<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
<TABLE>
<C> <S>
(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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 0-23340
ROCK-TENN COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 62-0342590
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
504 THRASHER STREET, NORCROSS, GEORGIA 30071
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (770) 448-2193
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
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 20, 1996 (based on the last reported closing price
per share of Class A Common Stock as reported on the Nasdaq National Market on
such date) was $384,542,406.
As of December 20, 1996, the registrant had 21,247,712 and 11,948,435
shares of Class A Common Stock and Class B Common Stock outstanding,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to
be held on February 20, 1997 are incorporated by reference in Parts III and IV.
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<PAGE> 2
ROCK-TENN COMPANY
INDEX TO FORM 10-K
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C> <C>
PART I
Item 1. Business.................................................................. 3
Item 2. Properties................................................................ 6
Item 3. Legal Proceedings......................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders....................... 6
Item X. Executive Officers of the Registrant...................................... 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 9
Item 6. Selected Financial Data................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 11
Item 8. Financial Statements and Supplementary Data............................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 38
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 38
Item 11. Executive Compensation.................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 38
Item 13. Certain Relationships and Related Transactions............................ 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 38
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1936 as a folding carton manufacturer, the Company is a leading
converter of recycled and virgin paperboard and is a leading manufacturer of
recycled clay-coated and uncoated paperboard. The Company believes that it is
the third largest manufacturer of folding cartons in North America, the largest
U.S. producer of laminated paperboard products for the book cover and furniture
markets and the largest producer of fiber partitions in North America. The
Company operates 42 converting facilities, eight paperboard mills, 12 paper
recovery facilities and one distribution facility located in 20 states and
Canada.
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, 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 and 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 17 folding carton plants and one distribution
facility, and sales of folding cartons to unaffiliated customers accounted for
46.0%, 43.3% and 44.7% of the Company's net sales in fiscal 1996, 1995 and 1994,
respectively.
Laminated Paperboard Products. The Company manufactures a number of
leading 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 five laminated
paperboard products plants, and sales of laminated paperboard products to
unaffiliated customers accounted for 14.1%, 14.2% and 16.6% of the Company's net
sales in fiscal 1996, 1995 and 1994, respectively.
Partition Products. The Company believes it is the largest manufacturer of
fiber partitions in North America, which are marketed by the Company principally
to glass container manufacturers. Fiber partitions are manufactured by the
Company from 100% recycled uncoated paperboard. The Company manufactures 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 has developed a number of high
quality, value-added partition products for specific applications designed to
meet customers' packaging needs. The Company operates eight fiber partition
plants, and sales of fiber partition products to unaffiliated customers
accounted for 11.1%, 11.5% and 14.3% of the Company's net sales in fiscal 1996,
1995 and 1994, 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 board 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
3
<PAGE> 4
displays. The Company operates eight corrugated products plants, and sales of
corrugated products to unaffiliated customers accounted for 12.8%, 10.5% and
7.5% of the Company's net sales in fiscal 1996, 1995 and 1994, 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
operates eight paperboard mills, as well as twelve facilities that collect
recovered paper.
Recycled Paperboard. The Company is the fourth largest U.S. manufacturer
of 100% recycled paperboard (excluding linerboard, medium and paperboard used in
the manufacture of gypsum wallboard), and it believes that it is the fourth
largest producer of clay-coated recycled paperboard. The Company markets its
clay-coated and uncoated recycled paperboard to manufacturers of folding
cartons, fiber partitions and other laminated paperboard products. The Company
operates eight paperboard mills, and sales of recycled paperboard to
unaffiliated customers accounted for 9.6%, 13.2% and 12.5% of the Company's net
sales in fiscal 1996, 1995 and 1994, respectively.
Recycled Fiber. The Company operates 12 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 paperboard. Collected paper is sorted and baled and
then either transferred to the Company's paperboard mills for processing or sold
principally to other U.S. manufacturers of recycled paperboard.
SALES AND MARKETING
The Company sold converted products (primarily folding cartons) and
paperboard to over 2,500 and 500 customers, respectively, in fiscal 1996. None
of the Company's customers accounted for more than 10% of the Company's net
sales in fiscal 1996. 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 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, are also
marketed through independent sales representatives. Sales personnel are under
the supervision of regional sales managers, plant general managers or the
general manager for the particular product line, who support and coordinate the
sales activities within their designated area. The Company's paperboard and
laminated paperboard products sales personnel are generally paid a base salary,
and its packaging products sales personnel are generally paid a base salary plus
commissions. The Company's independent sales representatives are paid on a
commission basis.
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COMPETITION
The converted products and paperboard industries are highly competitive,
and no single company is dominant. Management believes that the Company is the
third largest manufacturer of folding cartons in North America, the largest
manufacturer of fiber partitions in North America, the largest U.S. producer of
laminated paperboard products for the book cover and furniture markets and the
fourth largest producer of clay-coated recycled paperboard in the U.S. The
Company's competitors include large, vertically integrated converted products
and paperboard companies and numerous smaller companies. The primary competitive
factors in the converted products and paperboard industries are price, design,
quality and service, with varying emphasis on these factors depending on the
product line. The Company believes that it competes effectively with respect to
each of these factors, but, to the extent that one or more of the Company's
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
customers with expanded geographic presences have tended in recent years to seek
suppliers who can, because of their broad geographic presence, efficiently and
economically supply all of the customers' packaging needs. In addition, during
recent years, purchasers of recycled paperboard have demanded higher quality
products meeting stricter quality control requirements. The Company's results of
operations could be adversely affected by these market trends.
ENVIRONMENTAL REGULATION
The Company is subject to various Federal, state, local and Canadian
provincial environmental laws and regulations, including those regulating the
discharge, storage, handling and disposal of a variety of substances. These laws
and regulations include the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), the Clean Air Act (as amended in 1990), the Clean
Water Act, the Resource Conservation and Recovery Act (including amendments
relating to underground tanks) and the Toxic Substances Control Act. These
environmental regulatory programs are administered by the U.S. Environmental
Protection Agency. In addition, states in which the Company 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 also are
governed by other Federal, state, local and Canadian provincial laws and
regulations relating to workplace safety and worker health, principally the
Occupational Safety and Health Act and regulations promulgated thereunder which,
among other things, establish asbestos and noise standards and regulate the use
of hazardous chemicals in the workplace. Although 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.
For additional information regarding the Company's anticipated expenditures
for environmental compliance and related matters, which information is
incorporated into this item by reference, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Expenditures for
Environmental Compliance" under Item 7 in Part II of this Annual Report.
EMPLOYEES
At September 30, 1996, the Company had 6,327 employees, of whom 4,934 were
hourly and 1,393 were salaried. Approximately 2,193 of the Company's hourly
employees are covered by union collective bargaining
5
<PAGE> 6
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 with respect to the
Company's paperboard mills:
<TABLE>
<CAPTION>
FISCAL 1996
PRODUCTION
LOCATION OF MILL CAPACITY (IN TONS) PAPERBOARD PRODUCED
--------------------------------------- ------------------ --------------------------------
<S> <C> <C>
Dallas, TX............................. 152,000 Clay-coated and uncoated
recycled paperboard
Lynchburg, VA.......................... 144,000 Uncoated recycled paperboard and
laminated paperboard products
Chattanooga, TN........................ 129,000 Uncoated recycled paperboard
Otsego, MI............................. 85,000 Uncoated recycled paperboard and
laminated paperboard products
Sheldon Springs, VT
(Missisquoi Mill).................... 74,000 Clay-coated recycled paperboard
Eaton, IN.............................. 55,000 Uncoated recycled paperboard
Stroudsburg, PA........................ 49,000 Clay-coated recycled paperboard
Cincinnati, OH......................... 47,000 Uncoated recycled paperboard
</TABLE>
In addition to the paperboard mills set forth above, the Company also
operates 42 converting facilities, 12 paper recovery facilities and one
distribution facility in 20 states (mainly in the Southwestern, Southeastern,
Midwestern and Northeastern U.S.) and Canada. Of these facilities, the Company
owns 30 and leases 12. One of these facilities is subject to encumbrances
relating to outstanding industrial revenue bonds. The Company's principal
executive offices are located in Norcross, Georgia, in buildings owned by the
Company. The Company believes that its existing production capacity is adequate
to service existing demand for the Company's products. The Company considers its
plants and equipment to be in good condition.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation incidental to its business from time
to time. The Company is not currently a party to any litigation that management
believes, if determined adversely to the Company, would have a material adverse
effect on the Company's results of operations or financial condition. For
additional information regarding litigation to which the Company is a party,
which information is incorporated into this item by reference, See "Item
1 -- Business -- Environmental Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
------------------------------------ --- -----------------------------------------------
<S> <C> <C>
Bradley Currey, Jr.................. 66 Chairman of the Board, Chief Executive Officer
and Director
Jay Shuster......................... 42 President, Chief Operating Officer and Director
Edward E. Bowns..................... 53 Executive Vice President and General Manager of
Industrial Products Group*
David E. Dreibelbis................. 44 Executive Vice President and General Manager of
the Mill Group*
David C. Nicholson.................. 42 Senior Vice President, Chief Financial Officer
and Secretary
Russell M. Currey................... 35 Senior Vice President of Marketing and Planning
Paul England........................ 41 Executive Vice President and General Manager of
the Recycled Fiber Division
Nicholas G. George.................. 46 Executive Vice President and General Manager of
the Folding Carton Division
James K. Hansen..................... 58 Executive Vice President and General Manager of
the Mill Division
R. Evan Hardin...................... 34 Treasurer
John H. Morrison.................... 53 Executive Vice President and General Manager of
the Corrugated Division
Paul G. Saari....................... 41 Vice President of Finance and Information
Systems
John D. Skelton II.................. 42 Executive Vice President and General Manager of
the Plastic Packaging Division
Alford L. Smith..................... 55 Executive Vice President and General Manager of
Paperboard Products Division
Richard E. Steed.................... 45 Executive Vice President and General Manager of
the Partition Division
</TABLE>
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* The Mill Group consists of the Mill and Recycled Fiber Divisions and the
Industrial Products Group consists of the Paperboard Products, Partition and
Corrugated Divisions.
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 of
Georgia. Mr. Currey is also a director of Genuine Parts Co., an auto parts
wholesaler, and Poe & Brown, Inc., an insurance agency. Mr. Currey is the father
of Russell M. Currey and brother of Robert B. Currey, a director of the Company.
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
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Executive Vice President and General Manager of the Partition Division. Mr.
Bowns joined the Company in October 1980.
David E. Dreibelbis has served as Executive Vice President and General
Manager of the Mill Group since September 1992. From July 1985 until September
1992, Mr. Dreibelbis was Executive Vice President and General Manager of the
Recycled Fiber Division. Mr. Dreibelbis joined the Company in April 1979.
David C. Nicholson has served as Senior Vice President of the Company since
September 1994 and as Chief Financial Officer and Secretary of the Company since
December 1986. Mr. Nicholson served as Vice President of the Company from
December 1986 to September 1994. Mr. Nicholson joined the Company in November
1983 and has served in various other capacities, including Treasurer from
December 1986 until January 1988, Controller and Director of Mergers and
Acquisitions.
Russell M. Currey has served as Senior Vice President of Marketing and
Planning since December 1994. Mr. Currey served as Executive Vice President and
General Manager of the Recycled Fiber Division from September 1992 until
December 1994. From February 1990 until September 1992, Mr. Currey served as
Manager of Strategic Development for the Mill Group. From July 1986 until
February 1990, he was General Manager of one of the Company's recycled fiber
plants. Mr. Currey joined the Company in July 1983. Mr. Currey is the son of
Bradley Currey, Jr. and the nephew of Robert B. Currey, a director of the
Company.
Paul England has served as Executive Vice President and General Manager of
the Recycled Fiber Division since September 1994. From September 1989 to
September 1994, Mr. England served in various capacities, including General
Manager of one of the Company's paperboard mills. Mr. England joined the Company
in September 1989.
Nicholas G. George has served as Executive Vice President and General
Manager of the Folding Carton Division since June 1991. From January 1991 until
June 1991 he was Vice President and General Sales Manager of the Folding Carton
Division. From July 1986 until January 1991, he was Vice President of Folding
Sales, Western Area. Mr. George joined the Company in May 1980.
James K. Hansen has served as Executive Vice President and General Manager
of the Mill Division since May 1990. 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 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 and Information Services
of the Company since July 1994 and as Assistant Secretary of the Company since
January 1988. From February 1988 to July 1994 he served as Treasurer of the
Company and from June 1987 until February 1988, Mr. Saari served as Controller
of the Company. Mr. Saari joined the Company in August 1984.
John D. Skelton II has served as Executive Vice President and General
Manager of the Plastic Packaging Division since December 1991. From January 1991
until December 1991, he served as Vice President of Folding Carton Sales,
Western Area. From 1981 until 1991, Mr. Skelton served as General Manager of
several of the Company's plants. Mr. Skelton joined the Company in July 1976.
Alford L. Smith has served as Executive Vice President and General Manager
of the Paperboard Products Division since December 1988. From January 1988 until
December 1988, he was Vice President of Sales of the Paperboard Products
Division. Mr. Smith joined the Company in March 1987.
Richard E. Steed has served as Executive Vice President and General Manager
of the Partition Division since December 1991. From December 1986 until December
1991, he 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 the Board of Directors.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock of the Company is traded on the Nasdaq National
Market under the symbol "RKTN." The table below sets forth the high and low
sales prices of the Class A Common Stock and the quarterly cash dividends
declared per share of Class A Common Stock and Class B Common Stock during the
periods indicated, as adjusted to reflect the 10% stock dividend paid by the
Company on November 15, 1996. The Company has applied to list its Class A Common
Stock on the New York Stock Exchange, Inc. (the "NYSE") and anticipates that
trading on the NYSE will commence under the symbol "RKT" on December 31, 1996.
There is no established trading market for the Company's Class B Common Stock.
<TABLE>
<CAPTION>
PRICE RANGE
--------------- CASH DIVIDENDS
HIGH LOW DECLARED
------ ------ --------------
<S> <C> <C> <C>
FISCAL 1995
First Quarter................................................... $16.36 $12.27 $0.068
Second Quarter.................................................. 17.50 15.00 0.068
Third Quarter................................................... 16.14 14.09 0.068
Fourth Quarter.................................................. 16.36 13.86 0.068
FISCAL 1996
First Quarter................................................... 15.91 14.32 0.068
Second Quarter.................................................. 16.59 14.32 0.068
Third Quarter................................................... 18.64 15.23 0.068
Fourth Quarter.................................................. 19.77 15.00 0.068
</TABLE>
- ---------------
As of December 20, 1996, there were approximately 3,342 and 135 holders of
record of the Company's Class A Common Stock and Class B Common Stock,
respectively.
Determinations to pay cash dividends are at the discretion of the Board of
Directors of the Company, and the actual payment of any such cash dividends in
the future will depend upon the Company's results of operations, earnings,
capital requirements, contractual restrictions, and other factors deemed
relevant by the Company's Board.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1996 1995(B) 1994(C) 1993(D) 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales................................... $876,111 $902,878 $705,849 $650,673 $655,468
Income before income taxes.................. 82,469 67,922 60,978 41,470 55,729
Net income.................................. 51,125 41,432 37,501 25,460 33,236
Earnings per common and common equivalent
share(a).................................. 1.50 1.21 1.10 .76 1.01
Cash provided by operating activities....... 123,530 76,977 57,955 58,428 65,583
Capital expenditures........................ 71,795 73,844 71,672 53,151 40,375
Cash paid for purchase of businesses........ -- 61,579 34,978 -- --
Total assets................................ 581,688 555,254 413,748 355,092 312,061
Long-term debt and redeemable preferred
stock (debt).............................. 139,344 144,245 52,090 51,617 39,310
Shareholders' equity........................ 349,155 307,898 281,959 235,030 205,563
Dividends paid per common share(a).......... .27 .27 .15 .07 .06
Book value per common share(a).............. 10.54 9.29 8.46 7.40 6.68
</TABLE>
- ---------------
(a) Reflects a 10% stock dividend paid by the Company on November 15, 1996.
(b) Reflects the results of operations of Olympic Packaging, Inc., a folding
carton manufacturer, beginning January 17, 1995, and Alliance Display and
Packaging, a corrugated display and packaging manufacturer, beginning
January 31, 1995, the dates the Company acquired all of the outstanding
stock of Olympic and substantially all of the net assets of Alliance,
respectively.
(c) Reflects the results of operations of Les Industries Ling, Inc., a folding
carton business in Quebec, Canada, beginning December 3, 1993, the date the
Company acquired the assets of this business. Also reflects the sale of
702,049 and 203,238 shares of Class A common stock on March 9, 1994 and
April 7, 1994, respectively, in connection with the Company's initial
public offering. Effective October 1, 1993, the Company changed its method
of depreciation for machinery and equipment acquired after such date from
the 200% declining balance method to the 150% declining balance method. The
effect of this change was to increase net income and earnings per share by
$422,000 or $.01 in fiscal 1994.
(d) Income amounts shown are net of $11.8 million of pretax, unusual expenses,
$7.2 million after tax, incurred by the Company in connection with certain
employee stock option and other transactions.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of the Company and Notes thereto included
elsewhere in this Annual Report. All per share amounts in the following
discussion have been restated to reflect a 10% stock dividend paid by the
Company on November 15, 1996. See Note 1 of Notes to Consolidated Financial
Statements.
GENERAL
The Company's core businesses are somewhat seasonal with the first fiscal
quarter experiencing generally lower sales and earnings due to reduced demand
from customers during the period. See Note 12 of Notes to Consolidated Financial
Statements. The converted products and paperboard industries are also somewhat
cyclical due to industry supply and demand factors and tend to fluctuate with
the general business cycle of the U.S. economy.
The Company's operations are fixed cost intensive. The Company's converting
operations do not have the ability to mitigate the effects of high fixed costs
because the Company's converted products are sold exclusively to third parties.
As a result, unit production costs and earnings from converted products
generally vary significantly with shipment levels. However, as a result of its
vertical integration, the Company can maintain operating rates at the Company's
paperboard mills during periods of reduced demand for recycled paperboard
because the Company's paperboard mills can supply an increased portion of the
recycled paperboard consumed by the Company's converting operations. The
Company's strategy has been to operate its paperboard mills at high operating
rates in order to lower unit production costs. Through the first nine months of
calendar 1996 and during calendar years 1995 and 1994, the Company's paperboard
mills ran at operating rates of 94.3% and 96.4% and 96.6%, respectively, and
maintained relatively constant fixed unit production costs.
Historically, costs of recovered paper, virgin paperboard and
containerboard, the Company's principal raw materials, have fluctuated
significantly due to market conditions. The cost of recovered paper generally
decreased from fiscal 1989 through fiscal 1993, increased significantly
beginning in the fourth quarter of fiscal 1994 through the third quarter of
fiscal 1995, decreased significantly beginning in the fourth quarter of fiscal
1995 through the second quarter of fiscal 1996 and have remained fairly stable
for the third and fourth quarters of fiscal 1996. The Company is not able to
predict whether recovered paper costs will rise or fall in the future. The
Company seeks to manage its raw materials costs through the following measures.
First, the Company's ongoing modernization of its manufacturing facilities has
reduced waste, which has helped reduce raw materials costs. Second, the Company
has sought to maximize its use of the expertise developed by the Recycled Fiber
Division's recovered paper buyers in order to purchase recovered paper at lower
costs. Third, the Company has invested in equipment that has enabled it to use
lower cost grades of recovered paper in the production of its recycled
paperboard while maintaining the high quality of the end product.
SEGMENT DATA
The Company operates in two industry segments: converted products and
paperboard. See Note 11 of Notes to Consolidated Financial Statements. 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. The paperboard
segment consists of facilities that manufacture
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<PAGE> 12
100% recycled clay-coated and uncoated paperboard and that collect recovered
paper. Intersegment sales are accounted for at prices that approximate market
prices.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER
30,
-----------------------------
1996 1995 1994
-------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales (aggregate):
Converted products............................................. $ 779.7 $ 757.7 $ 609.3
Paperboard..................................................... 281.4 329.4 252.0
-------- -------- ------
Total.................................................. $1,061.1 $1,087.1 $ 861.3
======== ======== ======
Net sales (intersegment):
Converted products............................................. $ 0.4 $ 0.4 $ 0.1
Paperboard..................................................... 184.6 183.8 155.4
-------- -------- ------
Total.................................................. $ 185.0 $ 184.2 $ 155.5
======== ======== ======
Net sales (unaffiliated customers):
Converted products:............................................ $ 779.3 $ 757.3 $ 609.2
Paperboard..................................................... 96.8 145.6 96.6
-------- -------- ------
Total.................................................. $ 876.1 $ 902.9 $ 705.8
======== ======== ======
Operating income:
Converted products............................................. $ 35.2 $ 31.2 $ 24.4
Paperboard..................................................... 64.4 51.4 43.8
-------- -------- ------
99.6 82.6 68.2
Corporate expense................................................ (7.5) (6.6) (4.9)
-------- -------- ------
Income from operations........................................... 92.1 76.0 63.3
Interest expense............................................... (10.9) (8.4) (2.8)
Interest income................................................ 1.3 0.3 0.5
-------- -------- ------
Income before income taxes....................................... $ 82.5 $ 67.9 $ 61.0
======== ======== ======
</TABLE>
RESULTS OF OPERATIONS
Fiscal 1996 Compared to Fiscal 1995
Net Sales (Unaffiliated Customers). Net sales for fiscal 1996 decreased
3.0% to $876.1 million from $902.9 million for fiscal 1995. This decrease
resulted from reduced customer demand and reduced selling prices, which were
offset partially by sales increases resulting from the acquisitions of Olympic
Packaging, Inc. ("Olympic") and Alliance Display and Packaging ("Alliance")
during January 1995. See Note 8 of Notes to Consolidated Financial Statements.
Net Sales (Aggregate) -- Converted Products Segment. Net sales of
converted products before intersegment eliminations for fiscal 1996
increased 2.9% to $779.7 million from $757.7 million for fiscal 1995. This
increase was primarily the result of the acquisitions of Alliance and
Olympic during January 1995, which was partially offset by reduced customer
demand for converted products.
Net Sales (Aggregate) -- Paperboard Segment. Net sales of paperboard
before intersegment eliminations for fiscal 1996 decreased 14.6% to $281.4
million from $329.4 million for fiscal 1995. This decrease resulted from a
10.2% decrease in tons shipped and a 1.3% decrease in average selling
prices for fiscal 1996. The decrease in tons shipped was primarily the
result of (i) a reduction by several outside customers of their purchases
of paperboard manufactured by the Company as they increased consumption of
internally manufactured paperboard and (ii) reduced customer demand.
Average paperboard prices decreased throughout fiscal 1996 and increased
throughout fiscal 1995.
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<PAGE> 13
Cost of Goods Sold. Cost of goods sold for fiscal 1996 decreased 8.0% to
$632.2 million from $687.4 million for fiscal 1995. Cost of goods sold as a
percentage of net sales for fiscal 1996 decreased to 72.2% from 76.1% for fiscal
1995. The decrease in cost of goods sold and cost of goods sold as a percentage
of net sales was primarily the result of a decrease in the cost of raw materials
including recovered paper.
Substantially all U.S. inventories of the Company are valued at the lower
of cost or market with cost determined on the last-in, first-out (LIFO)
inventory valuation method, which management believes generally results in a
better matching of current costs and revenues than under the first-in, first-out
(FIFO) inventory valuation method. In periods of decreasing costs, the LIFO
method generally results in lower cost of goods sold than under the FIFO method.
In periods of increasing costs, the results are generally the opposite.
Since some of the Company's competitors principally use the FIFO method,
the following supplemental data is presented to illustrate the comparative
effect of LIFO and FIFO accounting on the Company's results of operations. Cost
of goods sold determined under the LIFO method was $5.9 million lower and $9.4
million higher than it would have been under the FIFO method for fiscal 1996 and
1995, respectively. Net income was $3.7 million ($.11 per share) higher and $5.7
million ($.17 per share) lower than it would have been under the FIFO method for
fiscal 1996 and 1995, respectively. These supplemental FIFO earnings reflect the
after tax effect of LIFO each year. See Note 12 of Notes to Consolidated
Financial Statements.
Gross Profit. Gross profit for fiscal 1996 increased 13.2% to $243.9
million from $215.5 million for fiscal 1995. Gross profit as a percentage of net
sales increased to 27.8% for fiscal 1996 from 23.9% for fiscal 1995. The
increase in gross profit as a percentage of net sales was primarily the result
of the decreased cost of recovered paper, the Company's primary raw material,
and increased manufacturing efficiencies in the Company's laminated paperboard
products converting division and at the Company's Missisquoi mill in Vermont,
which were partially offset by the impact of reduced volumes in several
divisions and nonrecurring severance and other expenses related to a facility
closure and consolidation plan. See Note 9 of Notes to Consolidated Financial
Statements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1996 increased 8.8% to $151.8 million from
$139.5 million for fiscal 1995. Selling, general and administrative expenses as
a percentage of net sales for fiscal 1996 increased to 17.3% from 15.5% for
fiscal 1995. This increase in selling, general and administrative expenses as a
percentage of net sales resulted primarily from an increase in selling and
personnel costs as well as a decrease in net sales for fiscal 1996 as compared
to fiscal 1995.
Segment Operating Income
Operating Income -- Converted Products Segment. Operating income
attributable to the converted products segment for fiscal 1996 increased
12.8% to $35.2 million from $31.2 million for fiscal 1995. Operating margin
for fiscal 1996 was 4.5% compared to 4.1% for fiscal 1995. The increases in
operating income and operating margin were primarily the result of (i)
improvements in productivity and efficiency in the production of laminated
paperboard products as a result of further implementation of equipment with
new technology, (ii) an increase in customer demand for converted products
in the fourth quarter and (iii) increases in operating income earned at the
Alliance facility, all of which were partially offset by nonrecurring
expenses of approximately $3.6 million ($.07 per share after taxes)
consisting primarily of employee severance, employee relocation and
training costs, asset impairment, equipment and inventory relocation costs
and lease termination costs related to a facility closure and consolidation
plan. This plan involved the closing of the Company's laminated recycled
paperboard book cover panels operation in Lynchburg, Virginia and the
relocation of such operations to other Rock-Tenn manufacturing facilities,
the conversion of the Company's Vineland, New Jersey recycled paperboard
partition plant to a manufacturer of book cover panels and other recycled
paperboard products, the closing of the Macon, Georgia partition plant and
the start-up of a recently purchased partition plant in Hartwell, Georgia
to absorb some of the Vineland and most of the Macon, Georgia partition
production. See Note 9 of Notes to Consolidated Financial Statements.
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<PAGE> 14
Operating Income -- Paperboard Segment. Operating income attributable
to the paperboard segment for fiscal 1996 increased 25.3% to $64.4 million
from $51.4 million for fiscal 1995. Operating margin for fiscal 1996 was
22.9% compared to 15.6% for fiscal 1995. The increase in operating income
and margin was the result of decreases in the cost of recovered paper, the
primary raw material utilized in this segment, which were partially offset
by decreases in tons of paperboard shipped. The Company's weighted average
cost per ton of recovered paper during fiscal 1996 was $51 compared to $132
for fiscal 1995.
Interest Expense. Interest expense for fiscal 1996 increased 29.8% to
$10.9 million from $8.4 million for fiscal 1995. The increase in interest
expense is primarily due to an increase in the Company's average borrowing rate
and an increase in average borrowings.
Provision for Income Taxes. Provision for income taxes increased 18.5% to
$31.4 million for fiscal 1996 from $26.5 million for fiscal 1995. The Company's
effective tax rate decreased to 38.0% for fiscal 1996 compared to 39.0% for
fiscal 1995. This decrease is partially attributable to a lower estimated
effective state income tax rate during fiscal 1996.
Net Income and Earnings Per Common and Common Equivalent Share. Net income
for fiscal 1996 increased 23.4% to $51.1 million from $41.4 million for fiscal
1995. Net income as a percentage of net sales increased to 5.8% for fiscal 1996
from 4.6% for fiscal 1995. Earnings per common and common equivalent share for
fiscal 1996 increased 24.0% to $1.50 from $1.21 for fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales (Unaffiliated Customers). Net sales for fiscal 1995 increased
27.9% to $902.9 million from $705.8 million for fiscal 1994. Approximately 33.2%
of this increase resulted from the acquisitions during January 1995 of Olympic
Packaging, Inc. ("Olympic") and Alliance Display and Packaging ("Alliance"). See
Note 8 of Notes to Consolidated Financial Statements. Net sales also increased
as a result of price increases that were implemented in both business segments
to offset increased raw material costs.
Net Sales (Aggregate) -- Converted Products Segment. Net sales of
converted products before intersegment eliminations for fiscal 1995
increased 24.4% to $757.7 million from $609.3 million for fiscal 1994.
Approximately 44.0% of this increase was the result of the acquisitions of
Olympic and Alliance during January 1995. Net sales also increased as a
result of average selling price increases and increased volumes, primarily
in the Folding Carton Division. These price increases were implemented to
offset increased raw material costs.
Net Sales (Aggregate) -- Paperboard Segment. Net sales before
intersegment eliminations for fiscal 1995 increased 30.7% to $329.4 million
from $252.0 million for fiscal 1994. Approximately 22.7% of this increase
was attributable to increased sales of recovered fiber to unaffiliated
customers. The balance of this increase was attributable to average
paperboard selling price increases of 24.2%.
Cost of Goods Sold. Cost of goods sold for fiscal 1995 increased 29.9% to
$687.4 million from $529.0 million for fiscal 1994. Cost of goods sold as a
percentage of net sales for fiscal 1995 increased to 76.1% from 75.0% for fiscal
1994. During fiscal 1995, the Company implemented price increases that were
intended to recover the increased cost of raw materials. As a result, raw
material costs as a percentage of net sales increased during fiscal 1995, while
labor, benefits and other manufacturing costs decreased as a percentage of net
sales. The increase in cost of goods sold as a percentage of net sales in fiscal
1995 was due primarily to the inability of the Company to fully recover the
increased costs of raw materials.
Substantially all 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 increasing costs, the LIFO method
generally results in higher cost of goods sold than under the FIFO method. 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
14
<PAGE> 15
was $9.4 million and $1.7 million more than it would have been under the FIFO
method in fiscal 1995 and fiscal 1994, respectively. Net income was $5.7 million
($.17 per share) and $1.1 million ($.03 per share) lower than it would have been
under the FIFO method in fiscal 1995 and fiscal 1994, respectively. These
supplemental FIFO earnings reflect the after tax effect of LIFO each year. See
Note 12 of Notes to Consolidated Financial Statements.
Gross Profit. Gross profit for fiscal 1995 increased 21.9% to $215.5
million from $176.8 million for fiscal 1994. Gross profit as a percentage of net
sales decreased to 23.9% for fiscal 1995 from 25.0% for fiscal 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1995 increased 22.9% to $139.5 million from
$113.5 million for fiscal 1994. Selling, general and administrative expenses as
a percentage of net sales for fiscal 1995 decreased to 15.5% from 16.1% for
fiscal 1994. This decrease in selling, general and administrative expenses as a
percentage of net sales reflected that a portion of the increase in net sales
was attributable to price increases.
Segment Operating Income
Operating Income -- Converted Products Segment. Operating income
attributable to the converted products segment for fiscal 1995 increased
27.9% to $31.2 million from $24.4 million for fiscal 1994. Operating margin
for fiscal 1995 was 4.1% compared to 4.0% for fiscal 1994. These increases
in operating income and operating margin were the result of (i) increased
volumes in existing plants, primarily in the Folding Carton Division, which
resulted in higher efficiencies and allocation of fixed overhead costs and
(ii) improvements in productivity and efficiency in the production of
laminated paperboard products as a result of the installation of equipment
with improved technology, which were offset somewhat by (x) lower operating
margins resulting from the lag time between the increase in raw material
costs and the implementation of price increases and (y) operating losses
incurred by the newly acquired Olympic and Alliance operations.
Operating Income -- Paperboard Segment. Operating income attributable
to the paperboard segment for fiscal 1995 increased 17.4% to $51.4 million
from $43.8 million for fiscal 1994. Operating margin for fiscal 1995 was
15.6% compared to 17.4% for fiscal 1994. This decline in operating margin
was due primarily to the inability of the Company to fully recover
increased raw material costs during fiscal 1995. The principal raw material
used within the paperboard segment is recovered paper. The Company's
weighted average cost of recovered paper per ton during fiscal 1995 was
$132 compared to $57 during fiscal 1994.
Interest Expense. Interest expense for fiscal 1995 increased 200.0% to
$8.4 million from $2.8 million for fiscal 1994. Interest expense increased
primarily as a result of borrowings under the Company's credit facilities, which
proceeds were used by the Company to finance the Olympic and Alliance
acquisitions and increases in working capital. In August of 1995, the Company
issued $100.0 million of aggregate principal amount of 7.25% notes due August 1,
2005 (the "Notes"), which proceeds were used to repay outstanding indebtedness
under the Company's revolving credit facilities.
Provision for Income Taxes. Provision for income taxes increased 12.8% to
$26.5 million for fiscal 1995 from $23.5 million for fiscal 1994. The Company's
effective tax rate increased to 39.0% for fiscal 1995 compared to 38.5% for
fiscal 1994. This increase in the effective rate was due to nondeductible
goodwill incurred in the Olympic acquisition.
Net Income and Earnings Per Common and Common Equivalent Share. Net income
for fiscal 1995 increased 10.4% to $41.4 million from $37.5 million for fiscal
1994. Net income as a percentage of net sales decreased to 4.6% for fiscal 1995
from 5.3% for fiscal 1994. Earnings per common and common equivalent share for
fiscal 1995 increased 10.0% to $1.21 from $1.10 for fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital requirements and capital
expenditures (including acquisitions) from net cash provided by operating
activities, borrowings under term notes and its bank credit facilities
15
<PAGE> 16
and proceeds received in connection with the issuance of industrial revenue
bonds and debt and equity securities. The Company maintains certain credit
facilities under which it has $100.0 million in aggregate borrowing
availability. At September 30, 1996, the Company had no borrowings outstanding
under these credit facilities. In August of 1995, the Company sold $100.0
million of the Notes. Cash and cash equivalents, $50.9 million at September 30,
1996, increased from $21.5 million at September 30, 1995.
The Company's capital expenditures aggregated $71.8 million for fiscal
1996. These expenditures were used primarily for (i) three printers, two die
cutters, and several plant and warehouse expansions in the Folding Carton
Division, (ii) the upgrading of the paperforming, coating and drying equipment
at the Company's paperboard mills, (iii) the capital costs associated with the
relocation of one facility in the Recycled Fiber Division and (iv) the upgrading
of computer hardware in approximately twelve of the Company's manufacturing
facilities.
The Company estimates that its capital expenditures will aggregate
approximately $65.0 million in fiscal 1997. These expenditures will be primarily
for (i) the remaining payments for two printers, an additional new printer, the
remaining payments for two die cutters, an additional new die cutter, one gluer
and warehouse expansions in the Folding Carton Division, (ii) a die cutter in
the Corrugated Division, (iii) a laminator upgrade and a cut-to-size machine in
the Paperboard Products Division, (iv) the remaining capital costs associated
with the relocation of one facility in the Recycled Fiber Division, (v) the
upgrading of the paperforming, coating and drying equipment at the Company's
paperboard mills and (vi) the upgrading of computer hardware in several of the
Company's manufacturing facilities. The Company has completed the engineering
work required to convert one of the uncoated recycled paperboard machines at its
Chattanooga mill to a clay-coated recycled paperboard machine. During fiscal
1997, improvements will be made to this machine's paperforming capabilities. The
cost of the final stages of this conversion have not yet been determined.
Net cash provided by operating activities for fiscal 1996 was $123.5
million compared to $77.0 million for fiscal 1995. This increase was primarily
the result of reduced net operating asset requirements as well as increased
earnings before depreciation and amortization. Net cash used for financing
activities aggregated $26.4 million including $17.9 million for repayment of
scheduled maturities of term notes and $9.1 million for dividends paid on
outstanding capital stock.
Net cash provided by operating activities for fiscal 1995 was $77.0
million. The Company's investing activities included $61.6 million to finance
the cash portion of the purchase price for the Olympic and Alliance acquisitions
and capital expenditures of $73.8 million. Net cash provided by financing
activities aggregated $67.3 million for fiscal 1995, including net additions to
long-term debt of $82.4 million which resulted primarily from (i) increased
borrowings under revolving credit facilities and a term note, which were used to
finance the Olympic and Alliance acquisitions, and increases in working capital
and (ii) the receipt of the net proceeds in connection with the issuance of the
Notes, which were used to repay outstanding indebtedness under the Company's
revolving credit facilities.
Net cash provided by operating activities was $58.0 million during fiscal
1994. The Company's investing activities included the purchase of Les Industries
Ling ("Ling Acquisition"), in connection with which the Company paid an
aggregate purchase price of $35.0 million, and capital expenditures of $71.7
million. Net cash provided by financing activities aggregated $10.9 million,
including $12.9 million of net proceeds from the initial public offering of
905,287 shares of Class A Common Stock, $9.6 million in proceeds received in
connection with the issuance of industrial revenue bonds, which funds were
restricted to the purchase of property, plant and equipment, and $1.9 million of
proceeds received upon the exercise of outstanding stock options, net of $5.0
million used to pay dividends on outstanding capital stock and $4.6 million used
to redeem certain shares of outstanding preferred stock of the Company.
The Company historically has expanded its business through the acquisition
of other related businesses and the Company plans to continue to focus on
acquisitions. The converted products and recycled paperboard industries have
undergone significant consolidation in recent years and the Company believes it
will be able to capitalize on this trend in the future. On January 17, 1995, the
Company consummated the acquisition of all of the outstanding capital stock of
Olympic, a folding carton manufacturer with manufacturing facilities in
16
<PAGE> 17
Mundelein, Illinois and Madison, Wisconsin. On January 31, 1995, the Company
acquired substantially all of the assets of Alliance, a corrugated display and
packaging manufacturer with a manufacturing facility in Winston-Salem, North
Carolina.
The Company has reached an agreement in principle to acquire all of the
outstanding capital stock of the parent of Waldorf Corporation, a manufacturer
of folding cartons, 100% recycled paperboard and recycled corrugating medium,
for approximately $410 million (which includes cash to be paid at closing as
well as net long-term debt of Waldorf to be outstanding at closing). Waldorf had
net sales and net income of $377 million and $17.4 million, respectively, in its
fiscal year ended June 30, 1996. The acquisition is expected to close in January
1997. Consummation of the acquisition is subject to negotiation and execution of
a definitive purchase agreement, the satisfactory completion of due diligence,
certain customary closing conditions and certain regulatory approvals, and there
can be no assurance that it will be consummated. Rock-Tenn intends to finance
the acquisition, including any refinancing of Waldorf's long term debt,
initially with available cash and borrowings under a new $400 million credit
facility. The Company currently plans to repay a portion of such borrowings with
the net proceeds of a public offering of equity securities early in 1997.
Consummation of any such public offering will be dependent upon the market
conditions prevailing at the time.
The Board of Directors has authorized the Company to repurchase from time
to time prior to July 31, 1998 up to 1.5 million shares of Class A Common Stock
in open market transactions on the Nasdaq National Market. In addition, the
Board has authorized the Company to repurchase from time to time shares of Class
B Common Stock pursuant to certain first offer rights contained in the Company's
Restated and Amended Articles of Incorporation, provided that the aggregate
number of shares of Class A and Class B Common Stock purchased under these
programs may not exceed 1.5 million shares. During fiscal 1996, the Company
repurchased 217,000 shares of Class A Common Stock at an aggregate cost of $4.0
million. The Company funded these repurchases with cash provided by operations.
The Company anticipates that it will make additional purchases through July
1998.
The Company anticipates that it will be able to fund its capital
expenditures, acquisitions, stock repurchases, dividends and working capital
needs for the foreseeable future with cash generated from operations, borrowings
under its bank credit facilities and the proceeds from the issuance of debt or
equity securities or other additional long-term debt financing.
EXPENDITURES FOR ENVIRONMENTAL COMPLIANCE
The Company does not believe that future compliance with environmental and
health and safety laws and regulations will have any material adverse effect on
its results of operations or financial condition. However, environmental, health
and safety laws and regulations are becoming increasingly more stringent.
Consequently, unforeseen expenditures required to comply with such laws and
regulations, including remediation costs, or unforeseen environmental
liabilities could have a material adverse effect on the Company's financial
condition or results of operations. In addition, the Company cannot with
certainty assess at this time the impact upon its operations or capital
expenditure requirements of the future emissions standards and enforcement
practices under the 1990 amendments to the Clean Air Act. However, although
there can be no assurance, the Company believes that any such impact or capital
expenditures will not have a material adverse effect on the Company's financial
condition or results of operations.
The Company may choose to modify or replace the coal fired boilers at two
of its facilities in order to operate cost effectively while complying with
emissions regulations under the Clean Air Act. The Company estimates these
improvements will cost approximately $2.0 million; however, the Company may
spend more on these improvements to reduce its energy costs at such facilities.
In addition, the Company estimates that it will spend an additional $500,000 for
capital expenditures during fiscal 1997 in connection with other matters
relating to environmental compliance.
The Company has been identified as a potentially responsible party ("PRP")
at eight Superfund sites pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), or comparable
state statutes. Except with respect to the Muncie Racetrack site ("Muncie
Site"), no remediation costs or allocations have been determined with respect to
such sites. With
17
<PAGE> 18
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 received its final allocation of
approximately $9,300 on September 23, 1996 for the surface contamination at the
site. This amount represents 0.3% of the site remediation costs. The Company
believes that no further soil remediation activities will be required. However,
additional costs may be required in connection with the investigation and
remediation of groundwater contamination, and the Company does not currently
have sufficient information to estimate such costs.
In addition, a water treatment lagoon at one of the Company's facilities is
included with an adjacent former landfill owned by a third party that is being
investigated as a CERCLA site for potential addition to the National Priority
List ("NPL"). Based upon information currently available, the Company believes
that it has no material liability at this site. However, there can be no
assurance that such lagoon, together with the landfill, will not be added to the
NPL as a Superfund site or that the Company will not be required to conduct some
remediation in the future.
Based upon currently available information and the opinions of the
Company's environmental compliance managers and General Counsel, although there
can be no assurance, the Company believes that any liability it may have at any
site will not have a material adverse effect on the Company's financial
condition or results of operations.
On December 1, 1995, a suit was filed by a private party against, among
others, the Company in the United States District Court for the Western District
of Michigan alleging that the Company is jointly and severally liable under
federal and state law for the release of certain hazardous materials at the
Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site. No specific
amounts have been asserted by the plaintiff with respect to this matter,
however, the eventual amounts could be material. The Company has responded to
and denies any liability with respect to this matter and is vigorously defending
against these claims. The Company cannot currently predict whether the plaintiff
will prevail on its claims or the magnitude of any potential recovery, if any.
NEW ACCOUNTING STANDARDS AND DEPRECIATION METHOD
Issued in 1995, Statement of Financial Accounting Standards No. 121 ("SFAS
121") establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. The Company has evaluated the
impact of the October 1, 1996 adoption of SFAS 121 and believes that it will not
have a material impact on the Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
establishes financial accounting and reporting standards for stock-based
employee compensation plans, such as employee stock purchase plans and stock
option plans. This statement was issued in 1995 and is required to be adopted by
the Company October 1, 1996. In accordance with the alternatives permitted under
SFAS 123, the Company plans to present the pro forma impact of its stock-based
employee compensation plans in the footnotes to its consolidated financial
statements rather than charge the estimated pro forma expense related to these
plans to its consolidated statement of income.
In October 1996, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 96-1 ("SOP 96-1"). SOP 96-1 provides accounting
guidance on issues relating to the recognition, measurement and disclosure of
environmental liabilities. The Company is required to adopt this statement in
fiscal 1998. Currently, the Company has not completed the analysis necessary to
determine what the impact of SOP 96-1 will be on the Company's consolidated
financial statements; however, the Company does not anticipate a material
impact.
The Company has changed its method of depreciation for machinery and
equipment placed in service after September 30, 1996 to the straight-line
method. This change will be applied on a prospective basis to such assets
acquired after that date. The Company's previous policy of depreciation for
additions of machinery and equipment was the 150% declining balance method.
Assets placed in service prior to the effective date of the change continue to
be depreciated using accelerated methods. The Company changed its method of
depreciation based upon 1) management's shift in operating style over the last
several years to focus on capital and technological improvements and related
changes in maintenance, 2) management's belief that straight-
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<PAGE> 19
line 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. Assuming the Company implements the
$65.0 million capital expenditures contemplated by its fiscal 1997 capital
expenditure budget, depreciation expense related to these expenditures in fiscal
1997 under the straight-line method would be approximately $2.4 million compared
to approximately $3.6 million under the 150% declining balance method. The
effect of this would be to increase earnings per share by $.02 after taxes.
FORWARD LOOKING STATEMENTS
Statements herein regarding the proposed acquisition of Waldorf
Corporation, anticipated capital expenditures, estimated environmental
compliance expenditures, proposed stock repurchases and certain other matters
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 events or amounts to
differ materially from those expected. Such risks and uncertainties include,
among other things, the possible effects of increased costs and/or reduced
supply of raw materials, fluctuations in selling prices, increased competition
and potential unforseen or underestimated environmental liabilities or costs as
well as the ability of the Company to consummate acquisitions. Management
believes these anticipated events and estimates are reasonable; however, undue
reliance should not be placed on such expectations, which are based on currently
available information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Rock-Tenn Company
We have audited the accompanying consolidated balance sheets of Rock-Tenn
Company as of September 30, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended September 30, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Rock-Tenn Company at September 30, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
October 24, 1996
19
<PAGE> 20
ROCK-TENN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.............................................. $876,111 $902,878 $705,849
Cost of goods sold (includes $3,239, $3,355 and $3,503
paid to a related party) -- (Note 7)................ 632,202 687,377 529,058
-------- -------- --------
Gross profit........................................... 243,909 215,501 176,791
Selling, general and administrative expenses........... 151,752 139,534 113,484
-------- -------- --------
Income from operations................................. 92,157 75,967 63,307
Interest expense....................................... (10,978) (8,387) (2,827)
Interest income........................................ 1,290 342 498
-------- -------- --------
Income before income taxes............................. 82,469 67,922 60,978
Provision for income taxes (Note 6).................... 31,344 26,490 23,477
-------- -------- --------
Net income............................................. $ 51,125 $ 41,432 $ 37,501
======== ======== ========
Earnings per common and common equivalent share (Note
1)................................................... $ 1.50 $ 1.21 $ 1.10
======== ======== ========
</TABLE>
See accompanying notes
20
<PAGE> 21
ROCK-TENN COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 50,876 $ 21,532
Accounts receivable (net of allowance for doubtful accounts of $3,094
and $2,144)....................................................... 78,041 88,196
Inventories (Note 1)................................................. 58,505 63,608
Other current assets................................................. 1,908 6,979
--------- ---------
Total current assets......................................... 189,330 180,315
Property, plant and equipment, at cost (Note 3):
Land and buildings................................................... 113,059 101,850
Machinery and equipment.............................................. 478,181 432,994
Leasehold improvements............................................... 4,049 3,063
Transportation equipment............................................. 12,106 10,193
--------- ---------
607,395 548,100
Less accumulated depreciation and amortization......................... (272,541) (238,024)
--------- ---------
Net property, plant and equipment...................................... 334,854 310,076
Goodwill (net of accumulated amortization of $5,015 and $2,304)........ 48,632 51,265
Other assets........................................................... 8,872 13,598
--------- ---------
$ 581,688 $ 555,254
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 28,555 $ 29,888
Accrued compensation and benefits.................................... 21,838 23,071
Current maturities of long-term debt (Note 3)........................ 7,260 17,842
Other current liabilities............................................ 11,296 9,793
--------- ---------
Total current liabilities.................................... 68,949 80,594
Long-term debt due after one year (Note 3)............................. 139,344 144,245
Deferred income taxes (Note 6)......................................... 23,136 18,032
Other liabilities...................................................... 1,104 4,485
Commitments and contingencies (Notes 4 and 10)
Shareholders Equity (Note 5):
Preferred stock, $.01 par value; 50,000,000 shares authorized; no
shares outstanding at September 30, 1996 and 1995................. -- --
Class A common stock, $.01 par value; 175,000,000 shares authorized;
21,178,313 outstanding at September 30, 1996 and 18,581,791
outstanding at September 30, 1995, Class B common stock, $.01 par
value; 60,000,000 shares authorized; 11,949,097 outstanding at
September 30, 1996 and 11,538,470 outstanding at September 30,
1995.............................................................. 331 301
Capital in excess of par value....................................... 109,879 48,682
Retained earnings.................................................... 239,561 260,252
Other................................................................ (616) (1,337)
--------- ---------
Total shareholders' equity................................... 349,155 307,898
--------- ---------
$ 581,688 $ 555,254
========= =========
</TABLE>
See accompanying notes
21
<PAGE> 22
ROCK-TENN COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A AND CLASS B
COMMON STOCK CAPITAL IN
------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS OTHER TOTAL
---------- ------ ---------- -------- ------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993....... 28,891,098 $289 $ 31,918 $202,823 $ -- $235,030
Net income.......................... -- -- -- 37,501 -- 37,501
Cash dividends:
Preferred stock -- $3.00 per
share.......................... -- -- -- (5) -- (5)
Class B preferred stock -- $3.75
per share...................... -- -- -- (150) -- (150)
Common stock -- $.15 per share.... -- -- -- (4,868) -- (4,868)
Common stock issued in initial
public offering................... 905,287 9 12,865 -- -- 12,874
Other sales of common stock......... 535,565 5 1,935 -- -- 1,940
Purchases of Class A common stock... (40,000) -- (82) (591) -- (673)
Exchanges of common stock........... (13,113) -- -- -- -- --
Income tax benefit from exercise of
nonqualified stock options........ -- -- 741 -- -- 741
Foreign currency translation
adjustments....................... -- -- -- -- (226) (226)
Pension adjustments................. -- -- -- -- (205) (205)
---------- ----- ---------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1994....... 30,278,837 303 47,377 234,710 (431) 281,959
Net income.......................... -- -- -- 41,432 -- 41,432
Cash dividends -- $.27 per share.... -- -- -- (9,078) -- (9,078)
Sales of common stock............... 314,370 3 1,696 -- -- 1,699
Purchases of Class A common stock... (459,500) (5) (728) (6,812) -- (7,545)
Purchases of Class B common stock... (13,446) -- (214) -- -- (214)
Income tax benefit from exercise of
stock options..................... -- -- 551 -- -- 551
Foreign currency translation
adjustments....................... -- -- -- -- 317 317
Pension adjustments................. -- -- -- -- (1,223) (1,223)
---------- ----- ---------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1995....... 30,120,261 301 48,682 260,252 (1,337) 307,898
Net income.......................... -- -- -- 51,125 -- 51,125
Cash dividends -- $.27 per share.... -- -- -- (9,064) -- (9,064)
Sales of common stock............... 212,566 2 2,489 -- -- 2,491
Purchases of Class A common stock... (217,000) (2) (364) (3,650) -- (4,016)
Foreign currency translation
adjustments....................... -- -- -- -- (658) (658)
Pension adjustments................. -- -- -- -- 1,379 1,379
Effect of 10% stock dividend paid on
November 15, 1996 (Note 1)........ 3,011,583 30 59,072 (59,102) -- --
---------- ----- ---------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1996....... 33,127,410 $331 $ 109,879 $239,561 $ (616) $349,155
========== ===== ========== ======== ======= ========
</TABLE>
See accompanying notes
22
<PAGE> 23
ROCK-TENN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................. $ 51,125 $ 41,432 $ 37,501
Items in income not affecting cash:
Depreciation and amortization........................... 48,564 43,191 34,333
Deferred income taxes................................... 5,105 6,398 2,770
(Gain) loss on sale of property, plant and equipment.... (459) 66 (267)
Change in operating assets and liabilities (excluding
acquisitions):
Accounts receivable..................................... 10,043 (10,760) (9,084)
Inventories............................................. 4,990 3,593 (7,280)
Other assets............................................ 5,657 (10,303) (1,430)
Accounts payable........................................ (1,238) 1,761 4,047
Accrued liabilities..................................... (257) 942 (2,533)
Income taxes payable.................................... -- 657 (102)
-------- --------- ---------
19,195 (14,110) (16,382)
-------- --------- ---------
Cash provided by operating activities................... 123,530 76,977 57,955
FINANCING ACTIVITIES:
Net proceeds from initial public offering of common
stock................................................... -- -- 12,874
Net additions to revolving credit facilities............... 432 -- --
Additions to long-term debt................................ 1,933 105,106 9,600
Repayment of long-term debt................................ (17,863) (22,685) (3,263)
Redemption of preferred stock and other.................... (281) -- (4,593)
Sales of common stock, excluding initial public offering... 2,491 1,699 1,940
Purchases of common stock.................................. (4,016) (7,759) (673)
Cash dividends paid........................................ (9,064) (9,078) (5,023)
-------- --------- ---------
Cash (used for) provided by financing activities........ (26,368) 67,283 10,862
INVESTING ACTIVITIES:
Cash paid for purchase of businesses....................... -- (61,579) (34,978)
Capital expenditures....................................... (71,795) (73,844) (71,672)
Proceeds from sale of property, plant and equipment........ 2,172 1,721 2,091
Decrease (increase) in unexpended industrial revenue bond
proceeds................................................ 2,210 (2,067) (153)
Cash paid for intangibles.................................. (356) (2,280) --
-------- --------- ---------
Cash used for investing activities...................... (67,769) (138,049) (104,712)
Effect of exchange rate changes on cash...................... (49) 94 (36)
-------- --------- ---------
Increase (decrease) in cash and cash equivalents............. 29,344 6,305 (35,931)
Cash and cash equivalents at beginning of year............... 21,532 15,227 51,158
-------- --------- ---------
Cash and cash equivalents at end of year..................... $ 50,876 $ 21,532 $ 15,227
======== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes............................................ $ 22,288 $ 23,810 $ 20,809
Interest................................................ 10,719 7,213 2,785
Supplemental disclosure of noncash investing and financing
activities:
Liabilities assumed and notes issued in connection with
acquisitions............................................ -- 25,616 6,044
</TABLE>
See accompanying notes
23
<PAGE> 24
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business. The Company manufactures and distributes
converted products and paperboard 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 its subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results will differ from those estimates and
the differences could be material.
Revenue Recognition Policy. The Company recognizes revenue when title to
the goods sold passes to the buyer, which is generally at the time of shipment.
Stock Dividend. On October 24, 1996, a 10% stock dividend was declared by
the Board of Directors for shareholders of record on November 4, 1996. The stock
dividend was paid on November 15, 1996, and all applicable per share and
weighted average common and common equivalent shares outstanding information in
the consolidated financial statements reflects the stock dividend for all
periods presented herein. This dividend has been retroactively reflected in the
accompanying September 30, 1996 consolidated balance sheet and consolidated
statement of shareholders' equity and has been valued using the price per share
as of October 23, 1996. In addition, stock option information as of September
30, 1996 in Note 5 has been retroactively effected for the impact of this
dividend.
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. Cash equivalents include investments in money market accounts,
tax-free municipal bonds and related instruments. The bonds have a seven-day put
option which allows the Company to sell them with seven days notice and are
primarily backed by letters of credit issued by banks with investment grade
ratings.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents approximate fair market value.
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 10.5% and 10.2% of FIFO
cost at September 30, 1996 and 1995, respectively.
24
<PAGE> 25
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories at September 30, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1996 1995
-------- --------
<S> <C> <C>
Finished goods and work in process............................... $ 46,796 $ 49,926
Raw materials.................................................... 26,583 34,104
Supplies......................................................... 5,816 6,122
-------- --------
Inventories at FIFO cost......................................... 79,195 90,152
LIFO reserve..................................................... (20,690) (26,544)
-------- --------
Net inventories.................................................. $ 58,505 $ 63,608
======== ========
</TABLE>
It is impracticable to segregate the LIFO reserve between raw materials,
finished goods and work-in-process.
Depreciation and Amortization. For financial reporting purposes,
depreciation and amortization are provided on both the declining balance and
straight-line methods over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and building improvements................................... 15-40 years
Machinery and equipment............................................... 3-12 years
Leasehold improvements................................................ Term of lease
Transportation equipment.............................................. 3-8 years
Goodwill and other intangible assets.................................. 2-20 years
</TABLE>
Depreciation expense for the years ended September 30, 1996, 1995 and 1994
was approximately $44,889,000, $40,069,000 and $32,544,000, respectively.
Accumulated amortization relating to intangible assets, excluding goodwill,
was approximately $2,032,000 and $1,348,000 at September 30, 1996 and 1995,
respectively.
Earnings Per Share. Earnings per common and common equivalent share, after
consideration of preferred dividends, are based on the weighted average number
of common and common equivalent shares outstanding during the periods. Because
fully diluted earnings per common and common equivalent share are not materially
different than primary earnings per common and common equivalent share, such
amounts have not been presented. The following amounts have been adjusted to
retroactively reflect the effect of the 10% stock dividend declared on October
24, 1996 and paid on November 15, 1996.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Average number of shares outstanding....................... 33,201,461 33,281,092 32,764,238
Assumed exercise of options with proceeds used to
repurchase shares........................................ 812,597 884,522 1,109,356
---------- ---------- ----------
Total common and common equivalent shares........ 34,014,058 34,165,614 33,873,594
========== ========== ==========
</TABLE>
Goodwill. The Company has classified as goodwill the excess of the
acquisition cost over the fair value of the net assets of businesses acquired.
Existing goodwill is amortized on a straight-line basis over 20 years. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired, the Company's carrying value of the goodwill will be reduced by the
estimated shortfall of cash flows.
25
<PAGE> 26
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation. Assets and liabilities of the Company's
foreign operations are translated from the foreign currency at the rate of
exchange in effect as of the balance sheet date. Revenues and expenses are
translated at average monthly exchange rates prevailing during the year.
Resulting translation adjustments are reflected in shareholders' equity.
New Accounting Standards. In 1995, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). SFAS 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill.
The Company is required to adopt SFAS 121 as of October 1, 1996. The Company has
evaluated the impact of this adoption and believes that it will not have a
material impact on the Company's consolidated financial statements.
In 1995, the FASB also issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
requires companies to estimate the expense relating to all stock-based employee
compensation plans using a recognized pricing model. Companies have the option
of recognizing this expense or of disclosing its pro forma effects on net
income. Currently, the Company applies APB Opinion 25 in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
charged against income from operations for the stock-based employee compensation
plans for the years presented. In accordance with the alternatives permitted
under SFAS 123, beginning October 1, 1996, the Company plans to present the pro
forma impact of its stock-based employee compensation plans in the footnotes to
the consolidated financial statements rather than charge the estimated pro forma
expense related to these plans to its consolidated statement of income.
In October 1996, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 96-1 ("SOP 96-1"). SOP 96-1 provides accounting
guidance on issues relating to the recognition, measurement and disclosure of
environmental liabilities. The Company is required to adopt this statement in
fiscal 1998. Currently, the Company has not completed the analysis necessary to
determine what the impact of SOP 96-1 will be on the Company's consolidated
financial statements; however, the Company does not anticipate a material
impact.
Reclassifications. Certain reclassifications have been made to prior year
amounts to conform with the current year presentation.
2. 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.
26
<PAGE> 27
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net periodic pension cost includes the following components
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Service cost............................................ $ 4,327 $ 3,266 $ 3,588
Interest cost on projected benefit obligations.......... 7,235 6,140 5,645
Actual return on plan assets............................ (17,311) (11,492) 1,377
Net amortization of the initial asset................... (395) (395) (394)
Net amortization and deferral........................... 10,226 5,780 (6,635)
-------- -------- -------
Total Company defined benefit plan expense.............. 4,082 3,299 3,581
Multi-employer plans for collective bargaining
employees............................................. 166 159 167
-------- -------- -------
Net periodic pension cost............................... $ 4,248 $ 3,458 $ 3,748
======== ======== =======
</TABLE>
The reconciliation of the Company's defined benefit plans' funded status to
the amount reported in the Company's consolidated balance sheets at September
30, 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
PLANS WHERE PLANS WHERE PLANS WHERE PLANS WHERE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Actuarial present value of projected
benefit obligations for services
rendered to date:
Actuarial present value of
accumulated benefit obligations:
Vested.......................... $ 77,960 $ 1,240 $56,861 $16,247
Nonvested....................... 6,617 72 4,527 1,614
-------- ------ ------- -------
84,577 1,312 61,388 17,861
Additional amounts related to
projected compensation levels... 16,279 -- 14,951 231
-------- ------ ------- -------
100,856 1,312 76,339 18,092
Plan assets at fair value, primarily
equities, fixed income securities,
common trust funds and cash
equivalents........................ 100,599 1,244 69,421 15,878
-------- ------ ------- -------
Projected benefit obligations in
excess of plan assets.............. (257) (68) (6,918) (2,214)
Unrecognized prior service cost...... 2,911 63 2,157 1,507
Unrecognized net actuarial (gain)
loss -- difference in assumptions
and actual experience.............. (700) 49 8,011 1,268
Initial unrecognized net (asset)
liability being recognized over
periods ranging from 12 to 19
years.............................. (1,770) 29 (2,156) 20
Additional minimum liability......... -- (141) -- (2,979)
-------- ------ ------- -------
Prepaid (accrued) pension cost
included in consolidated balance
sheets............................. $ 184 $ (68) $ 1,094 $(2,398)
======== ====== ======= =======
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.5% as of September 30, 1996 and 1995. The
expected increase in compensation levels used in determining
27
<PAGE> 28
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the actuarial present value of the projected benefit obligations was 4% as of
September 30, 1996 and 1995. 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.
In fiscal 1994, the Board of Directors approved a Supplemental Executive
Retirement Plan ("SERP") to provide unfunded supplemental retirement benefits to
certain executive officers of the Company. The SERP provides for incremental
pension payments to partially offset the reduction in amounts that would have
been payable from the Company's principal pension plan if it were not for
limitations imposed by federal income tax regulations. The plan was effective on
October 1, 1994. Expense relating to the plan of $162,000 and $169,000 was
recorded for the years ended September 30, 1996 and 1995, respectively.
3. LONG-TERM DEBT
Long-term debt at September 30, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
7.25% notes, due August 2005, net of unamortized discount of $122
and $136(a).................................................... $ 99,878 $ 99,864
Fixed rate note, interest at 7.97%, principal due $5,000 annually
through December 1998(b)....................................... 15,000 20,000
Industrial revenue bonds, bearing interest at variable rates
(4.5% at September 30, 1996), due through December 2015(c)..... 28,250 27,750
Promissory note issued in connection with acquisition (See Note
8), interest at 7%, due fiscal 1996............................ -- 11,100
Other notes...................................................... 3,476 3,373
-------- --------
146,604 162,087
Less current maturities of long-term debt........................ 7,260 17,842
-------- --------
Long-term debt due after one year................................ $139,344 $144,245
======== ========
</TABLE>
a. During 1995, the Company filed a registration statement with the
Securities and Exchange Commission to register up to $200,000,000 in aggregate
principal amount of debt securities. Pursuant to this registration statement, in
August of 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 of 1995, the Company entered into an interest
rate adjustment transaction in order to effectively 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%.
b. Under the agreements covering this loan, restrictions exist as to the
maintenance of working capital minimums and ratios, creation of additional
long-term and short-term debt, certain leasing arrangements, mergers,
acquisitions or significant disposals. 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.
28
<PAGE> 29
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
c. Payments of principal and interest on these bonds are guaranteed by a
letter of credit issued by a bank. Restrictions on the Company similar to those
described in b. above exist under the terms of agreements with the bank. The
bonds are remarketed periodically based on the interest rate period selected by
the Company. In the event the bonds cannot be remarketed, the bank has agreed to
extend long-term financing to the Company in an amount sufficient to retire the
bonds.
At September 30, 1996, the fair market value of the Notes was approximately
$98,708,000 based on quoted market prices. The carrying amounts reported in the
consolidated balance sheet for all other fixed rate long-term debt approximate
fair market value. At September 30, 1996, the carrying amount for variable rate
long-term debt, which consists primarily of industrial revenue bonds, also
approximates fair market value since the interest rates on these instruments are
reset periodically.
At September 30, 1996, the cost of property, plant and equipment assigned
as collateral to an industrial revenue bond was approximately $20,398,000.
The amount of consolidated net earnings available for dividends and other
restricted payments, as defined in debt agreements, was approximately
$156,325,000 at September 30, 1996.
As of September 30, 1996, the aggregate maturities of long-term debt for
the succeeding five years are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................................ $7,260
1998........................................................................ 5,527
1999........................................................................ 9,221
2000........................................................................ 251
2001........................................................................ 142
</TABLE>
In fiscal 1995, the Company entered into revolving credit facilities which
provide aggregate borrowing availability of up to $100,000,000 through 2000.
Annual facility fees range from .05% to .125% of the aggregate borrowing
availability, based on the Company's consolidated funded debt to total
capitalization ratio. Under the agreement covering this loan, restrictions exist
similar to those described in b. above. No amounts are outstanding under these
facilities as of September 30, 1996 and 1995.
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,
1996, there was approximately U.S. $432,000 outstanding under this facility at
an average interest rate of 6.5%.
4. LEASES
The Company leases certain manufacturing and warehousing facilities and
equipment (primarily transportation equipment), under various operating leases.
As of September 30, 1996, future minimum lease payments, including certain
maintenance charges on transportation equipment, under all noncancelable leases,
are as follows (in thousands):
<TABLE>
<S> <C>
1997....................................................................... $ 5,199
1998....................................................................... 3,528
1999....................................................................... 2,662
2000....................................................................... 2,066
2001....................................................................... 1,294
Thereafter................................................................. 2,692
------
Total future minimum lease payments.............................. $17,441
======
</TABLE>
29
<PAGE> 30
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense for the years ended September 30, 1996, 1995 and 1994 was
approximately $8,653,000, $7,351,000 and $4,541,000, respectively, including
lease payments under cancelable leases.
5. SHAREHOLDERS' EQUITY
Capitalization
The Company's capital stock consists of Class A common stock ("Class A
Common") and Class B common stock ("Class B Common"). Holders of Class A Common
have one vote per share and holders of Class B Common have ten votes per share.
Holders of Class B Common are entitled to convert their shares into Class A
Common at any time on a share-for-share basis, subject to certain rights of
first refusal by the Company and its management committee.
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.
On March 9, 1994 and April 7, 1994, the Company issued 702,049 and 203,238
shares, respectively, of Class A Common in connection with the Company's initial
public offering.
Stock Option Plans
In December 1993, the shareholders approved the 1993 Stock Option Plan.
This plan allows for the granting of options to certain key employees for the
purchase of a maximum of 2,000,000 shares of Class A Common. In October 1996,
the Board of Directors increased this maximum amount to 2,200,000 shares as a
result of a 10% stock dividend declared on October 24, 1996 and paid on November
15, 1996 (See Note 1). In fiscal 1996, there were no options granted under this
plan. In fiscal 1995, there were 269,000 options granted under this plan, which
expire in 2005. The exercise price of these options is equal to the fair value
of the related shares on the grant date and they vest in increments equal to 25%
of the aggregate number of options granted after six months, one year, two years
and three years.
The Incentive Stock Option Plan, the 1987 Stock Option Plan and the 1989
Stock Option Plan provided for the granting of options to certain key employees
for an aggregate of 4,320,000 shares of Class A Common and 1,440,000 shares of
Class B Common. The Company will not grant any additional options under the
Incentive Stock Option Plan, the 1987 Stock Option Plan and the 1989 Stock
Option Plan.
30
<PAGE> 31
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below summarizes the changes in all stock options during the
periods indicated.
<TABLE>
<CAPTION>
CLASS B COMMON SHARES CLASS A COMMON SHARES
------------------------ --------------------------
SHARES PRICE RANGE SHARES PRICE RANGE
-------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Options outstanding at September 30,
1993..................................... 473,628 $ 2.77-8.20 1,338,216 $ 1.79-8.20
Exercised................................ (124,565) 2.77-6.70 (411,000) 2.75-8.17
Granted.................................. -- -- 284,000 16.75
-------- ---------
Options outstanding at September 30,
1994..................................... 349,063 $ 2.77-8.20 1,211,216 $ 1.79-16.75
Exercised................................ (38,628) 3.58-6.70 (215,416) 1.79-6.70
Granted.................................. -- -- 269,000 17.00-18.25
-------- ---------
Options outstanding at September 30,
1995..................................... 310,435 $ 2.77-8.20 1,264,800 $ 2.75-18.25
Exercised................................ (23,200) 3.60-8.20 (42,000) 4.75-8.20
Effect of stock dividend paid November
15, 1996.............................. 28,724 2.52-7.45 122,280 2.50-16.59
-------- ---------
Options outstanding at September 30,
1996..................................... 315,959 $ 2.52-7.45 1,345,080 $ 2.50-16.59
Options exercisable at September 30,
1996..................................... 315,959 $ 2.52-7.45 1,119,030 $ 2.50-16.59
Options available for future grant at
September 30, 1996....................... -- -- 1,591,700 --
</TABLE>
On October 4, 1996, 287,100 options, which expire in 2006, were granted
under the 1993 Stock Option Plan. As of October 5, 1996, there were 1,304,600
options available for future grant under this plan.
Employee Stock Purchase Plan
In fiscal 1994, the Board of Directors and shareholders approved the 1993
Employee Stock Purchase Plan. Under this plan, 600,000 shares of Class A Common
were reserved for purchase by certain employees of the Company. In October 1996,
the Board of Directors increased the number of reserved shares to 660,000
shares, as a result of a 10% stock dividend declared on October 24, 1996 and
paid on November 15, 1996 (See Note 1). In fiscal 1996 and 1995, approximately
147,000 and 86,000 shares, respectively, were purchased by employees under this
plan.
6. INCOME TAXES
The Company accounts for income taxes under the liability method which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. The recognition of future tax benefits is required to the extent that
realization of such benefits is more likely than not.
31
<PAGE> 32
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consists of the following components (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current income taxes:
Federal............................................. $23,552 $16,939 $16,790
State............................................... 2,927 3,108 3,306
Foreign............................................. (240) 45 611
------- ------- -------
Total current............................... 26,239 20,092 20,707
------- ------- -------
Deferred income taxes:
Federal............................................. 3,912 4,904 2,402
State............................................... 46 561 240
Foreign............................................. 1,147 933 128
------- ------- -------
Total deferred.............................. 5,105 6,398 2,770
------- ------- -------
Provision for income taxes............................ $31,344 $26,490 $23,477
======= ======= =======
</TABLE>
The differences between the statutory federal income tax rate and the
Company's effective income tax rate are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate..................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit..................... 2.7 3.5 3.7
Other, net..................................................... 0.3 0.5 (0.2)
--- --- ---
Effective tax rate............................................. 38.0% 39.0% 38.5%
=== === ===
</TABLE>
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):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
Deferred income tax assets:
Accruals and allowances........................................ $ 4,560 $ 5,097
Other.......................................................... 1,677 1,138
------- -------
Total.................................................. 6,237 6,235
------- -------
Deferred income tax liabilities:
Property, plant and equipment.................................. 24,583 18,493
Prepaid pension................................................ 179 1,499
Other.......................................................... 4,611 4,275
------- -------
Total.................................................. 29,373 24,267
------- -------
Net deferred income tax liability................................ $23,136 $18,032
======= =======
</TABLE>
The Company has not recorded any valuation allowances for deferred income
tax assets.
7. RELATED PARTY TRANSACTIONS
A director of the Company and brother of the retired Chairman of the Board
of Directors of the Company is the chairman and a significant shareholder of the
insurance agency that brokers substantially all
32
<PAGE> 33
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996, 1995 and 1994, payments were approximately
$3,239,000, $3,355,000 and $3,503,000, respectively.
8. ACQUISITIONS OF BUSINESSES
Fiscal 1994 Acquisitions
On December 3, 1993, the Company purchased substantially all of the assets
and business of Les Industries Ling, Inc., a folding carton facility located in
Canada, for approximately $34,978,000. The transaction was accounted for under
the purchase method. Therefore, the results of operations were included in the
accompanying consolidated statements of income beginning December 3, 1993.
The detail of the assets acquired is as follows (in thousands):
<TABLE>
<S> <C>
Net working capital........................................................ $ 4,497
Property, plant, equipment and other....................................... 19,637
Intangible assets.......................................................... 10,844
-------
Net assets acquired for cash............................................... $34,978
=======
</TABLE>
Fiscal 1995 Acquisitions
On January 17, 1995, the Company acquired all of the outstanding capital
stock of Olympic Packaging, Inc. ("Olympic"), a folding carton manufacturer with
manufacturing facilities located in Mundelein, Illinois and Madison, Wisconsin.
On January 31, 1995, the Company acquired substantially all of the assets of
Alliance Display and Packaging ("Alliance"), a corrugated display and packaging
manufacturer located in Winston-Salem, North Carolina. These acquisitions were
financed with borrowings under the Company's revolving credit facilities and the
issuance of an $18,500,000 promissory note to a seller (See Note 3). Both
acquisitions were accounted for under the purchase method. The consolidated
statement of income for fiscal 1995 includes the results of operations of
Olympic and Alliance from the respective dates of acquisition.
The detail of the assets acquired is as follows (in thousands):
<TABLE>
<S> <C>
Net working capital........................................................ $15,152
Property, plant, equipment and other....................................... 21,140
Intangible assets.......................................................... 43,787
-------
Net assets acquired........................................................ $80,079
=======
</TABLE>
Unaudited Pro Forma Information
The following unaudited pro forma information gives effect to the
acquisitions as if each had occurred at the beginning of the years presented
below. The pro forma information is provided for informational purposes only. It
is based on historical information and does not necessarily reflect the actual
results of operations that would have occurred had such acquisitions actually
occurred at the beginning of such years nor is it necessarily indicative of
future results of operations of the combined enterprise (in thousands, except
per share data, unaudited):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Net sales........................................................ $930,096 $807,221
Net income....................................................... 40,121 36,857
Earnings per common and common equivalent share.................. 1.17 1.08
</TABLE>
33
<PAGE> 34
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FACILITY CLOSURES AND CONSOLIDATION
On June 24, 1996, the Company announced a facility closure 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 one of its converting operations to one of the closed plants.
In connection with these closures and consolidation, the Company incurred
nonrecurring expenses of approximately $3,600,000 ($.07 per share after taxes)
consisting primarily of employee severance, employee relocation and training
costs, operating losses in excess of amounts normally expected to occur, asset
impairment, equipment and inventory relocation costs and lease termination
costs. All such nonrecurring expenses were charged to income from operations. As
of September 30, 1996, the Company had recorded a remaining liability of
approximately $640,000 related to this plan. The employment of approximately 150
employees was terminated in connection with these closures and consolidation.
10. COMMITMENTS AND CONTINGENCIES
Capital Additions
Estimated costs for completion of authorized capital additions under
construction totaled approximately $25,000,000 at September 30, 1996.
Stock Repurchase Plan
The Board of Directors has approved a stock repurchase plan for the
repurchase of a maximum of 1,500,000 shares in aggregate of Class A Common or
Class B Common prior to July 31, 1998. In fiscal 1996, 1995 and 1994, the
Company repurchased 217,000, 472,946 and 40,000 shares, respectively, under this
plan.
Environmental and Other Matters
The Company is subject to many federal, state, local and Canadian
provincial 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 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.
Currently, the Company has been named as a potentially responsible party at
eight 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 environmental assessment and remediation have not
been material for the three years ended September 30, 1996. It is possible that
costs in excess of amounts accrued may be incurred, however, management believes
that such additional amounts will not have a material effect on the Company's
financial position and results of operations.
On December 1, 1995, a suit was filed by a private party against, among
others, the Company in the United States District Court for the Western District
of Michigan alleging that the Company is jointly and severally liable under
federal and state law for the release of certain hazardous materials at the
Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site. No specific
amounts have been asserted by the plaintiff
34
<PAGE> 35
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with respect to this matter, however, the eventual amounts could be material.
The Company has responded to and denies any liability with respect to this
matter and is vigorously defending against these claims. The Company cannot
currently predict whether the plaintiff will prevail on its claims or the
magnitude of any potential recovery, if any.
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, fiber
partitions, corrugated containers, corrugated displays, thermoformed plastic
products and laminated paperboard products. The paperboard segment consists of
facilities that manufacture 100% recycled clay-coated and uncoated paperboard
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 Canada and, for fiscal 1996, represented
approximately 6.1%, 3.2% and 8.9% of total net sales to unaffiliated customers,
total income from operations and total identifiable assets, respectively. In
fiscal 1995, these operations represented approximately 5.6%, 5.8% and 9.9% of
total net sales to unaffiliated customers, total income from operations and
total identifiable assets, respectively. In fiscal 1994, these operations
represented approximately 5.0%, 4.8% and 11.0% 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.
Following is a tabulation of business segment information for each of the
past three fiscal years (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales (aggregate):
Converted products............................... $ 779,696 $ 757,704 $ 609,342
Paperboard....................................... 281,402 329,368 252,003
---------- ---------- ----------
Total.................................... $1,061,098 $1,087,072 $ 861,345
========== ========== ==========
Less net sales (intersegment):
Converted products............................... $ 429 $ 390 $ 155
Paperboard....................................... 184,558 183,804 155,341
---------- ---------- ----------
Total.................................... $ 184,987 $ 184,194 $ 155,496
========== ========== ==========
Net sales (unaffiliated customers):
Converted products............................... $ 779,267 $ 757,314 $ 609,187
Paperboard....................................... 96,844 145,564 96,662
---------- ---------- ----------
Total.................................... $ 876,111 $ 902,878 $ 705,849
========== ========== ==========
</TABLE>
35
<PAGE> 36
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Operating income (expense):
Converted products............................... $ 35,218 $ 31,163 $ 24,481
Paperboard....................................... 64,431 51,364 43,775
---------- ---------- ----------
99,649 82,527 68,256
Corporate Expense.................................. (7,492) (6,560) (4,949)
---------- ---------- ----------
Income from operations............................. 92,157 75,967 63,307
Interest expense................................. (10,978) (8,387) (2,827)
Interest income.................................. 1,290 342 498
---------- ---------- ----------
Income before income taxes......................... $ 82,469 $ 67,922 $ 60,978
========== ========== ==========
Identifiable assets:
Converted products............................... $ 414,331 $ 421,685 $ 302,070
Paperboard....................................... 110,769 100,366 86,093
Corporate........................................ 56,588 33,203 25,585
---------- ---------- ----------
Total.................................... $ 581,688 $ 555,254 $ 413,748
========== ========== ==========
Depreciation and amortization:
Converted products............................... $ 35,262 $ 30,414 $ 22,339
Paperboard....................................... 12,855 12,239 10,622
Corporate........................................ 447 538 1,372
---------- ---------- ----------
Total.................................... $ 48,564 $ 43,191 $ 34,333
========== ========== ==========
Capital expenditures, including assets acquired:
Converted products............................... $ 45,077 $ 72,164 $ 69,227
Paperboard....................................... 26,480 23,205 20,785
Corporate........................................ 238 805 1,278
---------- ---------- ----------
Total.................................... $ 71,795 $ 96,174 $ 91,290
========== ========== ==========
</TABLE>
12. FINANCIAL RESULTS BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Net sales............................................. $219,362 $216,477 $216,211 $224,061
Gross profit.......................................... 58,159 60,187 62,563 63,000
Net income............................................ 11,785 12,267 13,525 13,548
Earnings per common and common equivalent share....... .35 .36 .40 .40
1995
Net sales............................................. $192,088 $224,695 $243,828 $242,267
Gross profit.......................................... 48,458 55,067 56,956 55,020
Net income............................................ 9,975 10,804 10,867 9,786
Earnings per common and common equivalent share....... .29 .32 .32 .29
</TABLE>
The interim earnings per common and common equivalent share amounts were
computed as if each quarter was a discrete period. As a result, the sum of the
earnings per common and common equivalent share by quarter will not necessarily
total the annual earnings per common and common equivalent share.
36
<PAGE> 37
ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The results of operations for the third and fourth quarters of fiscal 1996
include nonrecurring expenses of approximately $1,300,000 and $2,300,000,
respectively, incurred by the Company as a result of the facility closure and
consolidation plan (See Note 9).
The Company's quarterly results of operations reflect LIFO estimates based
on management's projection of expected year-end inventory levels and costs.
Because these estimates are subject to many factors beyond management's control,
fourth quarter results are subject to the fiscal year-end LIFO inventory
valuation. The fiscal 1995 annual LIFO inventory valuation resulted in an
increase in cost of goods sold of $9,400,000, of which $3,700,000 was recognized
in the fourth quarter.
37
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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 2000," "Incumbent Directors -- Term Expiring 1999"
and "Incumbent Directors -- Term Expiring 1998" in the Proxy Statement for the
Annual Meeting of Shareholders to be held February 20, 1997 are incorporated
herein by reference for information on the directors of the Registrant. See Item
X in Part I hereof for information regarding the executive officers of the
Registrant. The section under the heading "Other Matters" entitled "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy
Statement for the Annual Meeting of Shareholders to be held on February 20, 1997
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" in the Proxy Statement for
the Annual Meeting of Shareholders to be held February 20, 1997 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 February 20, 1997 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 February 20, 1997 is
incorporated herein by reference.
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 are
included herein:
Report of Independent Auditors.
Consolidated Statements of Income for the years ended September 30, 1996,
1995 and 1994.
Consolidated Balance Sheets as of September 30, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended September 30,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
38
<PAGE> 39
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.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S> <C>
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).
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 -- Revolving Credit Agreement, dated January 17, 1995, by and among the Registrant, as
the Borrower, and Trust Company Bank, as the Lender (incorporated by reference to
Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995, Commission File No. 0-23340).
4.2 -- Revolving Credit Agreement, dated January 17, 1995, by and among the Registrant, as
the Borrower, and Wachovia Bank of Georgia, N.A., as the Lender (incorporated by
reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, Commission File No. 0-23340).
4.3 -- 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 1993 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.14 to the Registrant's Registration Statement on Form S-1, File No.
33-73312).
10.6 -- Rock-Tenn Company Pension Plan (incorporated by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1, File No. 33-73312).
10.7 -- Amendment Number One to the Rock-Tenn Company Pension Plan.
10.8 -- Amendment Number Two to the Rock-Tenn Company Pension Plan.
10.9 -- 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).
10.10 -- 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).
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S> <C>
10.11 -- 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).
11 -- Statement re: Computation of Per Share Earnings.
12 -- Statement re: Computation of Ratio of Earnings to Fixed Charges.
21 -- Subsidiaries of the Registrant.
23 -- 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, 1996 and 1995.
</TABLE>
(B) REPORTS ON FORM 8-K
Not applicable.
(C) SEE ITEM 14(A)(3) AND SEPARATE EXHIBIT INDEX ATTACHED HERETO.
(D) NOT APPLICABLE.
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROCK-TENN COMPANY
By: /s/ BRADLEY CURREY, JR.
------------------------------------
Bradley Currey, Jr.
Chairman of the Board and
Chief Executive Officer
Date: December 23, 1996
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------ ---------------------
<C> <S> <C>
/s/ BRADLEY CURREY, JR. Principal Executive December 23, 1996
- --------------------------------------------- Officer and Director,
Bradley Currey, Jr. Chairman of the Board
and Chief Executive
Officer
/s/ DAVID C. NICHOLSON Principal Financial and December 23, 1996
- --------------------------------------------- Accounting Officer,
David C. Nicholson Senior Vice President,
Chief Financial
Officer and Secretary
/s/ STEPHEN G. ANDERSON Director December 23, 1996
- ---------------------------------------------
Stephen G. Anderson
/s/ J. HYATT BROWN Director December 23, 1996
- ---------------------------------------------
J. Hyatt Brown
/s/ MARY LOUISE MORRIS BROWN Director December 23, 1996
- ---------------------------------------------
Mary Louise Morris Brown
/s/ CHARLES C. CRUMLEY Director December 23, 1996
- ---------------------------------------------
Charles C. Crumley
/s/ ROBERT B. CURREY Director December 23, 1996
- ---------------------------------------------
Robert B. Currey
/s/ LAWRENCE L. GELLERSTEDT, JR. Director December 23, 1996
- ---------------------------------------------
Lawrence L. Gellerstedt, Jr.
/s/ JOHN D. HOPKINS Director December 23, 1996
- ---------------------------------------------
John D. Hopkins
/s/ JAMES W. JOHNSON Director December 23, 1996
- ---------------------------------------------
John W. Johnson
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------ ---------------------
<C> <S> <C>
/s/ RANDOLPH SEXTON Director December 23, 1996
- ---------------------------------------------
Radolph Sexton
/s/ JAY SHUSTER Director December 23, 1996
- ---------------------------------------------
Jay Shuster
/s/ JAMES M. SIBLEY Director December 23, 1996
- ---------------------------------------------
James M. Sibley
/s/ JOHN W. SPIEGEL Director December 23, 1996
- ---------------------------------------------
John W. Spiegel
</TABLE>
42
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------ ---------------------------------------------------------------------- -------------
<C> <C> <S> <C>
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)..................................
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 -- Revolving Credit Agreement, dated January 17, 1995, by and among the
Registrant, as the Borrower, and Trust Company Bank, as the Lender
(incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995,
Commission File No. 0-23340)..........................................
4.2 -- Revolving Credit Agreement, dated January 17, 1995, by and among the
Registrant, as the Borrower, and Wachovia Bank of Georgia, N.A., as
the Lender (incorporated by reference to Exhibit 4.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, Commission File No. 0-23340)................................
4.3 -- 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 1993 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.14 to the Registrant's Registration Statement
on Form S-1, File No. 33-73312).......................................
10.6 -- Rock-Tenn Company Pension Plan (incorporated by reference to Exhibit
10.15 to the Registrant's Registration Statement on Form S-1, File No.
33-73312).............................................................
10.7 -- Amendment Number One to the Rock-Tenn Company Pension Plan............
10.8 -- Amendment Number Two to the Rock-Tenn Company Pension Plan............
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------ ---------------------------------------------------------------------- -------------
<C> <C> <S> <C>
10.9 -- 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)................................
10.10 -- 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)................................
10.11 -- 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).....................................................
11 -- Statement re: Computation of Per Share Earnings.......................
12 -- Statement re: Computation of Ratio of Earnings to Fixed Charges.......
21 -- Subsidiaries of the Registrant........................................
23 -- 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, 1996 and
1995..................................................................
</TABLE>
44
<PAGE> 45
SCHEDULE II
ROCK-TENN COMPANY
SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
- ------------------------------------ ------------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996:
Allowance for Doubtful Accounts..... $2,144 $1,522 -- $ 572(1) $3,094
Reserve for facility closures and
consolidation..................... -- $1,312 -- $ 672(2) $ 640
YEAR ENDED SEPTEMBER 30, 1995:
Allowance for Doubtful Accounts..... $1,361 $1,790 $2,209(3) $3,216(1) $2,144
YEAR ENDED SEPTEMBER 30, 1994:
Allowance for Doubtful Accounts..... $1,214 $ 791 -- $ 644(1) $1,361
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries
(2) Amounts paid relating to facility closures and consolidation
(3) Reserves acquired in connection with Olympic and Alliance acquisitions
45
<PAGE> 1
EXHIBIT 4.3
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 $4,100,000 Economic Development Revenue Bonds (Rock-Tenn
Converting Company Facility), Series 1987, issued by Baltimore City, Maryland;
(iii) the $6,750,000 Economic Development Revenue Bonds (Rock-Tenn Company, Mill
Division Inc. Project), Series 1995, issued by the City of Columbus, Indiana;
(iv) the $3,300,000 Economic Development Revenue Bonds (Rock-Tenn Converting
Company Facility), Series 1994, issued by the Maryland Industrial Development
Financing Authority (v) the $2,750,000 Industrial Development Revenue Bonds
(Rock-Tenn Company Project), Series 1981, issued by the City of Conway,
Arkansas; (vi) 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; (vii) 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; (viii) the
$2,500,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company
Project), Series 1995, issued by the Development Authority of DeKalb County,
(ix) the $2,500,000 Industrial Development Revenue Bonds (Rock-Tenn Converting
Company Project), Series 1993, issued by the City of Harrison, Arkansas, (x) the
$1,500,000 Industrial Development Revenue Bonds (Rock-Tenn Company Mill
Division, Inc.), Series 1996, issued by the Development Authority of DeKalb
County, 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.
<PAGE> 1
EXHIBIT 10.7
ROCK-TENN COMPANY
AMENDMENT NUMBER ONE TO THE
ROCK-TENN COMPANY PENSION PLAN
Pursuant to the power reserved in sec. 11.5 of the Rock-Tenn Company
Pension Plan as amended and restated effective as of October 1, 1989 ("Plan"),
the Rock-Tenn Company ("Plan Sponsor") hereby amends the Plan as follows:
SEC. 1
By amending sec. 6.4, Timing, effective as of October 1, 1989 to add the
following new paragraphs (d) and (e):
(d) If Participant Dies Before Entire Interest is Distributed. If
benefits have commenced and the Participant dies prior to receiving his
entire interest under this Plan, the remaining portion of such interest
shall be distributed to his designated Beneficiary at least as rapidly as
under the method of distribution selected by the Participant.
(e) Special TEFRA 242(b)(2) Elections. Any distributions made
pursuant to a designation made before January 1, 1984 in accordance with
sec. 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982
shall meet the requirements of Code sec. 401(a)(9) as in effect on December
31, 1983 and shall satisfy the requirements of Code sec.sec. 401(a)(11) and
417.
SEC. 2
This amendment is being made pursuant to the Plan Sponsor's application for
and is conditioned upon the receipt of a favorable determination letter that the
Plan satisfies the applicable requirements of Code sec. 401(a), sec. 501(a) and
the related Code sections.
ROCK-TENN COMPANY
By: /s/ DAVID C. NICHOLSON
------------------------------------
David C. Nicholson
Senior Vice President, Chief
Financial
Officer and Secretary
August 29, 1996
ATTEST:
By: /s/ PAUL G. SAARI
----------------------------------
Paul G. Saari
Vice President, Finance and
Information
Systems and Assistant Secretary
August 29, 1996
<PAGE> 1
EXHIBIT 10.8
ROCK-TENN COMPANY
AMENDMENT NUMBER TWO TO THE
ROCK-TENN COMPANY PENSION PLAN
Pursuant to the power reserved in sec. 11.5 of the Rock-Tenn Company
Pension Plan as amended and restated effective as of October 1, 1989 ("Plan"),
the Rock-Tenn Company ("Plan Sponsor") hereby amends the Plan, as follows:
By amending sec. 2.2, Actuarial Equivalent, effective as of October 1,
1996, to read as follows:
2.2 Actuarial Equivalent -- means that benefit which is payable in one
form and which has in the aggregate a present value equal to the present
value of the aggregate amount of benefits expected to be received under
another form of payment under this Plan, computed using
(a) (1) the 1971 Group Annuity Mortality Table, assuming that all
Participants are male and all Spouses and Beneficiaries are female, for
a benefit paid in a form other than a lump sum, or (2) the applicable
mortality table prescribed by the Secretary or his or her delegate
pursuant to Code sec. 417(e)(3), for any benefit paid in a lump sum; and
(b) an interest rate assumption (1) which equals an effective
annual rate of 5% for purposes of calculating a benefit payable in a
form other than a lump sum, or (2) for purposes of calculating the
amount of any benefit paid in a lump sum, which equals the annual rate
of interest on 30-year Treasury securities for the month of August which
immediately precedes the first day of the Plan Year which includes the
date as of which the benefit is paid; and
(c) such other assumptions as the Actuary for this Plan deems
reasonable and proper under the circumstances.
IN WITNESS WHEREOF, the Plan Sponsor has caused this Amendment Number Two
to be executed by its duly authorized officers and its corporate seal to be
affixed as of this the 30th day of September, 1996.
ROCK-TENN COMPANY
By: /s/ DAVID C. NICHOLSON
------------------------------------
David C. Nicholson
Senior Vice President, Chief
Financial Officer
and Secretary
ATTEST:
By: /s/ PAUL G. SAARI
----------------------------------
Paul G. Saari
Vice President, Finance and
Information
Systems and Assistant Secretary
August 29, 1996
<PAGE> 1
EXHIBIT 11
ROCK-TENN COMPANY
COMPUTATION OF EPS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Primary:
Average shares outstanding...................................... 33,201 33,281 32,764
Net effect of dilutive stock options -- based on the treasury
stock method using average market price...................... 813 885 1,110
------- ------- -------
Total................................................... 34,014 34,166 33,874
======= ======= =======
Net income available to common shareholders....................... $51,125 $41,432 $37,346
======= ======= =======
Per share amount.................................................. $ 1.50 $ 1.21 $ 1.10
======= ======= =======
Fully diluted:
Average shares outstanding...................................... 33,201 33,281 32,764
Net effect of dilutive stock options -- based on the treasury
stock method using the year-end market price if higher than
the average market price..................................... 918 902 1,128
------- ------- -------
Total................................................... 34,119 34,183 33,892
======= ======= =======
Net income available to common shareholders....................... $51,125 $41,432 $37,346
======= ======= =======
Per share amount.................................................. $ 1.50 $ 1.21 $ 1.10
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 12
ROCK-TENN COMPANY
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
(AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense............................... $ 3,721 $ 3,917 $ 2,736 $ 8,122 $10,772
Amortization of debt issuance costs............ 56 75 91 265 206
Portion of rent expense representative of
interest.................................... 1,304 1,216 1,035 1,443 2,316
------- ------- ------- ------- -------
Fixed Charges.................................. $ 5,081 $ 5,208 $ 3,862 $ 9,830 $13,294
======= ======= ======= ======= =======
Earnings:
Pretax income from continuing operations....... $55,729 $41,470 $60,978 $67,922 $82,469
Fixed charges.................................. 5,081 5,208 3,862 9,830 13,294
------- ------- ------- ------- -------
Earnings....................................... $60,810 $46,678 $64,840 $77,752 $95,763
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges............... 11.97 8.96 16.79 7.91 7.20
======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21
ROCK-TENN COMPANY
SUBSIDIARIES OF ROCK-TENN COMPANY
1. Rock-Tenn Company, Mill Division, Inc.
2. Dominion Paperboard Products, Ltd.
3. Rock-Tenn Company of Texas
4. Rock-Tenn Converting Company
5. Rock-Tenn Company of Arkansas
6. Ling Industries Inc.
7. Rock-Tenn Company of California, Inc.
8. Rock-Tenn Company of Illinois, Inc.
9. Concord Industries, Inc.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-83304) pertaining to the Rock-Tenn Company 1993 Employee Stock
Option Plan, the Rock-Tenn Company 1993 Employee Stock Purchase Plan, the
Rock-Tenn Company Incentive Stock Option Plan, the Rock-Tenn Company 1989 Stock
Option Plan, and the Rock-Tenn Company 1987 Stock Option Plan, and in the
Registration Statement (Form S-3 No. 33-93934) of Rock-Tenn Company and in the
related Prospectus pertaining to debt securities, of our report dated October
24, 1996, with respect to the consolidated financial statements and schedule of
Rock-Tenn Company included in this Annual Report (Form 10-K) for the year ended
September 30, 1996, and our report dated October 25, 1996, 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, 1996.
/s/ Ernst & Young LLP
Atlanta, Georgia
December 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANICIAL 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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 50,876
<SECURITIES> 0
<RECEIVABLES> 81,135
<ALLOWANCES> 3,094
<INVENTORY> 58,505
<CURRENT-ASSETS> 189,330
<PP&E> 607,395
<DEPRECIATION> 272,541
<TOTAL-ASSETS> 581,688
<CURRENT-LIABILITIES> 68,949
<BONDS> 139,344
0
0
<COMMON> 331
<OTHER-SE> 348,824
<TOTAL-LIABILITY-AND-EQUITY> 581,688
<SALES> 876,111
<TOTAL-REVENUES> 876,111
<CGS> 632,202
<TOTAL-COSTS> 632,202
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,978
<INCOME-PRETAX> 82,469
<INCOME-TAX> 31,344
<INCOME-CONTINUING> 51,125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,125
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
ROCK-TENN COMPANY
AUDITED FINANCIAL STATEMENTS
FOR THE ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<PAGE> 2
ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ 1
Statements of Financial Condition as of September 30, 1996 and 1995................... 2
Statements of Changes in Plan Equity for the years ended September 30, 1996 and
1995................................................................................ 3
Notes to Financial Statements......................................................... 4
</TABLE>
<PAGE> 3
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, 1996 and
1995, and the related statements of changes in plan equity for the years ended
September 30, 1996 and 1995. 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, 1996 and 1995 and the changes in
Plan equity for the years ended September 30, 1996 and 1995, in conformity with
generally accepted accounting principles.
<TABLE>
<S> <C>
/s/ Ernst & Young LLP
Atlanta, Georgia
October 25, 1996
</TABLE>
<PAGE> 4
ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1996 1995
-------- --------
<S> <C> <C>
Plan Assets:
Receivable from Rock-Tenn Company -- Notes 1 and 2..................... $380,701 $334,579
======== ========
Plan Liabilities and Equity:
Obligations to purchase Rock-Tenn Company Common Stock -- Notes 1 and
2................................................................... $380,701 $334,579
Plan Equity.............................................................. -- --
-------- --------
Total Plan Liabilities and Equity.............................. $380,701 $334,579
======== ========
</TABLE>
See notes to financial statements
2
<PAGE> 5
ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF CHANGES IN PLAN EQUITY
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Participant contributions............................................. $2,442,061 $1,579,387
Purchases of Rock-Tenn Company Common Stock -- Note 1................. 2,440,748 1,566,735
Amounts refunded to plan participants................................. 1,313 12,652
---------- ----------
Plan Equity at end of year............................................ $ -- $ --
========== ==========
</TABLE>
See notes to financial statements
3
<PAGE> 6
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, however, the first purchase
period commenced on November 1, 1994. Under the Plan, there were 600,000 shares
of the Company's Class A common stock reserved for purchase. In October 1996,
the Company's Board of Directors increased the number of shares reserved for
purchase under the Plan to 660,000 shares, as a result of a 10% stock dividend
declared on October 24, 1996 and paid on November 15, 1996.
The Plan permits eligible employees to make regular, systematic purchases
of the Company's Class A common stock directly from the Company through payroll
deductions. Substantially all regular, full-time employees of the Company and
its subsidiaries are eligible to participate in the Plan upon completion of at
least two years of employment as defined by the Plan. Voluntary employee
contributions are deducted from participants' compensation each pay period and
are held for the participant's account. All funds held by the Company under the
Plan are included in the general assets of the Company.
On the first day of each of the four purchase periods (November 1, February
1, May 1 and August 1), participants in the Plan are granted an option to
purchase shares of the Company's Class A common stock. On the last day of each
purchase period (January 31, April 30, July 31 and October 31), the Company uses
the funds accumulated in each participant's account in the Plan to purchase
shares of the Company's Class A common stock for the participant. The purchase
price per share to the participant is equal to 85% of the fair market value, as
defined, of the Company's Class A common stock on the first or last day of the
purchase period, whichever amount is lower. For the purchase periods ending
October 31, 1995, January 31, 1996, April 30, 1996 and July 31, 1996 there was a
total of 147,366 shares of the Company's Class A common stock purchased for
participants under the Plan. For the purchase periods ending January 31, 1995,
April 30, 1995 and July 31, 1995, there was a total of 86,059 shares of the
Company's Class A common stock purchased for participants under the Plan. The
purchased shares are placed into a brokerage account in the name of the
employee. A stock certificate representing any shares of the Company's Class A
common stock purchased under the Plan shall be delivered to the participant at
the participant's direction and expense.
Any participant may terminate contributions and withdraw from the Plan at
any time. Even though there are no current intentions to do so, the Board of
Directors can terminate the Plan at any time. Outstanding options at the time of
termination cannot be modified or cancelled without the written consent of the
participants.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the accrual
basis of accounting. Asset valuations are stated at cost which is equivalent to
fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires plan management to make estimates and
assumptions that affect the reported amounts of plan assets and liabilities and
disclosure of any contingent assets and liabilities at the date of the financial
statements and the reported amounts of changes in plan equity during the
reporting period. Actual results will differ from those estimates and the
differences could be material.
4
<PAGE> 7
PLAN ADMINISTRATION
The Plan is administered by the Compensation and Options Committee of the
Company's Board of Directors, which consists of four directors who are not
employees of the Company.
PLAN EXPENSES
Administrative expenses of the Plan are paid by the Company. Accordingly,
such expenses are not reflected in the accompanying financial statements.
NOTE 3 -- FEDERAL INCOME TAXES:
The Plan qualifies as an Employee Stock Purchase Plan under Section 423 of
the Internal Revenue Code of 1986. Transfers of shares under this Plan are not
intended to result in taxable income to employees under the Plan based on
provisions in Section 423 of the Internal Revenue Code.
5
