,300 $ 3.43 2 $6.06-$7.45 124,999 6.67 243,760 6.70 243,760 6.70 5 $15.23-$18.30 - - 901,600 16.32 603,525 15.70 8 $20.31 - - 455,000 20.31 - - 10 ----------------------------------------------------------------------------------------------------- 301,879 $ 4.87 1,977,660 $ 13.59 1,224,585 $ 10.13 6 -----------------------------------------------------------------------------------------------------
The weighted average exercise price for Class B Common options exercised or forfeited during fiscal 1997 was $2.74. The weighted average exercise price for Class A Common options exercised or forfeited and granted during fiscal 1997 was $4.21 and $19.49, respectively. The estimated weighted average fair value of options granted during fiscal 1997 with option prices equal to the market price on the date of grant was $7.61. EMPLOYEE STOCK PURCHASE PLAN Under the 1993 Employee Stock Purchase Plan, 660,000 shares of Class A Common are reserved for purchase by substantially all qualifying employees of the Company. In fiscal 1997, 1996 and 1995, approximately 196,000, 147,000 and 86,000 shares, respectively, were purchased by employees under this plan. ROCK-TENN COMPANY 38 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY 4. LONG-TERM DEBT - ------------------------------------------------------------------------------- Long-term debt at September 30, 1997 and 1996 consists of the following:
September 30, (Dollars In Thousands) 1997 1996 ---------------------------------------------------------------------------------------------------- Revolving credit facility(a) $386,000 $ - 7.25% notes, due August 2005, net of unamortized discount of $108 and $122(b) 99,892 99,878 Industrial revenue bonds, bearing interest at variable rates (4.25% at September 30, 1997), due through December 2015(c) 32,150 28,250 Other notes 15,580 18,476 ---------------------------------------------------------------------------------------------------- 533,622 146,604 Less current maturities of long-term debt 41,282 7,260 ---------------------------------------------------------------------------------------------------- Long-term debt due after one year $492,340 $139,344 ----------------------------------------------------------------------------------------------------
(a) In fiscal 1997, the Company replaced its $100,000,000 revolving credit facility with a new revolving credit facility, provided by a syndicate of banks, which provides aggregate borrowing availability of up to $450,000,000 through 2002. Borrowings outstanding under the facility bear interest based upon LIBOR plus an applicable margin. This rate was 6.24% at September 30, 1997. Annual facility fees range from .075% to .3% of the aggregate borrowing availability, based on the Company's consolidated funded debt to total capitalization ratio. Under the agreements covering this loan, restrictions exist as to the maintenance of financial ratios, creation of additional long-term and short-term debt, certain leasing arrangements, mergers, acquisitions, disposals and other matters. The agreements also provide that the payment of cash dividends, acquisition of common shares and redemption of preferred stock cannot exceed amounts based on an earnings formula. The Company is in compliance with such restrictions. In October 1997, the Company entered into two interest rate agreements effectively to cap the interest rate on portions of the amount outstanding under the revolving credit facility. Under the agreements, $75 million is capped at 8.00% per annum until October 7, 2000 while another $75 million is capped at 7.50% per annum until October 7, 1999. The costs associated with these interest rate agreements are being amortized over the terms of the agreements. (b) In August 1995, the Company sold $100,000,000 in aggregate principal amount of its 7.25% notes due August 1, 2005 (the "Notes"). The Notes are not redeemable prior to maturity and are not subject to any sinking fund requirements. The Notes are unsubordinated, unsecured obligations. The indenture related to the 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. Debt issuance costs of approximately $908,000 are being amortized over the term of the Notes. In May 1995, the Company entered into an interest rate adjustment transaction in order effectively to fix the interest rate on the 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 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 Notes is approximately 7.51%. (c) 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 (a) above 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. At September 30, 1997, the fair market value of the Notes was approximately $102,310,000 based on quoted market prices. The carrying amounts reported in the consolidated balance sheet for all other fixed rate long-term debt approximate fair market value. At September 30, 1997, the carrying amount for variable rate long-term debt also approximates fair market value since the interest rates on these instruments are reset periodically. ROCK-TENN COMPANY 39 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY The amount of consolidated net earnings available for dividends and other restricted payments, as defined in debt agreements, was approximately $162,393,000 at September 30, 1997. As of September 30, 1997, $353,000,000 of the $386,000,000 outstanding under the revolving credit facility was classified as long-term debt since the Company has the ability to continue to finance this amount pursuant to the terms of the revolving credit facility and does not intend to repay this amount with cash from operations during the ensuing year. As of September 30, 1997, the aggregate maturities of long-term debt for the succeeding five years are as follows (in thousands): ----------------------------------- 1998 $ 41,282 1999 9,310 2000 330 2001 197 2002 353,218 Thereafter 129,285 ----------------------------------- Total long-term debt $533,622 -----------------------------------
In fiscal 1996, one of the Company's Canadian subsidiaries entered into 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, 1997, there were no amounts outstanding under this facility. As of September 30, 1996, there was approximately U.S. $432,000 outstanding under this facility at an average interest rate of 6.5%. 5. LEASES - ------------------------------------------------------------------------------- The Company leases certain manufacturing and warehousing facilities and equipment (primarily transportation equipment) under various operating leases. As of September 30, 1997, future minimum lease payments, including certain maintenance charges on transportation equipment, under all noncancelable leases, are as follows (in thousands): ------------------------------------------------------ 1998 $ 4,104 1999 3,517 2000 2,426 2001 1,493 2002 678 Thereafter 2,012 ------------------------------------------------------ Total future minimum lease payments $ 14,230 ------------------------------------------------------
Rental expense for the years ended September 30, 1997, 1996 and 1995 was approximately $10,503,000, $8,653,000 and $7,351,000, respectively, including lease payments under cancelable leases. 6. 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. ROCK-TENN COMPANY 40 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY The provisions for income taxes consist of the following components (in thousands):
Years Ended September 30, 1997 1996 1995 ---------------------------------------------------------------------------------------------------- Current income taxes: Federal $13,676 $23,552 $16,939 State 2,694 2,927 3,108 Foreign 268 (240) 45 ---------------------------------------------------------------------------------------------------- Total current 16,638 26,239 20,092 ---------------------------------------------------------------------------------------------------- Deferred income taxes: Federal 3,989 3,912 4,904 State 349 46 561 Foreign 679 1,147 933 ---------------------------------------------------------------------------------------------------- Total deferred 5,017 5,105 6,398 ---------------------------------------------------------------------------------------------------- Provision for income taxes $21,655 $31,344 $26,490 ----------------------------------------------------------------------------------------------------
The differences between the statutory federal income tax rate and the Company's effective income tax rate are as follows:
Years Ended September 30, 1997 1996 1995 --------------------------------------------------------------------------------------------------- Statutory federal tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 3.9 2.7 3.5 Non-deductible amortization and write-off of goodwill (See Note 2) 18.3 - - Other, net 0.2 0.3 0.5 --------------------------------------------------------------------------------------------------- Effective tax rate 57.4% 38.0% 39.0% ---------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities consist of the following (in thousands):
September 30, 1997 1996 ---------------------------------------------------------------------------------------------------- Deferred income tax assets: Accruals and allowances $10,077 $ 4,560 Other 4,002 1,677 ---------------------------------------------------------------------------------------------------- Total 14,079 6,237 ---------------------------------------------------------------------------------------------------- Deferred income tax liabilities: Property, plant and equipment 74,281 24,583 Deductible intangibles 2,533 - Accrued pension and other 15,553 4,790 ---------------------------------------------------------------------------------------------------- Total 92,367 29,373 ---------------------------------------------------------------------------------------------------- Net deferred income tax liability $78,288 $23,136 ----------------------------------------------------------------------------------------------------
The Company has not recorded any valuation allowances for deferred income tax assets. The components of the income before income taxes and minority interest are (in thousands):
Years Ended September 30, 1997 1996 1995 ---------------------------------------------------------------------------------------------------- United States $35,267 $80,798 $65,289 ---------------------------------------------------------------------------------------------------- Foreign 2,840 1,671 2,633 ---------------------------------------------------------------------------------------------------- Income before income taxes and minority interest $38,107 $82,469 $67,922 ----------------------------------------------------------------------------------------------------
ROCK-TENN COMPANY 41 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY 7. 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 net periodic pension cost includes the following components (in thousands):
Years Ended September 30, 1997 1996 1995 ----------------------------------------------------------------------------------------------------- Service cost $ 6,027 $ 4,327 $ 3,266 Interest cost on projected benefit obligations 9,647 7,235 6,140 Actual return on plan assets (26,063) (17,311) (11,492) Net amortization of the initial asset (399) (395) (395) Net amortization and deferral 15,964 10,226 5,780 ----------------------------------------------------------------------------------------------------- Total Company defined benefit plan expense 5,176 4,082 3,299 Multi-employer plans for collective bargaining employees 163 166 159 ----------------------------------------------------------------------------------------------------- Net periodic pension cost $ 5,339 $ 4,248 $ 3,458 -----------------------------------------------------------------------------------------------------
The reconciliation of the Company's defined benefit plans' funded status to the amount reported in the Company's consolidated balance sheets at September 30, 1997 and 1996 is as follows (in thousands):
September 30, 1997 1996 -------------------------------------------------------------------------------------------------------- PLANS WHERE Plans where Plans where ASSETS EXCEED assets exceed accumulated ACCUMULATED accumulated benefits BENEFITS benefits exceed assets -------------------------------------------------------------------------------------------------------- Actuarial present value of projected benefit obligations for services rendered to date: Actuarial present value of accumulated benefit obligations: Vested $ 117,138 $ 77,960 $ 1,240 Nonvested 8,699 6,617 72 --------------------------------------------------------------------------------------------------- 125,837 84,577 1,312 Additional amounts related to projected compensation levels 20,971 16,279 - --------------------------------------------------------------------------------------------------- 146,808 100,856 1,312 Plan assets at fair value, primarily equities, fixed income securities, common trust funds and cash equivalents 159,048 100,599 1,244 --------------------------------------------------------------------------------------------------- Funded status 12,240 (257) (68) Unrecognized prior service cost 2,638 2,911 63 Unrecognized net actuarial (gain) loss-difference in assumptions and actual experience (16,466) (700) 49 Initial unrecognized net (asset) liability being recognized over periods ranging from 12 to 19 years (1,360) (1,770) 29 Additional minimum liability - - (141) --------------------------------------------------------------------------------------------------- (Accrued) prepaid pension cost included in consolidated balance sheets $ (2,948) $ 184 $ (68) ---------------------------------------------------------------------------------------------------
ROCK-TENN COMPANY 42 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY The discount rate used in determining the actuarial present value of the projected benefit obligations was 7.5% as of September 30, 1997 and 1996. The expected increase in compensation levels used in determining the actuarial present value of the projected benefit obligations was 4% as of September 30, 1997 and 1996. The expected long-term rate of return on assets, net of administrative expenses, used in determining net pension expense was 9% for all years presented. 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 $174,000, $162,000 and $169,000 was recorded for the years ended September 30, 1997, 1996 and 1995, respectively. Effective October 1, 1997 the Company implemented 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 contributions up to a maximum of 6% of compensation as defined by the plan. As a result of the new employee savings plan, the Company has amended its defined benefit plans to essentially lower pension benefits. 8. RELATED PARTY TRANSACTIONS - ------------------------------------------------------------------------------- A director of the Company is the chairman and a significant shareholder of the insurance agency that brokers substantially all 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, 1997, 1996 and 1995, payments were approximately $3,831,000, $3,239,000 and $3,355,000, respectively. A director of the Company is the former Chairman of the construction company that is constructing a new building at the Company's home office. For the year ended September 30, 1997, payments approximated $5,335,000 and were capitalized as property, plant and equipment. 9. COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------- CAPITAL ADDITIONS Estimated costs for completion of authorized capital additions under construction as of September 30, 1997 totaled approximately $32,000,000. STOCK REPURCHASE PLAN The Board of Directors has approved a stock repurchase plan for the repurchase of a maximum of 1,500,000 shares in aggregate of Class A Common or Class B Common prior to July 31, 1998. In fiscal 1997, the Company made no repurchases of shares. In fiscal 1996 and 1995, the Company repurchased 217,000 and 472,946 shares, respectively, under this plan. ENVIRONMENTAL AND OTHER MATTERS The Company is subject to many federal, state, local and foreign environmental laws and regulations. The Company is currently involved in the assessment of various sites, two of which the Company has an ownership interest in and all others of which are owned by third parties. Environmental expenditures which relate to an existing condition caused by past operations and which have no significant future economic benefit to the Company are expensed. Future environmental-related expenditures cannot be reliably determined in many circumstances due to the early stages of investigations, the uncertainty of specific remediation methods, changing environmental laws and ROCK-TENN COMPANY 43 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY interpretations and other matters. Such costs are accrued at the time the expenditure becomes probable and the costs can be reasonably estimated. Costs are accrued based upon estimates determined by management. Currently, the Company has been named as a potentially responsible party at ten sites. At such sites, a variety of potentially responsible parties are involved. Management believes that it is probable that the parties associated with these sites will fulfill their obligations. Expenses associated with and amounts accrued for environmental assessment and remediation have not been material for the three years ended September 30, 1997. It is possible that costs in excess of amounts accrued may be incurred, however, management believes that such additional amounts will not have a material effect on the Company's financial position and results of operations. On December 1, 1995, a suit was filed by a private party against, among others, the Company in the United States District Court for the Western District of Michigan alleging that the Company is jointly and severally liable under federal and state law for the release of certain hazardous materials at the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site. No specific amounts have been asserted by the plaintiff with respect to this matter, however, the eventual amounts could be material. The Company has responded to, and denies any liability with respect to, this matter and is vigorously defending itself. The Company cannot currently predict whether the plaintiff will prevail on its claims or the magnitude of any potential recovery, if any. In addition, the Company is involved in various other legal proceedings and matters arising in the normal course of business. It is the opinion of management, after consultation with legal counsel, that the resolutions of these matters would not have a material adverse effect on the financial position or the results of operations of the Company. 10. SEGMENT INFORMATION - ------------------------------------------------------------------------------- The Company operates principally in two business segments. The converted products segment is comprised of facilities that produce folding cartons, laminated paperboard products, fiber partitions, corrugated containers, corrugated displays and thermoformed plastic products. The paperboard segment consists of facilities that manufacture 100% recycled clay-coated and uncoated paperboard and corrugating medium and that collect recovered paper. Intersegment sales are accounted for at prices that approximate market prices. Certain operations included in the converted products segment are located in foreign countries and had operating income of $4,483,000, $2,944,000 and $4,369,000 for fiscal years ended September 30, 1997, 1996 and 1995, respectively. For fiscal 1997, foreign operations represented approximately 4.8%, 7.0% and 5.3% of total net sales to unaffiliated customers, total income from operations and total identifiable assets, respectively. In fiscal 1996, these operations represented approximately 6.1%, 3.2% and 8.9% of total net sales to unaffiliated customers, total income from operations and total identifiable assets, respectively. In fiscal 1995, these operations represented approximately 5.6%, 5.8% and 9.9% of total net sales to unaffiliated customers, total income from operations and total identifiable assets, respectively. Operating profit includes all costs and expenses directly related to the segment involved. The ROCK-TENN COMPANY 44 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY corporate portion of operating profit includes corporate general and administrative expenses. Assets are assigned to segments based on use. Corporate assets primarily consist of cash and cash equivalents and property, plant and equipment. Following is a tabulation of business segment information for each of the past three fiscal years (in thousands):
Years Ended September 30, 1997 1996 1995 ---------------------------------------------------------------------------------------------------- Net sales (aggregate): Converted products $ 938,711 $ 779,696 $ 757,704 Paperboard 391,805 281,402 329,368 ---------------------------------------------------------------------------------------------------- Total $ 1,330,516 $ 1,061,098 $ 1,087,072 ---------------------------------------------------------------------------------------------------- Less net sales (intersegment): Converted products $ 1,194 $ 429 $ 390 Paperboard 219,629 184,558 183,804 ---------------------------------------------------------------------------------------------------- Total $ 220,823 $ 184,987 $ 184,194 ---------------------------------------------------------------------------------------------------- Net sales (unaffiliated customers): Converted products $ 937,517 $ 779,267 $ 757,314 Paperboard 172,176 96,844 145,564 ---------------------------------------------------------------------------------------------------- Total $ 1,109,693 $ 876,111 $ 902,878 ---------------------------------------------------------------------------------------------------- Operating income (expense): Converted products(a) $ 26,412 $ 35,218 $ 31,163 Paperboard 46,382 64,431 51,364 ---------------------------------------------------------------------------------------------------- 72,794 99,649 82,527 Corporate expense (8,618) (7,492) (6,560) ---------------------------------------------------------------------------------------------------- Income from operations 64,176 92,157 75,967 Minority interest in consolidated subsidiary (351) - - Interest expense (26,787) (10,978) (8,387) Interest income 718 1,290 342 ---------------------------------------------------------------------------------------------------- Income before income taxes $ 37,756 $ 82,469 $ 67,922 ---------------------------------------------------------------------------------------------------- Identifiable assets: Converted products $ 644,339 $ 414,331 $ 421,685 Paperboard 457,845 110,769 100,366 Corporate 11,502 56,588 33,203 ---------------------------------------------------------------------------------------------------- Total $ 1,113,686 $ 581,688 $ 555,254 ---------------------------------------------------------------------------------------------------- Depreciation and amortization:(a), (b) Converted products $ 55,143 $ 35,262 $ 30,414 Paperboard 21,101 12,855 12,239 Corporate 559 447 538 ---------------------------------------------------------------------------------------------------- Total $ 76,803 $ 48,564 $ 43,191 ---------------------------------------------------------------------------------------------------- Capital expenditures, including assets acquired: Converted products $ 135,825 $ 45,077 $ 72,164 Paperboard 135,365 26,480 23,205 Corporate 210 238 805 ---------------------------------------------------------------------------------------------------- Total $ 271,400 $ 71,795 $ 96,174 ----------------------------------------------------------------------------------------------------
(a) The Company incurred $16,251,000 in fiscal 1997 in plant closing and other costs (see Note 2). These costs related to the converted products segment and the applicable amounts are reflected in the segment's operating income and depreciation and amortization. (b) The effect of the change in depreciation methods from the 150% declining balance method to the straight-line method ROCK-TENN COMPANY 45 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ROCK-TENN COMPANY for machinery and equipment placed in service during fiscal 1997 was to increase operating income by $4,936,000. The depreciation change resulted in a decrease in depreciation expense in each of the segments as follows: $2,689,000 in the converted products segment, $2,227,000 in the paperboard segment and $20,000 in the corporate expenses. 11. FINANCIAL RESULTS BY QUARTER (UNAUDITED) - -------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH 1997 QUARTER QUARTER QUARTER QUARTER ---------------------------------------------------------------------------------------------------- Net sales $208,318 $275,397 $300,302 $325,676 Gross profit 53,593 65,744 75,239 82,960 Net income (loss) 7,399 (7,191) 6,212 9,681 Earnings (loss) per common and common equivalent share .22 (.22) .18 .28 ---------------------------------------------------------------------------------------------------- First Second Third Fourth 1996 Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------- Net sales $219,362 $216,477 $216,211 $224,061 Gross profit 58,159 60,187 62,563 63,000 Net income 11,785 12,267 13,525 13,548 Earnings per common and common equivalent share .35 .36 .40 .40 ----------------------------------------------------------------------------------------------------
The interim earnings per common and common equivalent share amounts were computed as if each quarter was a discrete period. As a result, the sum of the earnings per common and common equivalent share by quarter will not necessarily total the annual earnings per common and common equivalent share. The results of operations for the second, third and fourth quarters of fiscal 1997 include expenses of approximately $12,784,000, $2,700,000 and $767,000, respectively, incurred by the Company as a result of the facility closings and related items (see Note 2). The results of operations for the third and fourth quarters of fiscal 1996 include expenses of approximately $1,300,000 and $2,300,000, respectively, incurred by the Company as a result of the facility closing and consolidation plan (see Note 2). ROCK-TENN COMPANY 46 31 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rock-Tenn Company at September 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective October 1, 1996, the Company changed its method of accounting for depreciation of machinery and equipment placed in service subsequent to September 30, 1996. Atlanta, Georgia October 21, 1997 ROCK-TENN COMPANY 47 32 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. 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, elected by the shareholders. 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, 1997, the Company's system of internal control is adequate to accomplish the objectives discussed herein. Bradley Currey, Jr. David C. Nicholson Chairman of the Board of Directors Senior Vice President and and Chief Executive Officer Chief Financial Officer
ROCK-TENN COMPANY 48 33 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. 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, elected by the shareholders. 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, 1997, the Company's system of internal control is adequate to accomplish the objectives discussed herein. Bradley Currey, Jr. David C. Nicholson Chairman of the Board of Directors Senior Vice President and and Chief Executive Officer Chief Financial Officer
ROCK-TENN COMPANY 49 EX-21 13 SUBSIDIARIES OF THE REGISTRANT 1 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 Delaware 14. Best Recycling, Inc. Iowa 15. RTS Packaging, LLC Delaware 16. Rock-Tenn Recycling Company Quebec, Canada 17. 9028-9463 Quebec, Inc. Quebec, Canada 18. Rock-Tenn Partition Company Georgia 19. RTS Empaques S. de R.L. de C.V. Mexico
EX-23 14 REPORT AND CONSENT OF ERNST & YOUNG LLP 1 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 21, 1997, included in the 1997 Annual Report to Shareholders of Rock-Tenn Company. Our audits also included 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 to the incorporation by reference in 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, and the Registration Statement (Form S-3 No. 33-93934) of Rock-Tenn Company of our report dated October 21, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) for the year ended September 30, 1997, and our report dated November 13, 1997, 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, 1997. Ernst & Young LLP Atlanta, Georgia December 12, 1997 EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K. 1,000 YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 3,345 0 118,794 3,632 94,035 217,615 877,320 326,146 1,113,686 152,145 492,340 0 0 344 370,868 1,113,686 1,109,693 1,109,693 832,157 832,157 0 0 26,787 37,756 21,655 16,101 0 0 0 16,101 .47 0
EX-99 16 FINANCIAL STATEMENTS FOR COMPANYS 1993 EMPLOYMENT 1 EXHIBIT 99 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN INDEX TO FINANCIAL STATEMENTS Report of Independent Auditors 1 Statements of Financial Condition as of September 30, 1997 and 1996 2 Statements of Changes in Plan Equity for the three years ended September 30, 1997 3 Notes to Financial Statements 4
2 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, 1997 and 1996 and the related statements of changes in plan equity for each of the three years in the period ended September 30, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Rock-Tenn Company 1993 Employee Stock Purchase Plan at September 30, 1997 and 1996 and the changes in Plan equity for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Atlanta, Georgia November 13, 1997 3 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 1996 ---------------------- Plan assets: Receivable from Rock-Tenn Company Notes 1 and 2 $510,348 $380,701 ======== ======== Plan liabilities and equity: Obligations to purchase Rock-Tenn Company common stock - Notes 1 and 2 $510,348 $380,701 Plan equity -- -- -------- -------- Total plan liabilities and equity $510,348 $380,701 ======== ========
See notes to financial statements 2 4 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF CHANGES IN PLAN EQUITY
Years Ended September 30, 1997 1996 1995 --------------------------------------- (Restated) Participant contributions $2,834,682 $2,107,505 $1,579,387 Purchases of Rock-Tenn Company common stock - Note 1 2,789,931 2,106,192 1,566,735 Amounts refunded to plan participants 44,751 1,313 12,652 ---------- ---------- ---------- Plan equity at end of year $ -- $ -- $ -- ========== ========== ==========
See notes to financial statements 3 5 ROCK-TENN COMPANY 1993 EMPLOYEES 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, however, the first purchase period commenced on November 1, 1994. Under the Plan, there were 600,000 shares of the Company's Class A common stock reserved for purchase. In October 1996, the Company's Board of Directors increased the number of shares reserved for purchase under the Plan to 660,000 shares, as a result of a 10% stock dividend declared on October 24, 1996 and paid on November 4, 1996. 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 the funds accumulated in each participant's account in the Plan to purchase shares of the Company's Class A common stock for the participant. The purchase price per share to the participant is equal to 85% of the fair 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, 1996, January 31, 1997, April 30, 1997 and July 31, 1997 there was a total of 195,627 shares of the Company's Class A common stock purchased for participants under the Plan. For the purchase periods ending October 31, 1995, January 31, 1996, April 30, 1996 and July 31, 1996, there was a total of 147,366 shares of the Company's Class A common stock purchased for participants under the Plan. For the purchase periods ending January 31, 1995, April 30, 1995 and July 31, 1995, there was a total of 86,059 shares of the Company's Class A common stock purchased for participants under the Plan. A stock certificate representing any shares of the Company's Class A common stock purchased under the Plan shall be held for, or at the participant's direction and expense, delivered to the participant. 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. Outstanding options at the time of termination cannot be modified or cancelled without the written consent of the participants. 4 6 NOTE 2 - SIGNIFICANT ACCOUNT POLICIES: Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting. Asset valuations are stated at cost which approximates fair value. 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 of changes in plan equity during the reporting period. Actual results will 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 three outside directors. Plan Expenses Administrative expenses of the Plan are paid by the Company. Restatement of 1996 Balances The Plan has restated its 1996 financial statements as a result of an overstatement of approximately $335,000 of the amounts shown as participant contributions and purchases of Rock-Tenn Company common stock as of September 30, 1996. There is no net effect on plan equity or participant accounts. NOTE 3 - FEDERAL INCOME TAXES: The Plan qualifies as an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code of 1986. Transfers of shares under this Plan are not intended to result in taxable income to employees under the Plan based on provisions in Section 423 of the Internal Revenue Code. NOTE 4 - SUBSEQUENT EVENTS On October 23, 1997, the Company's Board of Directors voted to increase the number of shares reserved for purchase under the Plan to 1,320,000. The increase is subject to shareholder approval. 5 -----END PRIVACY-ENHANCED MESSAGE-----