-----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, WGa98ECdXm3ZB4jM3XwaWJIYmxT/do3b1KKYoHE3CYtIdYulNd+XTCH+hbEAAYi5 AJQ62VUIvEt5pUMxdCFVuQ== 0000950144-98-014053.txt : 19981222 0000950144-98-014053.hdr.sgml : 19981222 ACCESSION NUMBER: 0000950144-98-014053 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981221 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: 98773067 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 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-23340 --------------------- ROCK-TENN COMPANY (Exact name of registrant as specified in its charter) GEORGIA 62-0342590 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 504 THRASHER STREET, NORCROSS, GEORGIA 30071 (Address of principal executive (Zip code) 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 4, 1998 (based on the last reported closing price per share of Class A Common Stock as reported on the New York Stock Exchange on such date) was approximately $376 million. As of December 14, 1998, the registrant had 23,017,199 and 11,636,683 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, 1998 are incorporated by reference in Part II. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on January 28, 1999 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.................................................. 7 Item 3. Legal Proceedings........................................... 8 Item 4. Submission of Matters to a Vote of Security Holders......... 8 Item X. Executive Officers of the Registrant........................ 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 11 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 11 Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................................... 11 Item 8. Financial Statements and Supplementary Data................. 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 13 PART III Item 10. Directors and Executive Officers of the Registrant.......... 14 Item 11. Executive Compensation...................................... 14 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 14 Item 13. Certain Relationships and Related Transactions.............. 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 15
2 3 PART I ITEM 1. BUSINESS Unless the context otherwise requires, references herein to the Company are to the Company and its subsidiaries, including RTS Packaging, LLC ("RTS"). RTS is a venture owned 65% by the Company. The Company conducts its partition products business through RTS. 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 third 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 believes that it is the largest producer of solid fiber partitions in North America. The Company operates 55 converting facilities, 10 paperboard mills, 14 paper recovery facilities, and one distribution facility located in 24 states, Canada and Mexico. The Company historically has expanded its business through the acquisition of other related businesses. Recent acquisitions include the following: - On January 21, 1997, the Company acquired all of the outstanding capital stock of the parent of Waldorf Corporation, 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., 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, a manufacturer of recycled paperboard book covers used by the book publishing industry PRODUCTS The Company operates in two industry segments: converted products and paperboard. CONVERTED PRODUCTS The Company primarily manufactures five lines of converted products: folding cartons, laminated paperboard products, solid fiber partitions, corrugated products and plastic packaging products. Folding Cartons. The Company believes that it is the third 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 45.3%, 49.1% and 46.0% of the Company's net sales in fiscal 1998, 1997, and 1996, respectively. The Company intends to close (as previously announced) one folding carton plant by December 31, 1998. 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 3 4 laminated paperboard products plants, and sales of laminated paperboard products to unaffiliated customers accounted for 12.5%, 11.6% and 14.1% of the Company's net sales in fiscal 1998, 1997 and 1996, respectively. The Company intends to close (as previously announced) one laminated paperboard products plant by January 31, 1999. Partition Products. The Company believes that it is the largest manufacturer of solid fiber partitions in North America, which are marketed principally to glass container manufacturers. Fiber partitions are manufactured by the Company from 100% recycled uncoated paperboard. The Company 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. The Company is focused on developing high quality, value-added partition products for specific applications designed to meet customers' packaging needs. The Company operates 11 solid fiber partition plants, and the Company's sales of fiber partition products to unaffiliated customers accounted for 10.6%, 9.3% and 11.1% of the Company's net sales in fiscal 1998, 1997 and 1996, respectively. 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 nine corrugated products plants, and sales of corrugated products to unaffiliated customers accounted for 10.3%, 10.4% and 12.8% of the Company's net sales in fiscal 1998, 1997 and 1996, 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. 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 believes that it is the second largest producer of recycled clay-coated paperboard in the U.S. The Company markets its recycled clay coated and uncoated 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 both recycled clay-coated paperboard and corrugating medium, and sales of recycled paperboard (including corrugating medium) to unaffiliated customers accounted for 15.8%, 13.4% and 9.6% of the Company's net sales in fiscal 1998, 1997 and 1996, 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 4 5 transferred to the Company's paperboard mills for processing or sold principally to other U.S. manufacturers of recycled paperboard. SALES AND MARKETING The Company sold converted products and paperboard to over 5,000 and 1,000 customers, respectively, in fiscal 1998. None of the Company's customers accounted for more than 10% of the Company's net sales in fiscal 1998. 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 supervised by regional sales managers, plant general managers or the general manager for the particular product line, who support and coordinate the sales activities within their designated area. 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. The Company's converted products include folding cartons, fiber partitions, corrugated containers, corrugated displays, thermoformed plastic products and laminated paperboard products. The Company's paperboard products include 100% recycled clay-coated and uncoated paperboard and corrugating medium. Management believes that the Company is the third 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 recycled clay-coated paperboard in the U.S. In addition, the Company believes that it is the largest manufacturer of solid fiber partitions in North America. The Company's competitors include large, vertically integrated converted products and paperboard companies and numerous smaller companies. In the folding carton and corrugated container markets, the Company competes with a significant number of national and regional packaging suppliers. In the fiber partitions, corrugated displays, thermoformed plastic products and laminated paperboard products markets, the Company competes with a smaller number of national, regional and local companies offering highly specialized products. In the paperboard segment, the Company competes with integrated and non-integrated national, regional and local companies manufacturing various grades of paperboard. 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 competes effectively with respect to each of these factors, but, to the extent that one or more of its competitors becomes more successful with respect to any key competitive factor, the Company's business 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 5 6 customers with an expanded geographic presence have tended in recent years to seek suppliers who can, because of their broad geographic presence, efficiently and economically supply all of the customers' packaging needs. In addition, during recent years, purchasers of recycled paperboard and converted products have demanded higher quality products meeting stricter quality control requirements. These market trends could adversely affect the Company's results of operations. ENVIRONMENTAL REGULATION The Company is 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 primarily administered by the U.S. Environmental Protection Agency. In addition, states in which the Company operates have adopted equivalent or more stringent environmental laws and regulations, or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies. The Company's operations are also 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 that, among other things, establish asbestos and noise standards and regulate the use of hazardous chemicals in the workplace. Although the Company does not use asbestos in the manufacture of its products, some of its 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 will have any material adverse effect on the Company's financial condition or results of operations. 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 results of operations or financial condition. The Company estimates that it will spend $1.5 million to $4.0 million for capital expenditures during fiscal 1999 in connection with matters relating to environmental compliance. In addition, 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. The Company has been identified as a potentially responsible party ("PRP") at nine Superfund sites pursuant to CERCLA or comparable state statutes. Except with respect to the Muncie Racetrack site ("Muncie Site"), the Kalamazoo River site ("Kalamazoo Site") and the Chemical Handling Corporation site ("Chemical Handling 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 has paid its final allocation of liability of approximately $9,300 for the surface contamination at the site. This amount represented 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. 6 7 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 Kalamazoo Site. The Company has entered into a settlement agreement pursuant to which the Company paid $325,000 and received releases from certain past, present and future environmental claims and actions involving the Kalamazoo Site. With respect to the Chemical Handling Site, the Company was found to have only minimal usage of the site. Therefore, on August 28, 1998, the Company signed a consent decree pursuant to which the Company paid approximately $41,000. The consent decree releases the Company from liability to the United States government associated with past response costs at the Chemical Handling Site. It is not anticipated that there will be any further clean-up costs at this site. 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. EMPLOYEES At September 30, 1998, the Company had 8,856 employees, of whom 6,923 were hourly and 1,933 were salaried. Approximately 3,278 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. ITEM 2. PROPERTIES The following table sets forth certain information about the Company's paperboard mills:
FISCAL 1998 PRODUCTION CAPACITY LOCATION OF MILL (IN TONS) PAPERBOARD PRODUCED - ----------------------------------- ----------- ----------------------------------- St. Paul, MN*...................... 180,000 Recycled corrugating medium Battle Creek, MI................... 130,000 Clay-coated recycled paperboard Dallas, TX......................... 160,000 Clay-coated and uncoated recycled paperboard Lynchburg, VA...................... 140,000 Uncoated recycled paperboard St. Paul, MN*...................... 165,000 Clay-coated recycled paperboard Chattanooga, TN.................... 120,000 Uncoated recycled paperboard Otsego, MI......................... 90,000 Uncoated recycled paperboard Sheldon Springs, VT (Missisquoi 84,000 Clay-coated recycled paperboard Mill)............................ 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 55 converting facilities, 14 paper recovery facilities and one distribution facility in 24 states (mainly in the Southwestern, Southeastern, Midwestern and Northeastern U.S.), Canada and Mexico. Of the Company's facilities, the Company owns 70 and leases nine. The Company's principal executive offices, which it owns, are located in Norcross, Georgia. 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. 7 8 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 financial condition or results of operations. For additional information regarding litigation to which the Company is a party, which is incorporated by reference into this item, see "Item 1 -- Business -- Environmental Regulation." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
NAME AGE POSITIONS HELD ---- --- ------------------------------------------------------------ Bradley Currey, Jr...... 68 Chairman of the Board, Chief Executive Officer and Director Jay Shuster............. 44 President, Chief Operating Officer and Director Edward E. Bowns......... 55 Executive Vice President and General Manager of Industrial Products Group* David E. Dreibelbis..... 46 Executive Vice President and General Manager of the Mill Group* David C. Nicholson...... 44 Senior Vice President, Chief Financial Officer and Secretary Russell M. Currey....... 37 Senior Vice President of Marketing and Planning Vincent D'Amelio........ 47 Executive Vice President and General Manager of the Plastic Packaging Division Paul England............ 43 Executive Vice President and General Manager of the Uncoated Paperboard Division Steve Flanagan.......... 44 Executive Vice President and General Manager of the Recycled Fiber Division Nicholas G. George...... 48 Executive Vice President and General Manager of the Folding Carton Division James K. Hansen......... 60 Executive Vice President and General Manager of the Coated Paperboard Division R. Evan Hardin.......... 36 Treasurer John H. Morrison........ 55 Executive Vice President and General Manager of the Corrugated Packaging and Display Division Paul G. Saari........... 43 Vice President of Finance John D. Skelton II...... 44 Executive Vice President and General Manager of Laminated Paperboard Products Division Richard E. Steed........ 47 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 8 9 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. 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. Vincent D'Amelio has served as Executive Vice President and General Manager of the Plastic Packaging Division since July 1998. From 1994 until July 1998, he was Vice-President for Manufacturing for the Plastic Packaging Division. Mr. D'Amelio joined the Company in 1994. 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. Steve Flanagan has served as Executive Vice President and General Manager of the Recycled Fiber Division since July 1998. From 1983 until 1995, he was General Manager of one of the Company's recycled fiber plants. From 1995 until July 1998, Mr. Flanagan served as Regional Manager, Southwest Region for the Recycled Fiber Division. Mr. Flanagan joined the Company in 1983. 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. 9 10 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. 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 Laminated Paperboard Products Division since July 1998. From December 1991 until July 1998, he served as Executive Vice President and General Manager of the Plastic Packaging Division. 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. 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, 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. 10 11 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 the inside front cover, and the shareholder information under the heading "Shareholder Information -- Common Stock" on page 49, of the Annual Report to Shareholders for the year ended September 30, 1998 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, 1994 through 1998 on page 16 of the Annual Report to Shareholders for the year ended September 30, 1998 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 17 through 27 of the Annual Report to Shareholders for the year ended September 30, 1998 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates and commodity prices. To modify the risk from these interest rate and commodity price fluctuations, the Company enters into various hedging transactions. INTEREST RATES The Company is exposed to changes in interest rates, primarily as a result of its short-term and long-term debt with both fixed and floating interest rates. The Company uses interest rate agreements effectively to cap the LIBOR rate on portions of the amount outstanding under the revolving credit facility. In addition, the Company has used an interest rate swap agreement effectively to fix the LIBOR rate on $100,000,000 of variable rate borrowings. 11 12 The following table summarizes information on instruments and transactions that are sensitive to interest rate fluctuations. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. The carrying value of the Company's variable rate debt approximates its fair value. The fair value of the fixed rate financial instruments is estimated based on quoted market prices. The interest rate swap agreement is settled quarterly. INTEREST RATE SENSITIVITY PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY AVERAGE INTEREST (SWAP) RATE/CAP STRIKE PRICE (IN THOUSANDS) - --------------------------------------------------------------------------------
FAIR VALUE 1999 2000 2001 2002 2003 THEREAFTER TOTAL 9/30/98 ---------- ---------- ---------- ---------- ---------- ---------- -------- ---------- LIABILITIES: Long-term debt, including current portion: Fixed rate............ $ 5,462 $ 324 $ 197 $ 218 $ 241 $ 100,746 $107,188 $107,438 Average interest rate................ 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% Variable rate, revolving credit facility............ $ 38,000 -- -- $ 331,000 -- -- $369,000 $369,000 Average interest rate................ LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR + + + + + + spread spread spread spread spread spread Variable rate, industrial development bonds... -- -- -- -- -- $ 32,150 $ 32,150 $ 32,150 Average interest rate................ open open open open open open market market market market market market (tax-free) (tax-free) (tax-free) (tax-free) (tax-free) (tax-free) INTEREST RATE DERIVATIVE FINANCIAL INSTRUMENTS RELATED TO DEBT: Interest rate swap: Pay fixed/receive variable............ -- -- -- -- -- $ 100,000 $100,000 $ 4,451 Average pay rate...... 5.8% 5.8% 5.8% 5.8% 5.8% 5.8% Average receive rate................ 90-day 90-day 90-day 90-day 90-day 90-day LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR Interest rate caps: Notional amount....... -- $ 75,000 $ 75,000 -- -- -- $150,000 $ 3 Strike rate........... -- 7.5% 8.0% -- -- -- Forward rate (beginning of period)............. 5.4% 4.6% 4.8% -- -- --
Spread range is 0.25% -- 0.875%, currently .750% COMMODITIES The Company sells recycled corrugating medium ("Medium") to various customers. The principal raw material used in the production of Medium is old corrugated containers ("OCC"). Medium and OCC prices and costs fluctuate widely due to changing market forces. The impact of these price and cost fluctuations has not been material to the overall consolidated financial statements; however, the Company does make use of swap agreements to synthetically manage the selling prices and raw material costs of a portion of its recycled medium business and to limit the Company's exposure to falling prices and rising costs. 12 13 The following table outlines the terms of the three commodity swaps that were outstanding at September 30, 1998. These swaps are settled quarterly. Board Swap #1 Contract Volume............................................. 24,000 short tons per year Average sales price (per ton)............................... Medium price(1) Contract sales price (per ton).............................. $380 Expiration Date............................................. December 31, 2002 Board Swap #2 Contract Volume............................................. 12,000 short tons per year Weighted average price (per ton)............................ Spread(2) Contract sales price (per ton).............................. $268 Expiration Date............................................. March 31, 2003 Board Swap #3 Contract Volume............................................. 12,000 short tons per year Weighted average price (per ton)............................ Spread(2) Contract sales price (per ton).............................. $270 Expiration Date............................................. March 31, 2003
- --------------- (1) Containerboard: 26 Lb. Semichemical Medium: Price (Eastern U.S.) as reported in the Paper Packaging Monitor. (2) Spread represents the difference between the Medium price (Containerboard: 26 Lb. Semichemical Medium: Price (Eastern U.S.) as reported in the Pulp Packaging Monitor) and the OCC price (Recovered Paper: Corrugated: OCC (11) Price as reported in the Recycled Materials Monitor). 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, 1998 are incorporated herein by reference: Consolidated Statements of Income for the years ended September 30, 1998, 1997 and 1996. Consolidated Balance Sheets as of September 30, 1998 and 1997. Consolidated Statements of Shareholders' Equity for the years ended September 30, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. The information in Note 12, "Financial Results by Quarter (Unaudited)" on page 45 of the Annual Report to Shareholders for the years ended September 30, 1998 and 1997 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 13 14 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 2002," "Incumbent Directors -- Term Expiring 2001" and "Incumbent Directors -- Term Expiring 2000" in the Proxy Statement for the Annual Meeting of Shareholders to be held January 28, 1999 are incorporated herein by reference for information on the directors of the Registrant. See Item X in Part I hereof for information regarding the executive officers of the Registrant. The section under the heading "Other Matters" entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 28, 1999 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 28, 1999 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 28, 1999 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 28, 1999 is incorporated herein by reference. 14 15 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, 1998 are incorporated by reference in Part II, Item 8: Consolidated Statements of Income for the years ended September 30, 1998, 1997 and 1996. Consolidated Balance Sheets as of September 30, 1998 and 1997. Consolidated Statements of Shareholders' Equity for the years ended September 30, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. Report of Independent Auditors. 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). 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.
15 16
EXHIBIT NUMBER - ------- 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. (incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1997). 10.9 -- Contribution Agreement dated as of September 5, 1997 by and among Rock-Tenn Company, Rock-Tenn Partition Company and RTS Packaging, LLC (incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1997). 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. (incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1997). 10.11 -- Consulting Agreement dated January 21, 1997 between Eugene U. Frey and the Company (incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1997). 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 (for SEC use only). 99 -- Audited Financial Statements for the Rock-Tenn Company 1993 Employee Stock Purchase Plan for the years ended September 30, 1998, 1997 and 1996.
16 17 (B) REPORTS ON FORM 8-K. Not applicable. (C) SEE ITEM 14(A)(3) AND SEPARATE EXHIBIT INDEX ATTACHED HERETO. (D) NOT APPLICABLE. 17 18 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 Date: December 18, 1998 By: /s/ BRADLEY CURREY, JR. ------------------------------------ Bradley Currey, Jr. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ----------------------------------------------------- ---------------------------- ----------------- /s/ BRADLEY CURREY, JR. Principal Executive Officer December 18, 1998 - ----------------------------------------------------- and Director, Chairman of Bradley Currey, Jr. the Board and Chief Executive Officer /s/ DAVID C. NICHOLSON Principal Financial and December 18, 1998 - ----------------------------------------------------- Accounting Officer, Senior David C. Nicholson Vice President, Chief Financial Officer and Secretary /s/ STEPHEN G. ANDERSON Director December 18, 1998 - ----------------------------------------------------- Stephen G. Anderson /s/ J. HYATT BROWN Director December 18, 1998 - ----------------------------------------------------- J. Hyatt Brown /s/ MARY LOUISE MORRIS BROWN Director December 18, 1998 - ----------------------------------------------------- Mary Louise Morris Brown /s/ ROBERT B. CURREY Director December 18, 1998 - ----------------------------------------------------- Robert B. Currey /s/ A.D. FRAZIER Director December 18, 1998 - ----------------------------------------------------- A.D. Frazier /s/ EUGENE U. FREY Director December 18, 1998 - ----------------------------------------------------- Eugene U. Frey /s/ LAWRENCE L. GELLERSTEDT, III Director December 18, 1998 - ----------------------------------------------------- Lawrence L. Gellerstedt, III /s/ JOHN D. HOPKINS Director December 18, 1998 - ----------------------------------------------------- John D. Hopkins
18 19
SIGNATURE TITLE DATE - ----------------------------------------------------- ---------------------------- ----------------- /s/ JAMES W. JOHNSON Director December 18, 1998 - ----------------------------------------------------- James W. Johnson /s/ RANDOLPH SEXTON Director December 18, 1998 - ----------------------------------------------------- Randolph Sexton /s/ JAY SHUSTER Director December 18, 1998 - ----------------------------------------------------- Jay Shuster /s/ JOHN W. SPIEGEL Director December 18, 1998 - ----------------------------------------------------- John W. Spiegel
19 20 INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF EXHIBITS PAGE NO. - ------- ----------------------- ---------- 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 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................. 23 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)
20 21
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF EXHIBITS PAGE NO. - ------- ----------------------- ---------- 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. (incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1997) 10.9 -- Contribution Agreement dated as of September 5, 1997 by and among Rock-Tenn Company, Rock-Tenn Partition Company and RTS Packaging, LLC (incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1997) 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. (incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1997) 10.11 -- Consulting Agreement dated January 21, 1997 between Eugene U. Frey and the Company (incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1997) 12 -- Statements re: Computation of Ratio of Earnings to Fixed Charges..................................................... 24 13 -- Annual Report to Shareholders submitted herewith but not "filed," except for those portions expressly incorporated by reference herein 21 -- Subsidiaries of the Registrant.............................. 25 23 -- Report and Consent of Ernst & Young LLP..................... 26 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............................................... 27
21 22 SCHEDULE II ROCK-TENN COMPANY SEPTEMBER 30, 1998 (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD - ------------------------------------------ ---------- ---------- ------ ---------- ---------- Year ended September 30, 1998: Allowance for Doubtful Accounts, Returns and Discounts........................ $3,632 $10,088 -- $9,903 $3,817 Reserve for Facility Closures and Consolidation........................ 4,640 1,903(3) -- 3,597 2,946 Year Ended September 30, 1997(4): Allowance for Doubtful Accounts, Returns and Discounts........................ $3,094 $12,454 $589(1) $12,505 $3,632 Reserve for Facility Closures and Consolidation........................ 1,176 1,090(3) 6,736(2) 4,362 4,640 Year Ended September 30, 1996(4): Allowance for Doubtful Accounts, Returns and Discounts........................ $2,144 $6,028 -- $5,078 $3,094 Reserve for Facility Closures and Consolidation........................ -- 1,926(3) -- 750 1,176
- --------------- (1) Reserve recorded in connection with Waldorf acquisition. (2) Reserve recorded in connection with Waldorf and Davey acquisitions and the formation of RTS Packaging, LLC. (3) Reserve recorded in connection with plant closings and employee terminations, net of reversals of $377 and $247 in fiscal 1997 and fiscal 1998, respectively. (4) Prior year amounts have been changed to conform to current year presentation. 22 EX-4.4 2 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. 23 EX-12 3 STATEMENTS RE: COMPUTATION OF RATIO OF EARNINGS 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, ------------------------------------------------ 1994 1995 1996 1997 1998 ------- ------- ------- ------- -------- Fixed Charges: Interest expenses............................. $ 2,736 $ 8,122 $10,772 $26,466 $ 34,622 Amortization of debt issuance costs........... 91 265 206 320 360 Interest capitalized during period............ -- -- -- 1,214 888 Portion of rent expenses representative of interest................................... 1,035 1,443 2,316 2,584 3,034 ------- ------- ------- ------- -------- Fixed charges................................. $ 3,862 $ 9,830 $13,294 $30,584 $ 38,904 ======= ======= ======= ======= ======== Earnings: Pretax income from continuing operations...... $60,978 $67,922 $82,469 $37,756 $ 74,613 Fixed charges................................. 3,862 9,830 13,294 30,584 38,904 ------- ------- ------- ------- -------- Earnings...................................... $64,840 $77,752 $95,763 $68,340 $113,517 ======= ======= ======= ======= ======== Ratio of earnings to fixed charges.............. 16.79 7.91 7.20 2.23 2.92 ======= ======= ======= ======= ========
24 EX-13 4 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 Rock-Tenn Overview Rock-Tenn has two core businesses. The Company supplies packaging and laminated paperboard products to consumer and industrial markets throughout North America. In addition, we produce 100% recycled paperboard, which is the principal raw material used by our converting operations. Since its founding in 1936, Rock-Tenn Company has expanded its existing businesses and acquired related businesses with a careful focus on developing niche markets that utilize recycled paperboard. The Company's long track record of success has been achieved by avoiding businesses with which Rock-Tenn has little experience, and entering businesses in which the Company has unique competence. Headquartered in Norcross, Georgia, Rock-Tenn employs approximately 9,300 people and operates 77 manufacturing facilities throughout the United States, Canada and Mexico. Rock-Tenn's Class A common stock is traded on the New York Stock Exchange under the symbol RKT. Rock-Tenn At-A-Glance...Foldout Our Five Strengths...1 Letter to Shareholders...2 A Foundation for Value...4 Integrated Operations...6 Market Leadership...8 Multiple Packaging Solutions...10 Solid Growth Strategy...12 Directors and Officers...14 Financial Review...15 Locations...48 Shareholder Information...49 FINANCIAL AND OPERATING HIGHLIGHTS ROCK-TENN COMPANY
Year Ended September 30, (In Thousands, Except Per Share Amounts) 1998 1997 % change - ----------------------------------------------------------------------------------------- Net sales $1,293,606 $1,109,693 17% Income before income taxes 74,613 37,756 98% Net income 42,020 16,101 161% Diluted earnings per common share 1.20 .47 155% Dividends paid per common share .30 .30 - Book value per common share 11.49 10.80 6% Total assets 1,111,481 1,113,686 - Long-term debt, including current maturities 508,338 533,622 (5%) Shareholders' equity 397,415 371,212 7% Cash provided by operating activities 125,688 106,377 18% Capital expenditures 81,666 87,016 (6%) Cash paid for purchases of businesses - 301,287 (100%) - ----------------------------------------------------------------------------------------
PRICE RANGE OF CLASS A COMMON STOCK
Fiscal 1998 Fiscal 1997 - ------------------------------------------------------------------------------------ High Low High Low First Quarter $20.94 $19.13 $23.25 $17.50 Second Quarter $21.81 $15.75 $20.00 $16.50 Third Quarter $16.88 $12.56 $18.25 $13.75 Fourth Quarter $15.06 $10.00 $22.00 $17.00 - ------------------------------------------------------------------------------------
ROCK-TENN COMPANY OPERATIONS [NATIONAL MAP OF ROCK-TENN COMPANY OPERATIONS] 2 FIVE YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS ROCK-TENN COMPANY
Year Ended September 30, (In Thousands, Except Per Share Amounts) 1998 1997(b)(c) 1996 1995(d) 1994 - ----------------------------------------------------------------------------------------------------------------------------- Net sales $1,293,606 $1,109,693 $876,111 $902,878 $705,849 Income before income taxes 74,613 37,756 82,469 67,922 60,978 Net income 42,020 16,101 51,125 41,432 37,501 - ----------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share(a) 1.20 .47 1.50 1.21 1.10 Dividends paid per common share(a) .30 .30 .27 .27 .15 Book value per common share(a) 11.49 10.80 10.54 9.29 8.46 - ----------------------------------------------------------------------------------------------------------------------------- Total assets 1,111,481 1,113,686 581,688 555,254 413,748 Long-term debt, including current maturities 508,338 533,622 146,604 162,087 61,210 Shareholders' equity 397,415 371,212 349,155 307,898 281,959 - ----------------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 125,688 106,377 123,530 77,604 57,955 Capital expenditures 81,666 87,016 72,151 73,844 71,672 Cash paid for purchases of businesses - 301,287 - 61,579 34,978 - -----------------------------------------------------------------------------------------------------------------------------
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 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 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. 16 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY General The Company's core businesses, converted products and paperboard, are cyclical because of general industry supply and demand factors and tend to fluctuate with the general business cycle of the U.S. economy. These businesses are also seasonal with the first fiscal quarter generally experiencing lower sales and earnings due to reduced demand from customers during the period. See Note 12 of Notes to Consolidated Financial Statements. Unit production costs and earnings from converted products generally vary significantly with shipment levels. Vertical integration enables the Company to maintain operating rates at its paperboard mills during periods of reduced demand for recycled paperboard. The Company's strategy has been to operate its paperboard mills at high operating rates in order to lower unit production costs. During fiscal 1998, 1997 and 1996, the Company's paperboard mills ran at operating rates of 89.5%, 88.8% and 85.7%, 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 material costs through the following measures. First, ongoing modernization of 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 book covers used by the book publishing industry. On September 5, 1997, the Company and Sonoco Products Company combined their respective fiber partition business assets 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. SEGMENT AND MARKET INFORMATION The Company operates principally in two industry segments: converted products and paperboard. The converted products segment is comprised of facilities that produce folding cartons, fiber partitions, corrugated containers, corrugated displays, thermoformed plastic products and laminated paperboard products. In the folding carton and corrugated container markets, the Company competes with a significant number of national and regional packaging suppliers. In the fiber partitions, corrugated displays, thermoformed plastic products and laminated paperboard products markets, the Company competes with a smaller number of national, regional and local companies offering highly specialized products. During fiscal 1998, the Company sold converted products to over 5,000 customers with no customer accounting for more than 10% of the Company's net sales. The Company sells converted products to several large national customers which annually purchase $25 to $45 million of converted products from the Company; however, a majority of the Company's converted products sales are to customers which annually purchase less than $10 million of converted products from the Company. Within the converted products market, conditions have become highly competitive as large national customers have begun consolidating their supplier relationships. As a result of this trend, the Company regularly participates in bidding for sales opportunities to national customers. The loss of business or the award of new business from national customers may have a significant impact on the Company's results of operations. The paperboard segment consists of facilities that manufacture 100% recycled clay-coated and uncoated paperboard (referred to herein as boxboard) and corrugating medium (referred to herein as medium) and that collect recovered 17 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY paper. In the paperboard segment, the Company competes with integrated and non-integrated national, regional and local companies manufacturing various grades of paperboard. During fiscal 1998, the Company sold paperboard to over 1,000 customers. A significant percentage of the Company's sales of boxboard are made to the Company's converted products segment. The current trend in the paperboard industry is for a higher degree of integration between paperboard production and converted products sales. The Company's paperboard segment's sales volumes may therefore be directly impacted by changes in demand for the Company's converted products.
Fiscal Year Ended September 30, (In Millions) 1998 1997 1996 - -------------------------------------------------------------- Net sales (aggregate): Converted products $1,063.7 $ 938.7 $ 779.7 Paperboard 461.1 391.8 281.4 - -------------------------------------------------------------- Total $1,524.8 $1,330.5 $1,061.1 - -------------------------------------------------------------- Net sales (intersegment): Converted products $ 0.2 $ 1.2 $ 0.4 Paperboard 231.0 219.6 184.6 - -------------------------------------------------------------- Total $ 231.2 $ 220.8 $ 185.0 - -------------------------------------------------------------- Net sales (unaffiliated customers): Converted products $1,063.5 $ 937.5 $ 779.3 Paperboard 230.1 172.2 96.8 - -------------------------------------------------------------- Total $1,293.6 $1,109.7 $ 876.1 - -------------------------------------------------------------- Operating income: Converted products $ 53.2 $ 26.4 $ 35.2 Paperboard 69.4 46.4 64.4 - -------------------------------------------------------------- 122.6 72.8 99.6 Corporate expense (8.7) (8.6) (7.5) - -------------------------------------------------------------- Income from operations 113.9 64.2 92.1 Interest expense (35.0) (26.8) (10.9) Interest and other income 1.0 0.7 1.3 Minority interest in income of consolidated subsidiary (5.3) (0.4) - - -------------------------------------------------------------- Income before income taxes $ 74.6 $ 37.7 $ 82.5 - --------------------------------------------------------------
Results of Operations Quarterly information, set forth in the following tables, is provided to assist in evaluating trends in the Company's results of operations. For additional discussion of quarterly information, see the Company's quarterly reports filed on Form 10-Q. Net Sales (Unaffiliated Customers) Net sales for fiscal 1998 increased 16.6% to $1,293.6 million from $1,109.7 million for fiscal 1997. Net sales increased primarily as a result of acquisitions completed during fiscal 1997 and price increases offset by lower volumes for operations owned during both periods. 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
First Second Third Fourth Fiscal (In Millions) Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------ 1996 $ 193.1 $ 193.3 $ 193.7 $ 199.6 $ 779.7 1997 184.4 231.5 251.7 271.1 938.7 1998 260.6 268.0 263.3 271.8 1,063.7 - ------------------------------------------------------------------------------
Net sales of converted products before intersegment eliminations for fiscal 1998 increased 13.3% to $1,063.7 million from $938.7 million for fiscal 1997. The increase was primarily the result of acquisitions completed during fiscal 1997 and certain price increases. The Company experienced volume decreases in the latter part of fiscal 1998, which were primarily attributable to lower sales to a national customer. Separately, the Company has been notified that another national customer will phase out purchases during the first half of fiscal 1999. The Company currently believes that the impact of lower volumes with these national customers will be offset in future periods by the award of new business from other customers. However, there can be no assurance regarding the amount or timing of any such awards. See Segment and Market Information. Net sales of converted products before intersegment eliminations for fiscal 1997 increased 20.4% to $938.7 million from $779.7 million for fiscal 1996. The increase was primarily the result of the Waldorf acquisition. Net Sales (Aggregate) - Paperboard Segment
First Second Third Fourth Fiscal (In Millions) Quarter Quarter Quarter Quarter Year - -------------------------------------------------------------- 1996 $ 72.9 $ 71.9 $ 69.9 $ 66.7 $281.4 1997 66.5 100.4 109.3 115.6 391.8 1998 121.4 118.7 111.8 109.2 461.1 - --------------------------------------------------------------
18 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY Net sales of paperboard before intersegment eliminations for fiscal 1998 increased 17.7% to $461.1 million from $391.8 million for fiscal 1997. The increase was the result of the Waldorf acquisition, significant price and volume increases on medium and price increases on boxboard. See Operating Income - Paperboard Segment. The increase was offset in part by volume decreases in the latter part of fiscal 1998 attributable to lower volume with one national customer within the converted products segment discussed above. The phase out of a national customer's purchases within the converted products segment during the first half of fiscal 1999 will also result in a reduction in boxboard volumes. The Company currently believes that the impact of the lower volumes with these national customers will be offset in the future by awards of new business from other converted products customers and from sales of boxboard to other converters. However, there can be no assurance regarding the amount or timing of any such awards. See Segment and Market Information. 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 increase was primarily the result of the Waldorf acquisition. Cost of Goods Sold Cost of goods sold for fiscal 1998 increased 13.7% to $950.2 million from $835.9 million for fiscal 1997. Cost of goods sold as a percentage of net sales for fiscal 1998 decreased to 73.5% from 75.3% for fiscal 1997. The decrease in cost of goods sold as a percentage of net sales was primarily the result of higher average selling prices and increased manufacturing efficiencies, which were partially offset by increased costs of recovered paper. See Operating Income - Paperboard Segment. Cost of goods sold for fiscal 1997 increased 33.0% to $835.9 million from $628.6 million for fiscal 1996. Cost of goods sold as a percentage of net sales for fiscal 1997 increased to 75.3% from 71.7% for fiscal 1996. The increase in cost of goods sold as a percentage of net sales was 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 medium business acquired in the Waldorf acquisition incurred significantly lower margins than the Company's average margins in fiscal 1996. 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 $1.2 million higher, the same as and $5.9 million lower than it would have been under the FIFO method for fiscal 1998, 1997 and 1996, respectively. Net income was $0.7 million lower, the same as and $3.7 million higher than it would have been under the FIFO method for fiscal 1998, 1997 and 1996, respectively. These supplemental FIFO earnings reflect the after tax effect of LIFO each year. Gross Profit
First Second Third Fourth Fiscal (% of Net Sales) Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------ 1996 26.5% 27.8% 29.5% 29.1% 28.3% 1997 25.7 23.9 24.6 24.7 24.7 1998 25.8 25.8 27.7 26.8 26.5 - ------------------------------------------------------------------
Gross profit for fiscal 1998 increased 25.4% to $343.4 million from $273.8 million for fiscal 1997. Gross profit as a percentage of net sales increased to 26.5% for fiscal 1998 from 24.7% for fiscal 1997. See Cost of Goods Sold. Gross profit for fiscal 1997 increased 10.6% to $273.8 million from $247.5 million for fiscal 1996. Gross profit as a percentage of net sales decreased to 24.7% for fiscal 1997 from 28.3% for fiscal 1996. See Cost of Goods Sold. 19 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY Selling, General and Administrative Expenses Selling, general and administrative expenses for fiscal 1998 increased 17.6% to $227.5 million from $193.4 million for fiscal 1997. Selling, general and administrative expenses as a percentage of net sales for fiscal 1998 increased to 17.6% from 17.4% for fiscal 1997. The increase in selling, general and administrative expenses as a percentage of net sales for fiscal 1998 resulted from increased incentive compensation expenses. Selling, general and administrative expenses for fiscal 1997 increased 27.4% to $193.4 million from $151.8 million for fiscal 1996. Selling, general and administrative expenses as a percentage of net sales for fiscal 1997 increased to 17.4% 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 During the fourth quarter of fiscal 1998, the Company began implementing certain cost reduction initiatives designed to reduce overhead and production costs and improve operating efficiency. In connection with these cost reduction initiatives, the Company recorded a $2.0 million charge primarily for severance and related costs associated with staff reductions. During fiscal 1999, the Company expects to incur $5.7 million of costs principally for severance related costs in connection with additional cost reduction initiatives. A significant portion of these costs will be incurred during the first half of fiscal 1999 in connection with the closing of the Company's Taylorsville, North Carolina folding carton operation and its Otsego, Michigan laminated converted products operation and consolidation of these businesses into its other existing facilities. During fiscal 1997, in connection with the Waldorf acquisition, the Company closed its folding carton plant at Mundelein, Illinois. The Mundelein facility was acquired in the acquisition of Olympic Packaging. In connection with this closing, the Company incurred a charge 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, based on an analysis of estimated future cash flows, that such goodwill would not be recoverable. The Company incurred additional costs of approximately $1.6 million during fiscal 1997 principally for employee termination and related charges associated with closing the Mundelein facility. In addition, during fiscal 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 related to the losses on disposal of machinery and equipment. During fiscal 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, Virginia, converting facility and was 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 $3.6 million consisting primarily of employee severance, employee relocation and training costs, asset impairment, equipment and inventory relocation costs and lease termination costs. Segment Operating Income Operating Income - Converted Products Segment
Net Sales Operating Return (In Millions, Except Percentages) (Aggregate) Income on Sales - -------------------------------------------------------------------------------- First Quarter $ 193.1 $ 6.6 3.4% Second Quarter 193.3 7.6 3.9 Third Quarter 193.7 9.7 5.0 Fourth Quarter 199.6 11.3 5.7 - -------------------------------------------------------------------------------- Fiscal 1996 $ 779.7 $ 35.2 4.5% - -------------------------------------------------------------------------------- First Quarter $ 184.4 $ 4.9 2.7% Second Quarter 231.5 (4.6) (2.0) Third Quarter 251.7 9.1 3.6 Fourth Quarter 271.1 17.0 6.3 - -------------------------------------------------------------------------------- Fiscal 1997 $ 938.7 $ 26.4 2.8% - -------------------------------------------------------------------------------- First Quarter $ 260.6 $ 9.6 3.7% Second Quarter 268.0 11.8 4.4 Third Quarter 263.3 14.1 5.4 Fourth Quarter 271.8 17.7 6.5 - -------------------------------------------------------------------------------- Fiscal 1998 $ 1,063.7 $ 53.2 5.0% - --------------------------------------------------------------------------------
20 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY Operating income attributable to the converted products segment for fiscal 1998 increased 101.5% to $53.2 million from $26.4 million for fiscal 1997. Operating margin for fiscal 1998 was 5.0% and 2.8% for fiscal 1997. Excluding $2.0 million and $16.2 million of plant closing and other related costs during fiscal 1998 and 1997, respectively, operating income attributable to the converted products segment for fiscal 1998 increased 29.6% to $55.2 million from $42.6 million for fiscal 1997. Excluding the effect of $2.0 million and $16.2 million of plant closing and other related costs during fiscal 1998 and 1997, respectively, the operating margin for fiscal 1998 and fiscal 1997 was 5.2% and 4.5%, respectively. The increase in operating margin, excluding the effect of the plant closure and other related costs, was the result of average selling price increases and operating efficiencies. 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 and $3.6 million of plant closing and other related costs during fiscal 1997 and 1996, respectively, operating income attributable to the converted products segment for fiscal 1997 increased 9.8% to $42.6 million from $38.8 million for fiscal 1996. Excluding the effect of $16.2 million and $3.6 million of plant closing and other related costs during fiscal 1997 and 1996, respectively, operating margin for fiscal 1997 and 1996 was 4.5% and 5.0%, respectively. 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. Operating Income - Paperboard Segment
Weighted Boxboard Average Medium Average Average Net Sales Operating Tons Boxboard Tons Medium Recovered (Aggregate) Income Return Shipped Price Shipped Price Paper Cost (In Millions) (In Millions) On Sales (In Thousands) (Per Ton) (In Thousands) (Per Ton) (Per Ton) - --------------------------------------------------------------------------------------------------------------------------------- First Quarter $ 72.9 $16.8 23.0% 148.0 $466 - - $65 Second Quarter 71.9 16.5 22.9 155.1 438 - - 53 Third Quarter 69.9 16.3 23.3 161.5 407 - - 43 Fourth Quarter 66.7 14.8 22.2 162.0 392 - - 44 - -------------------------------------------------------------------------------------------------------------------------------- Fiscal 1996 $281.4 $64.4 22.9% 626.6 $425 - - $51 - -------------------------------------------------------------------------------------------------------------------------------- First Quarter $ 66.5 $11.0 16.5% 160.3 $389 - - $52 Second Quarter 100.4 12.2 12.2 221.6 384 24.8 $234 57 Third Quarter 109.3 12.4 11.3 241.3 377 29.8 217 50 Fourth Quarter 115.6 10.8 9.3 240.4 380 43.2 275 64 - -------------------------------------------------------------------------------------------------------------------------------- Fiscal 1997 $391.8 $46.4 11.8% 863.6 $382 97.8 $247 $56 - -------------------------------------------------------------------------------------------------------------------------------- First Quarter $121.4 $18.0 14.8% 242.0 $406 45.0 $330 $70 Second Quarter 118.7 18.3 15.4 236.2 408 45.6 347 68 Third Quarter 111.8 18.3 16.4 225.3 405 40.8 338 59 Fourth Quarter 109.2 14.8 13.6 220.0 398 43.9 318 58 - -------------------------------------------------------------------------------------------------------------------------------- Fiscal 1998 $461.1 $69.4 15.1% 923.5 $404 175.3 $332 $64 - --------------------------------------------------------------------------------------------------------------------------------
21 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY Operating income attributable to the paperboard segment for fiscal 1998 increased 49.6% to $69.4 million from $46.4 million for fiscal 1997. Operating margin for fiscal 1998 increased to 15.1% from 11.8% in fiscal 1997. These increases were primarily the result of the Waldorf acquisition, significant price and volume increases for medium and price increases for boxboard, which were offset somewhat by higher weighted average recovered paper costs. 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 decreases in operating income and margin for fiscal 1997 were primarily the result of significant losses incurred by the medium business acquired in the Waldorf acquisition, an increase in weighted average recovered paper costs and lower average selling prices, which were partially offset by higher volumes. Interest Expense Interest expense for fiscal 1998 increased to $35.0 million from $26.8 million for fiscal 1997 and from $10.9 million for fiscal 1996. The increase in interest expense was primarily due to an increase in the outstanding borrowings during such periods resulting from the Waldorf acquisition and the Rite Paper acquisition. Provision for Income Taxes Provision for income taxes for fiscal 1998 increased to $32.6 million from $21.7 million for fiscal 1997. Provision for income taxes for fiscal 1997 decreased to $21.7 million from $31.3 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 during fiscal 1997, which is not deductible for income tax purposes, the Company's effective tax rate increased to 43.7% for fiscal 1998 compared to 42.8% for fiscal 1997 and compared to 38.0% for fiscal 1996. This increase in the effective tax rate in fiscal 1998 and 1997 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 Basic and Diluted Earnings Per Common Share Net income for fiscal 1998 increased 160.9% to $42.0 million from $16.1 million for fiscal 1997. Net income as a percentage of net sales increased to 3.2% for fiscal 1998 from 1.5% for fiscal 1997. Diluted earnings per share for fiscal 1998 increased to $1.20 from $.47 for fiscal 1997. 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. Diluted earnings per share for fiscal 1997 decreased to $.47 from $1.50 for fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES Working Capital and Capital Expenditures 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 fiscal 1997, the Company entered into a revolving credit facility under which it has aggregate borrowing availability of $450.0 million. At September 30, 1998, the Company had $369.0 million outstanding under its revolving credit facility. Cash and cash equivalents, $5.8 million at September 30, 1998, increased from $3.3 million at September 30, 1997. Net cash provided by operating activities for fiscal 1998 was $125.7 million compared to $106.4 million for fiscal 1997. This increase was primarily the result of increased earnings before depreciation and amortization and a smaller change in operating assets and liabilities. Net cash used by financing activities aggregated $44.7 million for fiscal 1998 and consisted primarily of repayments of debt and quarterly dividend payments. 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 22 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY and Davey and quarterly dividend payments. Net cash used for investing activities was $78.4 million for fiscal 1998 compared to $387.5 million for fiscal 1997 and consisted primarily of capital expenditures for fiscal 1998 and cash paid for the Waldorf acquisition and capital expenditures for fiscal 1997. 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 quarterly 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 quarterly dividend payments. The Company's capital expenditures aggregated $81.7 million for fiscal 1998. These expenditures were used primarily for the purchase and upgrading of certain machinery and equipment in all of the Company's divisions, building improvements in three of the Company's divisions and completion of a new building at the Company's home office. The Company estimates that its capital expenditures will aggregate approximately $77.0 million in fiscal 1999. 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 one of the Company's divisions. 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. Derivative Instruments The Company enters into a variety of derivative transactions. Generally, the Company designates at inception that derivatives are a hedge of risks associated with specific assets, liabilities or future commitments and monitors each derivative to determine if it remains an effective hedge. The effectiveness of the derivative as a hedge is based on changes in its value being highly correlated with changes in value of the underlying hedged item. The Company includes amounts received or paid in operations when the underlying transaction settles. The Company does not enter into or hold derivatives for trading or speculative purposes. The Company uses interest rate cap agreements and interest rate swap agreements to manage synthetically the interest rate characteristics of a portion of its outstanding debt and partially to limit the Company's exposure to rising interest rates. Amounts to be received or paid as a result of interest rate cap agreements and interest rate swap agreements are accrued and recognized as an adjustment of interest expense related to the designated debt. Interest rate cap purchase costs are amortized to interest expense ratably during the life of the agreement. The Company uses commodity swap agreements to manage synthetically the selling prices and raw material costs of a portion of its medium business and to limit the Company's exposure to falling prices and rising costs. Amounts to be received or paid as a result of these swap agreements are recognized in the period in which the related sale is made. Acquisitions 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. The Company, however, is currently in the process of integrating the operations it acquired during fiscal 1997 into the Company's other operations. Consequently, although the Company cannot predict the extent to which it will pursue future acquisitions, the Company expects that it will be less likely to pursue additional acquisitions in the near term. 23 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY 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 $5.3 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 867,510 shares of the Company's Class A common stock. On September 5, 1997, the Company and Sonoco Products Company combined their respective fiber partition business assets into RTS Packaging. Pursuant to the agreement, the Company owns 65% of the outstanding interests of RTS Packaging. Stock Repurchase Program The Board of Directors has authorized the Company to repurchase from time to time prior to July 31, 2003 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 this plan may not exceed 1.5 million shares. During fiscal 1998, the Company repurchased 290,100 shares of Class A common stock and no Class B common stock under this plan. Under a previously authorized plan which expired on July 31, 1998, the Company repurchased 40,000 shares of Class A common stock and no Class B common stock during fiscal 1998. YEAR 2000 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 depends upon its information technology ("IT") and non-IT systems (which are systems used to run manufacturing equipment that contain embedded hardware or software that must handle dates and may not properly record dates after 1999) to conduct and manage the Company's business. Unless remediated, Year 2000 related issues may materially adversely affect the results of operations, financial condition and cash flow of the Company and/or one or more of the Company's suppliers or customers. While the Company obtains its raw materials, equipment and services from a number of suppliers and sells its products to a number of customers for a wide variety of applications, if a sufficient number of these suppliers or customers experience Year 2000 problems that prevent or substantially impair their ability to continue to transact business with the Company as they currently do, the Company would be required to find alternative suppliers and/or customers for its products. Any delay or inability in finding such alternatives could have a material adverse effect on the Company's results of operations, financial condition and cash flow. The Company currently has a team dedicated to identifying, evaluating and resolving the Company's potential Year 2000 issues. The Company's Year 2000 program includes six stages: education, inventory, assessment, remediation, testing and implementation. The education stage involved identifying Year 2000 leaders at each of the Company's facilities and educating Company personnel on the specific issues associated with the Year 2000 problem. During the inventory stage, Company personnel identified any system (IT and non-IT) that could potentially have a Year 2000 problem and developed 24 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY software that is now being used to centrally track these identified systems. The assessment stage involves determining if there is a Year 2000 problem with the specific system (IT and non-IT). Remediation involves deciding what action to take if there is a Year 2000 problem, such as modifying or replacing the system, and actually fixing the problem. Testing is performed on the system once the remediation is complete. When it is determined that the system is Year 2000 compliant, the system is implemented. The Company expects to have substantially completed all phases of its Year 2000 program by June 30, 1999, which will leave six months for additional internal testing and troubleshooting prior to 2000. The Company is approximately 90% and 60% complete with the assessment stage relating to IT and non-IT systems, respectively. With respect to IT systems that are known to have required remediation, approximately 60% of such systems have been remediated, tested and implemented and are currently Year 2000 compliant, and with respect to non-IT systems that are known to have required remediation, approximately 50% of such systems have been remediated, tested and implemented and are currently Year 2000 compliant. Based on the results of the Company's Year 2000 program, the Company will develop contingency plans as necessary. The Company currently believes that it will be able to modify, upgrade or replace all of its IT and non-IT systems affected by the Year 2000 problem on a timely basis. In the event that the Company does not remediate on a timely basis any material Year 2000 problem, the Company may be unable to, among other things, take customer orders, manufacture and ship products, invoice customers or collect payments. Under a number of the Company's supply agreements, the Company is required to indemnify and hold harmless customers for damages incurred by such customers arising from the Company's failure to resolve its Year 2000 problems. The amount of any potential liability and/or lost revenue cannot be reasonably estimated at this time; however, such amounts could be material. The Company has also begun a program to assess the Year 2000 readiness of its suppliers. This program has involved identifying suppliers that are critical to the Company's operations as well as suppliers that would be hard to replace and conducting a survey of such suppliers to begin assessing their Year 2000 readiness. Based upon the results of this assessment, the Company will develop contingency plans as deemed necessary. The Company cannot reasonably estimate the magnitude of the impact on the Company of the Year 2000 problems that may be experienced by any of the Company's suppliers; however, the impact of any such problems could have a material adverse effect on the Company's results of operations, financial condition and cash flow. Further, the Company does not propose to assess the Year 2000 problems, if any, of its customers. To the extent customers experience Year 2000 problems that are not remediated on a timely basis, the Company anticipates potential material fluctuations in the demand for its products. While the Company believes the occurrence of such a scenario is unlikely, a possible worst case scenario might include the inadvertent failure of the Company to remediate the process controllers (which are non-IT systems) on one or more of the Company's paper machines. Depending on the number of machines affected, such event could have an adverse impact on the Company's manufacture of paperboard and its ability to supply its converting operations, which, depending on its duration, could have a material adverse effect on the Company's results of operations, financial condition and cash flow. The Company is in the process of assessing the process controllers on all of its paper machines and has involved external process controller vendors to assist the Company in testing these systems. Costs associated with the Year 2000 program (excluding costs relating to capital improvements to IT and non-IT systems that are not directly related to remediating Year 2000 problems in such systems) are being expensed as incurred. Funding for the program is being provided through the Company's operating cash flows. To date, the Company has spent approximately $1.0 million in connection with the Year 2000 program and expects to spend an additional $2.0 million to $5.0 million to complete the program. There can be no assurance that the cost of the Company's Year 2000 program will not materially exceed expectations. 25 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY EXPENDITURES FOR ENVIRONMENTAL COMPLIANCE The Company does not believe that future compliance with environmental and health and safety laws and regulations will have a material adverse effect on its 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 results of operations or financial condition. 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 results of operations or financial condition. The Company estimates that it will spend an additional $1.5 million to $4.0 million for capital expenditures during fiscal 1999 in connection with other matters relating to environmental compliance. In addition, 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 that 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. The Company has been identified as a potentially responsible party ("PRP") at nine 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"), the Kalamazoo River site ("Kalamazoo Site"), and the Chemical Handling Corporation site ("Chemical Handling 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 has paid its final allocation of liability of approximately $9,300 for the surface contamination at the site. This amount represented 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. 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. The Company has entered into a settlement agreement pursuant to which the Company paid $325,000 and received releases from certain past, present and future environmental claims and actions involving the Kalamazoo Site. With respect to the Chemical Handling Site, the Company was found to have only minimal usage of the Site. Therefore, on August 28, 1998, the Company signed a consent decree pursuant to which the Company paid approximately $41,000. The consent decree releases the Company from liability to the United States government associated with past response costs at the Chemical Handling Site. It is not anticipated that there will be any further clean-up costs at this site. 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 results of operations or financial condition. 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 26 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ROCK-TENN COMPANY 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 $3.0 million. New Accounting Standards 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 in fiscal 1999. 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. Financial Accounting Standards No. 133 ("SFAS 133") establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 is required to be adopted in fiscal 2000. The Company is currently evaluating SFAS 133 and has not yet determined its impact on the Company's consolidated financial statements. FORWARD-LOOKING STATEMENTS Statements herein regarding, among other things, estimated capital expenditures for fiscal 1999, the anticipated impact and cost of remediating Year 2000 problems, expected expenditures for environmental, health and safety law compliance, awards of new business and costs expected to be incurred as a result of certain cost reduction initiatives 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 extent of the Company's and certain third parties' Year 2000 problems, the costs to remedy such problems and the impact of the failure to remedy such problems, the estimated cost of compliance with environmental, health and safety laws, the expected resolution of various pending environmental matters, the amount and timing of awards of new business and the estimated costs expected to be incurred in connection with certain cost reduction initiatives. Such statements are subject to certain risks including, among others, that the amount of necessary capital expenditures has been underestimated, the extent of the Company's Year 2000 problems and the costs to remedy, and the likely impact of, such problems 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, the amount and timing of awards of new business is overstated and the costs associated with certain cost reduction initiatives have been underestimated. 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. 27 14 Consolidated Statements of Income ROCK-TENN COMPANY
Year Ended September 30, (In Thousands, Except Per Share Data) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Net sales $1,293,606 $1,109,693 $876,111 Cost of goods sold 950,167 835,877 628,622 - --------------------------------------------------------------------------------------------------------------- Gross profit 343,439 273,816 247,489 Selling, general and administrative expenses 227,548 193,389 151,752 Plant closing and other costs 1,997 16,251 3,580 - --------------------------------------------------------------------------------------------------------------- Income from operations 113,894 64,176 92,157 Interest expense (34,982) (26,787) (10,978) Interest and other income 974 718 1,290 Minority interest in income of consolidated subsidiary (5,273) (351) - - --------------------------------------------------------------------------------------------------------------- Income before income taxes 74,613 37,756 82,469 Provision for income taxes (Note 7) 32,593 21,655 31,344 - --------------------------------------------------------------------------------------------------------------- Net income $ 42,020 $ 16,101 $ 51,125 =============================================================================================================== Basic earnings per share (Note 1) $ 1.21 $ .48 $ 1.54 =============================================================================================================== Diluted earnings per share (Note 1) $ 1.20 $ .47 $ 1.50 ===============================================================================================================
See accompanying notes. 28 15 Consolidated Balance Sheets ROCK-TENN COMPANY
September 30, (In Thousands, Except Share and Per Share Data) 1998 1997 - --------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 5,769 $ 3,345 Accounts receivable (net of allowances of $3,817 and $3,632) 118,164 115,162 Inventories (Note 1) 88,019 94,035 Other current assets 4,200 5,073 - --------------------------------------------------------------------------------------------------------------- Total current assets 216,152 217,615 Property, plant and equipment, at cost (Note 1): Land and buildings 178,168 163,528 Machinery and equipment 740,498 696,039 Transportation equipment 14,957 13,636 Leasehold improvements 4,386 4,117 - --------------------------------------------------------------------------------------------------------------- 938,009 877,320 Less accumulated depreciation and amortization (376,470) (326,146) - --------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 561,539 551,174 - --------------------------------------------------------------------------------------------------------------- Goodwill 317,389 325,697 Other assets 16,401 19,200 - --------------------------------------------------------------------------------------------------------------- $1,111,481 $1,113,686 =============================================================================================================== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 45,924 $ 54,471 Accrued compensation and benefits 42,040 34,500 Current maturities of long-term debt (Note 4) 43,462 41,282 Other current liabilities 21,054 21,892 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 152,480 152,145 Long-term debt due after one year (Note 4) 464,876 492,340 Deferred income taxes (Note 7) 82,248 78,288 Other long-term items 14,462 19,701 Commitments and contingencies (Notes 6 and 10) Shareholders' equity (Note 3): Preferred stock, $.01 par value; 50,000,000 shares authorized; no shares outstanding at September 30, 1998 and 1997 - - Class A common stock, $.01 par value; 175,000,000 shares authorized; 22,851,838 outstanding at September 30, 1998 and 22,582,976 outstanding at September 30, 1997, Class B common stock, $.01 par value; 60,000,000 shares authorized; 11,724,972 outstanding at September 30, 1998 and 11,791,350 outstanding at September 30, 1997 346 344 Capital in excess of par value 128,904 126,363 Retained earnings 274,039 245,592 Other (5,874) (1,087) - --------------------------------------------------------------------------------------------------------------- Total shareholders' equity 397,415 371,212 - --------------------------------------------------------------------------------------------------------------- $1,111,481 $1,113,686 ===============================================================================================================
See accompanying notes. 29 16 Consolidated Statements of Shareholders' Equity ROCK-TENN COMPANY
Class A and Class B Capital in (In Thousands, Except Share Common Stock Excess of Retained and Per Share Data) Shares Amount Par Value Earnings Other Total - --------------------------------------------------------------------------------------------------------------- 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 Net income - - - 42,020 - 42,020 Cash dividends - $.30 per share - - - (10,388) - (10,388) Sales of common stock 532,584 5 3,771 - - 3,776 Purchases of Class A common stock (330,100) (3) (1,230) (3,185) - (4,418) Foreign currency translation adjustments - - - - (4,787) (4,787) - --------------------------------------------------------------------------------------------------------------- Balance at September 30, 1998 34,576,810 $346 $128,904 $274,039 $(5,874) $397,415 ===============================================================================================================
See accompanying notes. 30 17 Consolidated Statements of Cash Flows ROCK-TENN COMPANY
Year Ended September 30, (In Thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Operating activities: Net income $ 42,020 $ 16,101 $ 51,125 Items in income not affecting cash: Depreciation and amortization 70,827 62,117 48,564 Plant closing and other costs - 14,686 - Deferred income taxes 3,974 5,017 5,105 Loss (gain) on disposal of plant and equipment and other 604 (373) (459) Minority interest in income of consolidated subsidiary 5,273 351 - Change in operating assets and liabilities (excluding acquisitions): Accounts receivable (3,866) (7,343) 10,043 Inventories 5,223 (253) 4,990 Other assets 1,219 17,408 5,657 Accounts payable (8,224) 7,484 (1,238) Accrued liabilities 8,638 (8,818) (257) - ----------------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 125,688 106,377 123,530 Financing activities: Net (repayments) additions to revolving credit facilities (17,000) 385,570 432 Additions to long-term debt - 5,000 1,933 Repayments of long-term debt (8,285) (150,775) (17,863) Debt issuance costs - (124) (281) Sales of common stock 3,776 4,059 2,491 Purchases of common stock (4,418) - (4,016) Cash dividends paid to shareholders (10,388) (10,070) (9,064) Distribution to minority interest (8,400) - - - ----------------------------------------------------------------------------------------------------------------------------- Cash (used for) provided by financing activities (44,715) 233,660 (26,368) Investing activities: Cash paid for purchases of businesses, net of cash received - (301,287) - Capital expenditures (81,666) (87,016) (72,151) Proceeds from sale of property, plant and equipment 2,700 1,364 2,172 Decrease (increase) in unexpended industrial revenue bond proceeds 610 (610) 2,210 - ----------------------------------------------------------------------------------------------------------------------------- Cash used for investing activities (78,356) (387,549) (67,769) Effect of exchange rate changes on cash (193) (19) (49) - ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 2,424 (47,531) 29,344 Cash and cash equivalents at beginning of year 3,345 50,876 21,532 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 5,769 $ 3,345 $ 50,876 ============================================================================================================================= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes, net of refunds $ 25,916 $ 784 $ 22,288 Interest, net of amounts capitalized 37,258 29,249 10,719
See accompanying notes. 31 18 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 converted products, including folding cartons, fiber partitions, corrugated containers and displays and laminated paperboard products, 100% recycled paperboard, and recycled corrugating medium primarily to nondurable goods producers. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables generally are due within 30 days. The Company 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. The Company recognizes revenue when title to the goods sold passes to the buyer, which is generally at the time of shipment. Derivatives. The Company enters into a variety of derivative transactions. Generally, the Company designates at inception that derivatives are a hedge of risks associated with specific assets, liabilities or future commitments and monitors each derivative to determine if it remains an effective hedge. The effectiveness of the derivative as a hedge is based on changes in its value being highly correlated with changes in value of the underlying hedged item. The Company includes amounts received or paid in operations when the underlying transaction settles. The Company does not enter into or hold derivatives for trading or speculative purposes. The Company uses interest rate cap agreements and interest rate swap agreements to synthetically manage the interest rate characteristics of a portion of its outstanding debt and partially to limit the Company's exposure to rising interest rates. Amounts to be received or paid as a result of interest rate cap agreements and interest rate swap agreements are accrued and recognized as an adjustment of interest expense related to the designated debt. Interest rate cap purchase costs are amortized to interest expense ratably during the life of the agreement. The Company uses commodity swap agreements to manage synthetically the selling prices and raw material costs of a portion of its recycled corrugating medium business and to limit the Company's exposure to falling prices and rising costs. Amounts to be received or paid as a result of these swap agreements are recognized in the period in which the related sale is made. Cash Equivalents. The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate fair market values. Inventories. Substantially all U.S. inventories are 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 13.1% and 12.2% of FIFO cost at September 30, 1998 and 1997, respectively. Inventories at September 30, 1998 and 1997 are as follows (in thousands):
September 30, 1998 1997 - ---------------------------------------------------------- Finished goods and work in process $ 68,735 $ 64,933 Raw materials 29,139 37,474 Supplies 12,048 12,318 - ---------------------------------------------------------- Inventories at FIFO cost 109,922 114,725 LIFO reserve (21,903) (20,690) - ---------------------------------------------------------- Net inventories $ 88,019 $ 94,035 - ----------------------------------------------------------
It is impracticable to segregate the LIFO reserve between raw materials, finished goods and work in process. 32 19 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 years ended September 30, 1998, 1997 and 1996, the Company capitalized interest of approximately $888,000, $1,214,000 and none, respectively. 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, 1998, 1997 and 1996 was approximately $59,525,000, $53,698,000 and $44,889,000, 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 diluted share. Basic and Diluted Earnings Per Share. The following table sets forth the computation of basic and diluted earnings per share:
Year Ended September 30, 1998 1997 1996 - -------------------------------------------------------------------------- Numerator: Net income $42,020,000 $16,101,000 $51,125,000 Denominator: Denominator for basic earnings per share - weighted average shares 34,595,662 33,513,557 33,201,461 Effect of dilutive stock options 547,880 829,841 812,597 Denominator for diluted earnings per share - weighted average shares and assumed conversions 35,143,542 34,343,398 34,014,058 - -------------------------------------------------------------------------- Basic earnings per share $ 1.21 $ .48 $ 1.54 - -------------------------------------------------------------------------- Diluted earnings per share $ 1.20 $ .47 $ 1.50 - --------------------------------------------------------------------------
Goodwill and Other Intangible Assets. The Company has classified as goodwill the excess of the acquisition cost over the fair values of the net assets of businesses acquired. Goodwill is amortized on a straight-line basis over periods ranging from twenty to forty years. Accumulated amortization relating to goodwill at September 30, 1998 and 1997 was $19,740,000 and $10,321,000, respectively. Other intangible assets primarily represent costs allocated to non-compete agreements, financing costs and patents. These assets are amortized on a straight-line basis over their estimated useful lives. Accumulated amortization relating to intangible assets, excluding goodwill, was approximately $4,512,000 and $3,440,000 at September 30, 1998 and 1997, respectively. Asset Impairment. The Company generally accounts for long-lived asset impairment under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles to be 33 20 held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset. If the sum of the estimated expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. Measurement of an impairment loss is based on the estimated fair value of the asset. Long-lived assets to be disposed of are generally recorded at the lower of their carrying amount or estimated fair value less cost to sell. Foreign Currency Translation. Assets and liabilities of the Company's foreign operations are generally translated from the foreign currency at the rate of exchange in effect as of the balance sheet date. Earnings from foreign operations are indefinitely reinvested in the respective operations. Revenues and expenses are generally translated at average monthly exchange rates prevailing during the year. Resulting translation adjustments are reflected in shareholders' equity. New Accounting Standards. In 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 1999. 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 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 is required to be adopted in fiscal 2000. The Company is currently evaluating SFAS 133 and has not yet determined its 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 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 recycled 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 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 $5,293,000 in connection with the planned termination of approximately 120 employees of Waldorf, principally certain senior executives and other employees at the Waldorf corporate office. The Company paid $4,753,000 in 1998 and 1997 related to these terminations and expects to make payments of approximately $690,000 during fiscal 1999. The remaining accrual was adjusted to expense in fiscal 1998. 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 867,510 shares of the Company's Class A common stock (fair value of approximately $12,200,000). 34 21 On September 5, 1997, the Company and Sonoco Products Company combined their respective fiber partition business assets 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 the transactions have been accounted for under the purchase method of accounting. The goodwill arising from these purchase transactions is being amortized over forty years. The assets acquired and liabilities assumed are as follows (in thousands): - ----------------------------------------------------------- Value of assets acquired $ 575,997 Deferred tax and other liabilities (102,264) 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 both 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):
Year Ended September 30, 1997 1996 - ---------------------------------------------------------- Net sales $1,231,215 $1,252,797 Net income 14,402 57,811 Diluted earnings per 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. During fiscal 1998, the Company notified approximately 40 people of their termination. In conjunction with these terminations, the Company recorded costs of $1,997,000, substantially all of which will be paid in fiscal 1999. As of September 30, 1998, the Company has a remaining liability of approximately $1,974,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements." During fiscal 1997, in connection with the Waldorf acquisition, management decided to close the Company's folding carton plant at Mundelein, Illinois. The Mundelein facility was acquired in the acquisition of Olympic Packaging. In connection with this closing, the Company incurred a charge of approximately $12,784,000 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, based on an analysis of estimated future cash flows, that such goodwill would not be recoverable. For the year ended September 30, 1997, the Company charged to expense approximately $1,622,000 principally for the termination of approximately 150 employees and other related charges associated with closing the Mundelein facility. Of the $1,622,000, losses of $207,000 were incurred in fiscal 1997 and payments of approximately $186,000 and $1,029,000 were made in fiscal 1998 and 1997, respectively. The remaining accrual was adjusted in fiscal 1998. The Mundelein facility had revenue and operating losses of $19,032,000 and $1,242,000, respectively, in fiscal 1997 and $30,440,000 and $1,197,000, respectively, in fiscal 1996. In addition, during fiscal 1997, management decided to close a plastics recycling facility located in Indianapolis, Indiana. For the year ended September 30, 1997, the Company charged to expense approximately $1,750,000 related to this closing, primarily relating to losses on disposal of the equipment. Severance costs were immaterial. Revenue and operating losses were immaterial to the overall consolidated financial statements. 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 $3,580,000 consisting primarily of employee severance, employee relocation and training costs, equipment and inventory relocation costs and lease termination costs. All such expenses were charged to income from operations. 35 22 Of the $3,580,000, losses of $1,654,000 were incurred in fiscal 1996 and payments of approximately $8,000, $744,000 and $750,000 were made in fiscal 1998, 1997 and 1996, respectively. The remaining accrual was adjusted in fiscal 1998 and 1997. As of September 30, 1998 no amounts were accrued related to this plan. The employment of approximately 150 employees was terminated in connection with these closures and consolidation. 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. During fiscal 1998, approximately 157,000 Class B Common shares were converted to Class A Common shares. The Company also has authorized preferred stock, of which no shares have been issued. The terms and provisions of such shares will be determined by the Board of Directors upon any issuance of such shares. Stock 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 and have 10 year terms. The Incentive Stock Option Plan, the 1987 Stock Option Plan and the 1989 Stock Option Plan provided for the granting of options to certain key employees for an aggregate of 4,320,000 shares of Class A Common and 1,440,000 shares of Class B Common. The Company will not grant any additional options under the Incentive Stock Option Plan, the 1987 Stock Option Plan or the 1989 Stock Option Plan. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, generally no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to September 30, 1995 under the fair value method of that Statement. The pro forma information is not likely to be representative of the effect on reported net income for future years, as future years will include the effect of additional vesting options. The fair values for the options granted subsequent to September 30, 1995 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 1998 and 1997, respectively: risk-free interest rate of 4.8% and 6.3%, a dividend yield of 2.0% for both years, volatility factor of the expected market price of the Company's common stock of .32 and .28, and an expected life of the option of 10 years. No options were granted during fiscal 1996. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair values estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair values of its employee stock options. For purposes of pro forma disclosures, the estimated fair values 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):
1998 1997 1996 - -------------------------------------------------------------------- Pro forma net income $ 40,730 $ 15,165 $ 51,125 Pro forma earnings per share Basic 1.18 .45 1.54 Diluted 1.16 .44 1.50 - --------------------------------------------------------------------
36 23 The table below summarizes the changes in all stock options during the periods indicated:
Class B Common Class A Common ----------------------------------------- ------------------------------------------- Weighted Average Weighted Average Shares Price Range Exercise Price Shares Price Range Exercise Price - --------------------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 1995 310,435 $2.77-8.20 $5.29 1,264,800 $ 2.75-18.25 $10.24 Exercised (23,200) $3.60-8.20 $5.75 (42,000) $ 4.75-8.20 $ 7.10 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 $4.78 1,345,080 $ 2.50-16.59 $ 9.41 Exercised or forfeited (14,080) $2.52-3.27 $2.74 (124,520) $ 2.50-18.30 $ 4.21 Granted - - - 757,100 $ 17.50-20.31 $19.49 - --------------------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 1997 301,879 $2.52-7.45 $4.87 1,977,660 $ 2.50-20.31 $13.60 Exercised or forfeited (99,660) $2.52-7.45 $3.62 (246,420) $ 2.50-18.30 $ 3.71 Granted - - - 519,200 $ 11.13-18.75 $11.48 - --------------------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 1998 202,219 $3.27-7.45 $5.49 2,250,440 $ 3.26-20.31 $14.19 Options exercisable at September 30, 1998 202,219 $3.27-7.45 $5.49 1,126,840 $ 3.26-18.30 $12.43 Options available for future grant at September 30, 1998 - - - 315,400 - - - ---------------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning options outstanding and exercisable at September 30, 1998:
Class B Common Class A Common -------------------------- -------------------------------------------------------- Weighted Weighted Weighted Weighted Average Number Average Average Average Remaining Range of Outstanding Exercise Number Exercise Number Exercise Contractual Life Exercise Prices and Exercisable Price Outstanding Price Exercisable Price (Both Classes) - ---------------------------------------------------------------------------------------------------------------------------- $ 3.26-6.09 152,719 $4.85 280,040 $ 4.83 280,040 $ 4.83 2.0 $ 7.42-7.45 49,500 $7.45 99,000 $ 7.44 99,000 $ 7.44 4.8 $11.13 - - 495,000 $11.13 - - 10.0 $15.23-17.50 - - 613,400 $15.40 605,900 $15.37 6.5 $18.30-20.31 - - 763,000 $19.51 141,900 $18.30 8.6 - ---------------------------------------------------------------------------------------------------------------------------- 202,219 $5.49 2,250,440 $14.19 1,126,840 $12.43 7.0 ============================================================================================================================
37 24 The estimated weighted average fair value of options granted during fiscal 1998 and 1997, respectively, with option prices equal to the market price on the date of grant was $4.46 and $7.61. No options were granted during fiscal 1996. Employee Stock Purchase Plan. Under the Amended and Restated 1993 Employee Stock Purchase Plan, 1,320,000 shares of Class A Common are reserved for purchase by substantially all qualifying employees of the Company. In fiscal 1998, 1997 and 1996, approximately 207,000, 196,000 and 147,000 shares, respectively, were purchased by employees under this plan. 4. Long-term Debt - -------------------------------------------------------------------------------- Long-term debt at September 30, 1998 and 1997 consists of the following:
September 30, (In Thousands) 1998 1997 - -------------------------------------------------------------------------------- Revolving credit facility (a) $369,000 $386,000 7.25% notes, due August 2005, net of unamortized discount of $94 and $108(b) 99,906 99,892 Industrial revenue bonds, bearing interest at variable rates (4.65% at September 30, 1998), due through December 2037(c) 32,150 32,150 Other notes 7,282 15,580 - -------------------------------------------------------------------------------- 508,338 533,622 Less current maturities of long-term debt 43,462 41,282 - -------------------------------------------------------------------------------- Long-term debt due after one year $464,876 $492,340 ================================================================================
(a) The Company has a 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 6.38% and 6.24% at September 30, 1998 and 1997, respectively. 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 LIBOR rate on portions of the amount outstanding under the revolving credit facility. Under the agreements, $75,000,000 is capped at 8.00% per annum until October 7, 2000 while another $75,000,000 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. In April 1998, the Company entered into an interest rate swap agreement effectively to fix the LIBOR rate on $100,000,000 of variable rate borrowings at 5.79% per annum until April 2005. (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 38 25 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. The amount of consolidated net earnings available for dividends and other restricted payments, as defined in debt agreements, was approximately $182,878,000 at September 30, 1998. As of September 30, 1998, $331,000,000 of the $369,000,000 outstanding under the revolving credit facility has been 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, 1998, the aggregate maturities of long-term debt for the succeeding five years are as follows (in thousands): - -------------------------------------------------------------------------------- 1999 $ 43,462 2000 324 2001 197 2002 331,218 2003 241 Thereafter 132,896 - -------------------------------------------------------------------------------- Total long-term debt $ 508,338 - --------------------------------------------------------------------------------
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, 1998 and 1997, there were no amounts outstanding under this facility. 5. Financial Instruments - -------------------------------------------------------------------------------- At September 30, 1998 and 1997, the fair market value of the Notes was approximately $100,250,000 and $102,310,000, respectively, based on quoted market prices. At September 30, 1998, the carrying amount for variable rate long-term debt approximates fair market value since the interest rates on these instruments are reset periodically. At September 30, 1998, the fair values of the two interest rate cap agreements were immaterial. At September 30, 1998, the fair value of the interest rate swap agreement was $4,451,000. There is no carrying amount associated with these instruments. In fiscal 1998, the Company entered into three separate swap agreements to synthetically manage the selling prices and raw material costs of a portion of its recycled corrugating medium business and to limit the Company's exposure to falling prices and rising costs. The agreements together hedge 12,000 tons of recycled corrugating medium each quarter and expire during fiscal 2003. These swap agreements were entered into through privately negotiated transactions for which there is no readily accessible market. It is impracticable to estimate the fair values as they are based upon future costs and prices which cannot be reasonably estimated. There is no carrying amount associated with these instruments. 6. Leases and Other Agreements - -------------------------------------------------------------------------------- The Company leases certain manufacturing and warehousing facilities and equipment (primarily transportation equipment) under various operating leases. As of September 30, 1998, future minimum lease payments, including certain maintenance charges on transportation equipment, under all noncancelable leases, are as follows (in thousands): - -------------------------------------------------------------------------------- 1999 $ 7,364 2000 6,335 2001 5,014 2002 3,625 2003 2,961 Thereafter 8,491 - -------------------------------------------------------------------------------- Total future minimum lease payments $33,790 - -------------------------------------------------------------------------------
Rental expense for the years ended September 30, 1998, 1997 and 1996 was approximately $12,264,000, $10,503,000 and $8,653,000, respectively, including lease payments under cancelable leases. 39 26 7. Income Taxes - -------------------------------------------------------------------------------- The Company accounts for income taxes under the liability method which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The recognition of future tax benefits is required to the extent that realization of such benefits is more likely than not. The provisions for income taxes consist of the following components (in thousands):
Year Ended September 30, 1998 1997 1996 - -------------------------------------------------------------------------------- Current income taxes: Federal $25,360 $13,676 $23,552 State 2,498 2,694 2,927 Foreign 761 268 (240) - -------------------------------------------------------------------------------- Total current 28,619 16,638 26,239 - -------------------------------------------------------------------------------- Deferred income taxes: Federal 3,359 3,989 3,912 State 265 349 46 Foreign 350 679 1,147 - -------------------------------------------------------------------------------- Total deferred 3,974 5,017 5,105 - -------------------------------------------------------------------------------- Provision for income taxes $32,593 $21,655 $31,344 ================================================================================
The differences between the statutory federal income tax rate and the Company's effective income tax rate are as follows:
Year Ended September 30, 1998 1997 1996 - -------------------------------------------------------------------------------- Statutory federal tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 3.7 3.9 2.7 Non-deductible amortization and write-off of goodwill (see Note 2) 3.5 18.3 - Other, net (primarily non-taxable items) 1.5 0.2 0.3 - -------------------------------------------------------------------------------- Effective tax rate 43.7% 57.4% 38.0% ===============================================================================-
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, 1998 1997 - -------------------------------------------------------------------------------- Deferred income tax assets: Accruals and allowances $ 9,092 $10,077 Other 5,955 4,002 - -------------------------------------------------------------------------------- Total 15,047 14,079 - -------------------------------------------------------------------------------- Deferred income tax liabilities: Property, plant and equipment 77,266 74,281 Deductible intangibles 2,343 2,533 Inventory and other 17,686 15,553 - -------------------------------------------------------------------------------- Total 97,295 92,367 - -------------------------------------------------------------------------------- Net deferred income tax liability $82,248 $78,288 ================================================================================
The Company has not recorded any valuation allowances for deferred income tax assets. The components of the income before income taxes are (in thousands):
Year Ended September 30, 1998 1997 1996 - -------------------------------------------------------------------------------- United States $71,356 $34,916 $80,798 Foreign 3,257 2,840 1,671 - -------------------------------------------------------------------------------- Income before income taxes $74,613 $37,756 $82,469 ================================================================================
40 27 8. Retirement Plans - -------------------------------------------------------------------------------- The Company has a number of defined benefit pension plans covering essentially all employees who are not covered by certain collective bargaining agreements. The benefits are based on years of service and, for certain plans, compensation. The Company's practice is to fund amounts deductible for federal income tax purposes. In addition, under several labor contracts the Company makes payments based on hours worked into multi-employer pension plan trusts established for the benefit of certain collective bargaining employees. The Company's projected benefit obligations, fair value of assets, and net periodic pension cost includes the following components (in thousands):
Year Ended September 30, 1998 1997 - -------------------------------------------------------------------------------- Projected benefit obligations at beginning of year $146,808 $102,168 Service cost 7,460 6,027 Interest cost on projected benefit obligations 11,008 9,647 Amendments (8,410) 322 Actuarial loss 12,714 642 Acquisitions and other 1,861 31,878 Benefits paid (5,252) (3,876) - -------------------------------------------------------------------------------- Projected benefit obligations at end of year $166,189 $146,808 ================================================================================ Fair value of assets at beginning of year $159,048 $101,843 Actual return on plan assets 35,945 25,308 Acquisitions and other 2,427 34,571 Employer contribution 2,894 1,202 Benefits paid (5,252) (3,876) - -------------------------------------------------------------------------------- Fair value of assets at end of year $195,062 $159,048 ================================================================================ Funded status $ 28,873 $ 12,240 Net unrecognized asset (909) (1,360) Net unrecognized gain (23,420) (16,466) Unrecognized prior service (income) cost (5,029) 2,638 - -------------------------------------------------------------------------------- Net accrued pension cost included in consolidated balance sheets $ (485) $ (2,948) ================================================================================
The amounts required to be recognized in the consolidated income statements are as follows (in thousands):
Year Ended September 30, 1998 1997 1996 - --------------------------------------------------------------------------------- Service cost $ 7,460 $ 6,027 $ 4,327 Interest cost on projected benefit obligations 11,008 9,647 7,235 Expected return on plan assets (14,870) (10,449) (7,615) Net amortization of the initial asset (385) (399) (395) Net amortization of (gain) loss (110) (7) 98 Net amortization of prior service (income) cost (436) 445 432 - --------------------------------------------------------------------------------- Total Company defined benefit plan expense 2,667 5,264 4,082 Multi-employer plans for collective bargaining employees 237 163 166 - --------------------------------------------------------------------------------- Net periodic pension cost $ 2,904 $ 5,427 $ 4,248 =================================================================================
The discount rate used in determining the actuarial present value of the projected benefit obligations was 7.0%, 7.5% and 7.5% as of September 30, 1998, 1997 and 1996, respectively. The expected increase in compensation levels used in determining the actuarial present value of the projected benefit obligations was 4.0% as of September 30, 1998, 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 projected benefit obligations, accumulated benefit obligation and fair value of assets for underfunded plans was $2,392,000, $2,392,000 and $2,352,000, respectively, as of September 30, 1998. The projected benefit obligations, accumulated benefit obligation and fair value of assets for underfunded plans was $1,312,000, $1,312,000 and $1,244,000, respectively, as of September 30, 1997. 41 28 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 50% of contributions up to a maximum of 6% of compensation as defined by the plan. During fiscal 1998, the Company recorded matching expense of $4,001,000 related to the plan, including matching expense related to employees of the former Waldorf operations. As a result of the new employee savings plan, effective January 1, 1998, the Company amended its defined benefit plans to lower pension benefits. Net periodic pension cost was approximately $1,600,000 lower during fiscal 1998 as a result of the reduced benefits. 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 partially to 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 $219,000, $174,000 and $162,000 was recorded for the years ended September 30, 1998, 1997 and 1996, respectively. Amounts accrued as of September 30, 1998 and 1997 related to the plan were $688,000 and $482,000, respectively. 9. 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, 1998, 1997 and 1996, payments were approximately $4,898,000, $3,831,000 and $3,239,000, respectively. A director of the Company is the former Chairman of the construction company that built a new building for the Company. For the years ended September 30, 1998 and 1997, payments approximated $2,733,000 and $5,335,000, respectively, and were capitalized as property, plant and equipment. 10. Commitments and Contingencies - -------------------------------------------------------------------------------- Capital Additions. Estimated costs for completion of authorized capital additions under construction as of September 30, 1998 total approximately $26,000,000. 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, 2003. During fiscal 1998, the Company repurchased 290,100 shares of Class A Common under this plan. Under a previously authorized plan which expired on July 31, 1998, the Company repurchased 40,000, none and 217,000 shares of Class A Common during fiscal 1998, 1997 and 1996, respectively. 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 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. 42 29 The Company has been named as a potentially responsible party at nine 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, 1998. 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. The Company has entered into a settlement agreement pursuant to which the Company paid $325,000 and received releases from certain past, present and future environmental claims and actions involving this site. 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. 11. 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 $4,293,000, $4,483,000 and $2,944,000 for fiscal years ended September 30, 1998, 1997 and 1996, respectively. For fiscal 1998, foreign operations represented approximately 4.1%, 3.8% and 5.4% of total net sales to unaffiliated customers, total income from operations and total identifiable assets, 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. Operating profit includes all costs and expenses directly related to the segment involved. The 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. 43 30 Following is a tabulation of business segment information for each of the past three fiscal years (in thousands):
Year Ended September 30, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Net sales (aggregate): Converted products $ 1,063,749 $ 938,711 $ 779,696 Paperboard 461,123 391,805 281,402 - ----------------------------------------------------------------------------------------------------------- Total $ 1,524,872 $ 1,330,516 $ 1,061,098 =========================================================================================================== Less net sales (intersegment): Converted products $ 286 $ 1,194 $ 429 Paperboard 230,980 219,629 184,558 - ----------------------------------------------------------------------------------------------------------- Total $ 231,266 $ 220,823 $ 184,987 =========================================================================================================== Net sales (unaffiliated customers): Converted products $ 1,063,463 $ 937,517 $ 779,267 Paperboard 230,143 172,176 96,844 - ----------------------------------------------------------------------------------------------------------- Total $ 1,293,606 $ 1,109,693 $ 876,111 =========================================================================================================== Operating income: Converted products (a) $ 53,233 $ 26,412 $ 35,218 Paperboard 69,374 46,382 64,431 - ----------------------------------------------------------------------------------------------------------- 122,607 72,794 99,649 Corporate expense (8,713) (8,618) (7,492) - ----------------------------------------------------------------------------------------------------------- Income from operations 113,894 64,176 92,157 Minority interest in consolidated subsidiary (5,273) (351) - Interest expense (34,982) (26,787) (10,978) Interest and other income 974 718 1,290 - ----------------------------------------------------------------------------------------------------------- Income before income taxes $ 74,613 $ 37,756 $ 82,469 =========================================================================================================== Indentifiable assets: Converted products $ 639,217 $ 644,339 $ 414,331 Paperboard 461,432 457,845 110,769 Corporate 10,832 11,502 56,588 - ----------------------------------------------------------------------------------------------------------- Total $ 1,111,481 $ 1,113,686 $ 581,688 =========================================================================================================== Depreciation and amortization: (a) Converted products $ 44,820 $ 55,143 $ 35,262 Paperboard 25,314 21,101 12,855 Corporate 693 559 447 - ----------------------------------------------------------------------------------------------------------- Total $ 70,827 $ 76,803 $ 48,564 =========================================================================================================== Capital expenditures, including assets acquired: Converted products $ 57,749 $ 135,825 $ 45,433 Paperboard 23,638 135,365 26,480 Corporate 279 210 238 - ----------------------------------------------------------------------------------------------------------- Total $ 81,666 $ 271,400 $ 72,151 ===========================================================================================================
(a) The Company incurred $1,997,000, $16,251,000 and $3,580,000 in fiscal 1998, 1997 and 1996, respectively, 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 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. 44 31 12. Financial Results by Quarter (Unaudited) - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- First Second Third Fourth 1998 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Net sales $316,475 $327,854 $320,078 $329,199 Gross profit 81,841 84,693 88,812 88,093 Net income 8,677 9,786 11,800 11,757 Basic earnings per share 0.25 0.28 0.34 0.34 Diluted earnings per share 0.25 0.28 0.34 0.34 - -------------------------------------------------------------------------------- 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 73,818 80,661 Net income (loss) 7,399 (7,191) 6,212 9,681 Basic earnings (loss) per share 0.22 (0.22) 0.19 0.28 Diluted earnings (loss) per share 0.22 (0.22) 0.18 0.28 - --------------------------------------------------------------------------------
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 basic and diluted earnings per share by quarter will not necessarily total the annual basic and diluted earnings per share. The results of operations for the fourth quarter of fiscal 1998 includes expenses of approximately $1,997,000 incurred by the Company as a result of the facility closing (See Note 2). 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). 45 32 REPORT OF INDEPENDENT AUDITORS [LOGO ERNST & YOUNG LLP] TO 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, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1998, 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. ERNST & YOUNG LLP Atlanta, Georgia October 20, 1998 46 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, 1998, the Company's system of internal control is adequate to accomplish the objectives discussed herein. /S/ Bradley Currey, Jr. Bradley Currey, Jr. Chairman of the Board of Directors and Chief Executive Officer /S/ David C. Nicholson David C. Nicholson Senior Vice President and Chief Financial Officer 47 34 Locations ROCK-TENN COMPANY
Converted Products Segment Paperboard Segment - --------------------------- -------------------------- Folding Carton Corrugated Packaging Coated Paperboard Division & Display Division Division Augusta, GA Dothan, AL Battle Creek, MI Baltimore, MD Gallatin, TN Dallas, TX Chicago, IL Greenville, SC Delaware Water Gap, PA Chicopee, MA Hunt Valley, MD Sheldon Springs, VT Clinton, IA Mundelein, IL St. Paul, MN Conway, AR Norcross, GA* El Paso, TX Tullahoma, TN Uncoated Paperboard Eutaw, AL Winston-Salem, NC Division Greenville, TX Chattanooga, TN Harrison, AR RTS Packaging, LLC Cincinnati, OH Kimball, TN Charleroi, PA Eaton, IN Knoxville, TN Dallas, TX Lynchburg, VA Lebanon, TN Downington, PA Otsego, MI Madison, WI Eaton, IN Marshville, NC Hartwell, GA Recycled Fiber Milwaukee, WI Hillside, IL Division Norcross, GA Merced, CA Atlanta, GA Springfield, OH Monterrey, Nuevo Leon, Mexico Chattanooga, TN Stone Mountain, GA Orange, CA Cincinnati, OH St. Paul, MN Scarborough, ME Cleveland, TN Taylorsville, NC Tukwila, WA Dallas, TX Warwick, Quebec, Canada Des Moines, IA Waxahachie, TX Plastic Packaging Fort Worth, TX Division Huntsville, AL Laminated Paperboard Conyers, GA Indianapolis, IN Products Division Franklin Park, IL Knoxville, TN Aurora, IL Maple Grove, MN Columbus, IN Montreal, Quebec, Canada Dallas, TX Shelbyville, TN Jersey City, NJ Sheldon Springs, VT Lynchburg, VA St. Paul, MN Macon, GA Otsego, MI *2 Locations Vineland, NJ Wright City, MO
48 35 SHAREHOLDER INFORMATION Rock-Tenn Company HOME OFFICE 504 Thrasher St. Norcross, GA 30071 770-448-2193 TRANSFER AGENT AND REGISTRAR Wachovia Bank of North Carolina, N.A. c/o Boston Equiserve, L.P. P.O. Box 8217 Boston, MA 02266-8217 800-633-4236 INVESTOR RELATIONS Investor Relations Department P.O. Box 4098 Norcross, GA 30091 770-448-2193 Fax: 770-263-3582 ANNUAL MEETING Northeast Atlanta Hilton 5993 Peachtree Industrial Blvd. Norcross, GA 30092 Thursday, January 28, 1999 9:00 A.M. LEGAL COUNSEL King & Spalding 191 Peachtree St. Atlanta, GA 30303 AUDITORS Ernst & Young LLP 600 Peachtree St. Suite 2800 Atlanta, GA 30308 DIRECT DEPOSIT OF DIVIDENDS Rock-Tenn shareholders may have their quarterly cash dividends automatically deposited to checking, savings or money market accounts through the automatic clearinghouse system. If you wish to participate in the program, please contact: Wachovia Bank of North Carolina, N.A. c/o Boston Equiserve, L.P. P.O. Box 8217 Boston, MA 02266-8217 800-633-4236 COMMON STOCK Rock-Tenn Class A common stock trades on the New York Stock Exchange under the symbol RKT. There is not an established public trading market for the Company's Class B common stock. As of December 1, 1998, there were approximately 4,373 Class A common shareholders of record and 137 Class B common shareholders of record. FORM 10-K REPORT A copy of the Company's annual report on Form 10-K for the year ended September 30, 1998, as filed with the Securities and Exchange Commission is available at no charge to shareholders of record, by writing to: Investor Relations Rock-Tenn Company P.O. Box 4098 Norcross, GA 30091 49 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 ROCK-TENN COMPANY SUBSIDIARIES OF ROCK-TENN COMPANY
JURISDICTION OF NAME INCORPORATION ------------------------------------------------------------ --------------- 1. Rock-Tenn Company, Mill Division, Inc. Tennessee 2. Dominion Paperboard Products, Ltd. Quebec, Canada 3. Rock-Tenn Company of Texas Georgia 4. Rock-Tenn Converting Company Georgia 5. Rock-Tenn Company of Arkansas Georgia 6. Ling Industries, Inc. Quebec, Canada 7. Rock-Tenn Company of California, Inc. Delaware 8. Rock-Tenn Company of Illinois, Inc. Illinois 9. Concord Industries, Inc. Illinois 10. Waldorf Corporation Delaware 11. Wabash Corporation Delaware 12. Wabash Development, Inc. Delaware 13. Waldorf Realty, Inc. Delaware 14. Best Recycling, Inc. Iowa 15. RTS Packaging, LLC Delaware 16. Rock-Tenn Recycling Company Quebec, Canada 17. Rock-Tenn Partition Company Georgia 18. RTS Empaques S. de R.L. de C.V. Mexico 19. Waldorf Corporation of Minnesota Delaware 20. RTS Embalajes de Chile Limitada Santiago, Chile
25 EX-23 6 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 20, 1998, included in the 1998 Annual Report to Shareholders of Rock-Tenn Company. Our audits also include the financial statement schedule of Rock-Tenn Company listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent (a) to the incorporation by reference in 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 20, 1998, with respect to the consolidated financial statements incorporated herein by reference; and (b) to the use of 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, 1998, and our report dated November 23, 1998, 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, 1998. ERNST & YOUNG LLP Atlanta Georgia December 15, 1998 26 EX-27 7 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-30-1998 OCT-01-1997 SEP-30-1998 5,769 0 121,981 3,817 88,019 216,152 938,009 376,470 1,111,481 152,480 464,876 0 0 346 397,069 1,111,481 1,293,606 1,293,606 950,167 950,167 0 0 34,982 74,613 32,593 42,020 0 0 0 42,020 1.21 1.20
EX-99 8 1993 EMP STOCK PURCHASE PLAN ENDED 1997/1996/1995 1 EXHIBIT 99 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. 28 Statements of Financial Condition as of September 30, 1998 and 1997.................................................. 29 Statements of Changes in Plan Equity for the three years ended September 30, 1998.................................. 30 Notes to Financial Statements............................... 31
27 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, 1998 and 1997 and the related statements of changes in plan equity for each of the three years in the period ended September 30, 1998. 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, 1998 and 1997 and the changes in Plan equity for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Atlanta, Georgia November 23, 1998 28 3 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, ------------------- 1998 1997 -------- -------- Assets: Receivable from Rock-Tenn Company -- Notes 1 and 2... $465,301 $510,348 ======== ======== Liabilities and equity: Obligations to purchase Rock-Tenn Company common stock -- Notes 1 and 2............................................. 465,301 510,348 Plan equity.......................................... -- -- -------- -------- Total liabilities and equity................................ $465,301 $510,348 ======== ========
See notes to financial statements 29 4 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF CHANGES IN PLAN EQUITY
YEARS ENDED SEPTEMBER 30, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Participant contributions............................... $ 2,867,976 $ 2,834,682 $ 2,107,505 Purchases of Rock-Tenn Company common stock -- Note 1... (2,809,359) (2,789,931) (2,106,192) Amounts refunded to Plan participants................... (58,617) (44,751) (1,313) ----------- ----------- ----------- Plan equity at end of year.............................. $ -- $ -- $ -- =========== =========== ===========
See notes to financial statements 30 5 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF THE PLAN: In 1993, the Board of Directors of Rock-Tenn Company (the "Company") adopted the Rock-Tenn Company 1993 Employee Stock Purchase Plan (the "Plan"). The Plan was effective beginning on January 1, 1994. On October 23, 1997, the Company's Board of Directors voted to amend and restate the Plan, thereby increasing the number of shares reserved for purchase under the Plan to 1,320,000. The amended and restated Rock-Tenn Company 1993 Employee Stock Purchase Plan was approved by Rock-Tenn Company shareholders on January 22, 1998. 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 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, 1997, January 31, 1998, April 30, 1998 and July 31, 1998 there was a total of 206,984 shares of the Company's Class A common stock purchased for participants under the Plan. 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. Stock certificates for all shares of the Company's Class A Common Stock purchased under the Plan are issued to participants at the end of each purchase period. Any participant may terminate contributions and withdraw from the Plan at any time. Even though there are no current intentions to do so, the Board of Directors can terminate the Plan at any time. Stock purchase transactions in process at the time of such termination cannot be modified or canceled without the written consent of the participants. NOTE 2 -- SIGNIFICANT ACCOUNT POLICIES: Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires Plan management to make estimates and assumptions that affect the reported amounts of Plan assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in Plan equity during the reporting period. Actual results will differ from those estimates and the differences could be material. 31 6 ROCK-TENN COMPANY 1993 EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. NOTE 3 -- FEDERAL INCOME TAXES: The Plan qualifies as an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code of 1986. Issuance of shares under this Plan are not intended to result in taxable income to participants in the Plan based on provisions in Section 423 of the Internal Revenue Code. NOTE 4 -- YEAR 2000 ISSUE (UNAUDITED): The Company has developed a plan to modify its internal information technology to be ready for the Year 2000 and has begun converting critical data processing systems. The Company expects the project to be substantially complete by early 1999. The Company does not expect this project to have a significant effect on Plan operations. 32 -----END PRIVACY-ENHANCED MESSAGE-----