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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 0-23340
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ROCK-TENN COMPANY
(Exact name of registrant as specified in its charter)
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GEORGIA 62-0342590
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
504 THRASHER STREET, NORCROSS, GEORGIA 30071
(Address of principal executive (Zip code)
offices)
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Registrant's telephone number, including area code: (770) 448-2193
Securities Registered Pursuant to Section 12(B) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
Securities Registered Pursuant to Section 12(G) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 4, 1998 (based on the last reported closing price
per share of Class A Common Stock as reported on the New York Stock Exchange on
such date) was approximately $376 million.
As of December 14, 1998, the registrant had 23,017,199 and 11,636,683
shares of Class A Common Stock and Class B Common Stock outstanding,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
September 30, 1998 are incorporated by reference in Part II. Portions of the
Proxy Statement for the Annual Meeting of Shareholders to be held on January 28,
1999 are incorporated by reference in Parts III and IV.
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INDEX TO FORM 10-K
ROCK-TENN COMPANY
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PAGE
REFERENCE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
Item X. Executive Officers of the Registrant........................ 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 11
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 11
Item 8. Financial Statements and Supplementary Data................. 13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 13
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 14
Item 11. Executive Compensation...................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 14
Item 13. Certain Relationships and Related Transactions.............. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 15
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references herein to the Company are
to the Company and its subsidiaries, including RTS Packaging, LLC ("RTS"). RTS
is a venture owned 65% by the Company. The Company conducts its partition
products business through RTS.
GENERAL
Founded in 1936 as a folding carton manufacturer, the Company is a leading
converter of recycled and virgin paperboard, a leading manufacturer of recycled
clay-coated and uncoated paperboard and a producer of corrugating medium. The
Company believes that it is the third largest manufacturer of folding cartons in
North America and the largest U.S. producer of laminated paperboard products for
the book cover and furniture markets. The Company believes that it is the
largest producer of solid fiber partitions in North America. The Company
operates 55 converting facilities, 10 paperboard mills, 14 paper recovery
facilities, and one distribution facility located in 24 states, Canada and
Mexico.
The Company historically has expanded its business through the acquisition
of other related businesses. Recent acquisitions include the following:
- On January 21, 1997, the Company acquired all of the outstanding capital
stock of the parent of Waldorf Corporation, a manufacturer of folding
cartons and 100% recycled paperboard and a manufacturer of corrugating
medium
- On June 9, 1997, the Company acquired substantially all of the assets of
Rite Paper Products, Inc., a manufacturer of laminated paperboard
components primarily for the ready-to-assemble furniture industry
- On July 9, 1997, the Company acquired substantially all of the assets and
certain of the liabilities of The Davey Company, a manufacturer of
recycled paperboard book covers used by the book publishing industry
PRODUCTS
The Company operates in two industry segments: converted products and
paperboard.
CONVERTED PRODUCTS
The Company primarily manufactures five lines of converted products:
folding cartons, laminated paperboard products, solid fiber partitions,
corrugated products and plastic packaging products.
Folding Cartons. The Company believes that it is the third largest
producer of folding cartons in North America. The Company's folding cartons are
used by customers to package frozen, dry and perishable food items, paper goods,
hardware products, textile, automotive, apparel and other products. Folding
cartons are manufactured by the Company from recycled or virgin paperboard,
which is printed, coated, die-cut and glued in accordance with customer
specifications. Finished cartons are then shipped to customers' plants where
they are packed or sealed. The Company operates 22 folding carton plants and one
distribution facility, and sales of folding cartons to unaffiliated customers
accounted for 45.3%, 49.1% and 46.0% of the Company's net sales in fiscal 1998,
1997, and 1996, respectively. The Company intends to close (as previously
announced) one folding carton plant by December 31, 1998.
Laminated Paperboard Products. The Company manufactures a number of
laminated paperboard products. The Company believes it is the largest U.S.
producer of laminated paperboard products for the book cover and furniture
markets and that it is recognized for its expertise in laminating recycled
paperboard. The Company converts uncoated paperboard into specialty laminated
paperboard products for use in book covers and binders, furniture, automotive
components and other industrial products. The Company operates nine
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laminated paperboard products plants, and sales of laminated paperboard products
to unaffiliated customers accounted for 12.5%, 11.6% and 14.1% of the Company's
net sales in fiscal 1998, 1997 and 1996, respectively. The Company intends to
close (as previously announced) one laminated paperboard products plant by
January 31, 1999.
Partition Products. The Company believes that it is the largest
manufacturer of solid fiber partitions in North America, which are marketed
principally to glass container manufacturers. Fiber partitions are manufactured
by the Company from 100% recycled uncoated paperboard. The Company manufactures
solid fiber partitions in varying thicknesses to meet different structural
requirements that are well-suited for high speed casing, uncasing and filling
lines due to their precision die-cut construction. The Company is focused on
developing high quality, value-added partition products for specific
applications designed to meet customers' packaging needs. The Company operates
11 solid fiber partition plants, and the Company's sales of fiber partition
products to unaffiliated customers accounted for 10.6%, 9.3% and 11.1% of the
Company's net sales in fiscal 1998, 1997 and 1996, respectively.
Corrugated Products. The Company manufactures corrugated containers,
point-of-purchase displays and corrugated sheet stock, offering a range of flute
configurations and structural designs, which it markets primarily in the
Southeastern U.S. The Company purchases linerboard and corrugating medium, which
are fed simultaneously into a corrugator that flutes the medium to specified
sizes, glues the linerboard and fluted medium together and slits and cuts the
resulting corrugated paperboard into sheets in accordance with customer
specifications. The Company markets corrugated sheets to box manufacturers or
converts it into corrugated products ranging from one-color protective cartons
to graphically brilliant point-of-purchase containers and displays. The Company
operates nine corrugated products plants, and sales of corrugated products to
unaffiliated customers accounted for 10.3%, 10.4% and 12.8% of the Company's net
sales in fiscal 1998, 1997 and 1996, respectively.
Plastic Packaging Products. The Company manufactures thermoformed plastic
converted products and extruded plastic roll stock for sale to the food service,
industrial products, consumer products, healthcare and food processors markets.
The Company uses contact heat and radiant heat thermoforming equipment to
manufacture thermoformed products from plastic roll stock in a wide range of
thicknesses, expanding the range of product applications. The Company also
operates extruders to manufacture plastic roll stock in a wide range of colors.
The Company uses virgin and recycled plastic resin purchased from third parties
in the extrusion process, including high impact polystyrene, high density
polyethylene, polypropylene, polyethylene terephthalate (PET) and K resin
blends.
PAPERBOARD
The Company produces 100% recycled clay-coated and uncoated paperboard and
corrugating medium and operates ten paperboard mills, as well as 14 facilities
that collect recovered paper.
Recycled Paperboard. The Company is the largest U.S. manufacturer of 100%
recycled paperboard (excluding linerboard, medium and paperboard used in the
manufacture of gypsum wallboard) and believes that it is the second largest
producer of recycled clay-coated paperboard in the U.S. The Company markets its
recycled clay coated and uncoated paperboard to manufacturers of folding
cartons, fiber partitions, laminated paperboard products and other paperboard
products. The Company also manufactures recycled corrugating medium, which is
marketed to corrugated sheet manufacturers. The Company operates ten paperboard
mills, including one that produces both recycled clay-coated paperboard and
corrugating medium, and sales of recycled paperboard (including corrugating
medium) to unaffiliated customers accounted for 15.8%, 13.4% and 9.6% of the
Company's net sales in fiscal 1998, 1997 and 1996, respectively.
Recycled Fiber. The Company operates 14 paper recovery facilities that
collect paper from a number of sources including factories, commercial printers,
office buildings, retail stores and paper converters as well as from other
wastepaper collectors. Certain of the Company's paper recovery facilities are
located near the Company's paperboard mills to minimize freight costs and
provide an additional source of supply of high quality recovered paper for the
Company's operations. Recovered paper is the principal raw material used by the
Company in the production of recycled paperboard. Collected paper is sorted and
baled and then either
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transferred to the Company's paperboard mills for processing or sold principally
to other U.S. manufacturers of recycled paperboard.
SALES AND MARKETING
The Company sold converted products and paperboard to over 5,000 and 1,000
customers, respectively, in fiscal 1998. None of the Company's customers
accounted for more than 10% of the Company's net sales in fiscal 1998. The
Company generally manufactures converted products and paperboard pursuant to
customers' orders. Certain of the Company's converted products and paperboard
are marketed to certain key customers, the loss of which could have an adverse
effect on net income attributable to such converted products or paperboard
segments and, depending on the significance of such product line to the
Company's operations, the Company's results of operations. The Company believes
that it has strong relationships with its customers.
Each of the Company's converted product and paperboard lines are marketed
through its own sales force that maintains direct sales relationships with its
customers. Several converted product lines, including folding cartons and book
covers, are also marketed through independent sales representatives and
independent distributors, respectively. Sales personnel are supervised by
regional sales managers, plant general managers or the general manager for the
particular product line, who support and coordinate the sales activities within
their designated area. The Company's paperboard and laminated paperboard
products sales personnel are generally paid a base salary, and its packaging
products sales personnel are generally paid a base salary plus commissions. The
Company's independent sales representatives are paid on a commission basis.
COMPETITION
The converted products and paperboard industries are highly competitive,
and no single company is dominant. The Company's converted products include
folding cartons, fiber partitions, corrugated containers, corrugated displays,
thermoformed plastic products and laminated paperboard products. The Company's
paperboard products include 100% recycled clay-coated and uncoated paperboard
and corrugating medium. Management believes that the Company is the third
largest manufacturer of folding cartons in North America, the largest U.S.
manufacturer of 100% recycled paperboard (excluding linerboard, medium and
paperboard used in the manufacture of gypsum wallboard), the largest U.S.
producer of laminated paperboard products for the book cover and furniture
markets and the second largest producer of recycled clay-coated paperboard in
the U.S. In addition, the Company believes that it is the largest manufacturer
of solid fiber partitions in North America.
The Company's competitors include large, vertically integrated converted
products and paperboard companies and numerous smaller companies. In the folding
carton and corrugated container markets, the Company competes with a significant
number of national and regional packaging suppliers. In the fiber partitions,
corrugated displays, thermoformed plastic products and laminated paperboard
products markets, the Company competes with a smaller number of national,
regional and local companies offering highly specialized products. In the
paperboard segment, the Company competes with integrated and non-integrated
national, regional and local companies manufacturing various grades of
paperboard. The primary competitive factors in the converted products and
paperboard industries are price, design, quality and service, with varying
emphasis on these factors depending on the product line. The Company believes
that it competes effectively with respect to each of these factors, but, to the
extent that one or more of its competitors becomes more successful with respect
to any key competitive factor, the Company's business could be materially
adversely affected.
In addition, as demand for environmentally friendly packaging has
increased, producers of virgin paperboard have begun to manufacture paperboard
having some recycled paper content. Increasing acceptance of partially recycled
paperboard by consumers as an environmentally friendly alternative to paperboard
produced from 100% recovered paper could have an adverse effect on demand for
the Company's paperboard.
The converted products and recycled paperboard industries have undergone
significant consolidation in recent years, and the Company believes that current
trends within the converted products and paperboard industries will result in
further consolidation. Within the converted products industry, larger corporate
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customers with an expanded geographic presence have tended in recent years to
seek suppliers who can, because of their broad geographic presence, efficiently
and economically supply all of the customers' packaging needs. In addition,
during recent years, purchasers of recycled paperboard and converted products
have demanded higher quality products meeting stricter quality control
requirements. These market trends could adversely affect the Company's results
of operations.
ENVIRONMENTAL REGULATION
The Company is subject to various Federal, state, local, Canadian
provincial and Mexican environmental laws and regulations, including those
regulating the discharge, storage, handling and disposal of a variety of
substances. These laws and regulations include, among others, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), the Clean Air
Act (as amended in 1990), the Clean Water Act, the Resource Conservation and
Recovery Act (including amendments relating to underground tanks) and the Toxic
Substances Control Act. These environmental regulatory programs are primarily
administered by the U.S. Environmental Protection Agency. In addition, states in
which the Company operates have adopted equivalent or more stringent
environmental laws and regulations, or have enacted their own parallel
environmental programs, which are enforced through various state administrative
agencies. The Company's operations are also governed by other Federal, state,
local, Canadian provincial and Mexican laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Act and regulations promulgated thereunder that, among other things,
establish asbestos and noise standards and regulate the use of hazardous
chemicals in the workplace. Although the Company does not use asbestos in the
manufacture of its products, some of its facilities contain asbestos. However,
management believes such asbestos is properly contained and comprehensive
operations and maintenance plans have been, or are in the process of being,
implemented for those facilities where asbestos is present.
The Company does not believe that future compliance with environmental and
health and safety laws and regulations by the Company will have any material
adverse effect on the Company's financial condition or results of operations.
However, environmental, health and safety laws and regulations are becoming
increasingly stringent. Consequently, unforeseen expenditures required to comply
with such laws and regulations, including remediation costs or unforeseen
environmental liabilities, could have a material adverse effect on the Company's
financial condition or results of operations. In addition, the Company cannot
with certainty assess at this time the impact upon its operations or capital
expenditure requirements of the future emissions standards and enforcement
practices under the 1990 amendments to the Clean Air Act. However, although
there can be no assurance, the Company believes that any such impact or capital
expenditures will not have a material adverse effect on the Company's results of
operations or financial condition. The Company estimates that it will spend $1.5
million to $4.0 million for capital expenditures during fiscal 1999 in
connection with matters relating to environmental compliance.
In addition, the Company may choose to modify or replace the coal fired
boilers at two of its facilities in order to operate cost effectively while
complying with emissions regulations under the Clean Air Act. The Company
estimates these improvements will cost approximately $3.0 million; however, the
Company may spend more on these improvements to reduce its energy costs at such
facilities.
The Company has been identified as a potentially responsible party ("PRP")
at nine Superfund sites pursuant to CERCLA or comparable state statutes. Except
with respect to the Muncie Racetrack site ("Muncie Site"), the Kalamazoo River
site ("Kalamazoo Site") and the Chemical Handling Corporation site ("Chemical
Handling Site"), no remediation costs or allocations have been determined with
respect to such sites. With respect to the Muncie Site, approximately $3.2
million has been spent to date by certain PRPs other than the Company in
connection with soil remediation activities and studies. The Company has paid
its final allocation of liability of approximately $9,300 for the surface
contamination at the site. This amount represented 0.3% of the site remediation
costs. The Company believes that no further soil remediation activities will be
required. However, additional costs may be required in connection with the
investigation and remediation of groundwater contamination, and the Company does
not currently have sufficient information to estimate such costs.
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On December 1, 1995, a suit was filed by a private party against, among
others, the Company in the United States District Court for the Western District
of Michigan alleging that the Company is jointly and severally liable under
federal and state law for the release of certain hazardous materials at the
Kalamazoo Site. The Company has entered into a settlement agreement pursuant to
which the Company paid $325,000 and received releases from certain past, present
and future environmental claims and actions involving the Kalamazoo Site. With
respect to the Chemical Handling Site, the Company was found to have only
minimal usage of the site. Therefore, on August 28, 1998, the Company signed a
consent decree pursuant to which the Company paid approximately $41,000. The
consent decree releases the Company from liability to the United States
government associated with past response costs at the Chemical Handling Site. It
is not anticipated that there will be any further clean-up costs at this site.
Based upon currently available information and the opinions of the
Company's environmental compliance managers and General Counsel, although there
can be no assurance, the Company believes that any liability it may have at any
site will not have a material adverse effect on the Company's financial
condition or results of operations.
EMPLOYEES
At September 30, 1998, the Company had 8,856 employees, of whom 6,923 were
hourly and 1,933 were salaried. Approximately 3,278 of the Company's hourly
employees are covered by union collective bargaining agreements, which generally
have three-year terms. The Company has not experienced any work stoppages in the
past 10 years, and management believes that the Company's relations with its
employees are good.
ITEM 2. PROPERTIES
The following table sets forth certain information about the Company's
paperboard mills:
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FISCAL 1998
PRODUCTION
CAPACITY
LOCATION OF MILL (IN TONS) PAPERBOARD PRODUCED
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St. Paul, MN*...................... 180,000 Recycled corrugating medium
Battle Creek, MI................... 130,000 Clay-coated recycled paperboard
Dallas, TX......................... 160,000 Clay-coated and uncoated recycled
paperboard
Lynchburg, VA...................... 140,000 Uncoated recycled paperboard
St. Paul, MN*...................... 165,000 Clay-coated recycled paperboard
Chattanooga, TN.................... 120,000 Uncoated recycled paperboard
Otsego, MI......................... 90,000 Uncoated recycled paperboard
Sheldon Springs, VT (Missisquoi 84,000 Clay-coated recycled paperboard
Mill)............................
Eaton, IN.......................... 60,000 Uncoated recycled paperboard
Cincinnati, OH..................... 53,000 Uncoated recycled paperboard
Stroudsburg, PA.................... 51,000 Clay-coated recycled paperboard
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* Comprises one paperboard mill.
In addition to the paperboard mills set forth above, the Company also
operates 55 converting facilities, 14 paper recovery facilities and one
distribution facility in 24 states (mainly in the Southwestern, Southeastern,
Midwestern and Northeastern U.S.), Canada and Mexico. Of the Company's
facilities, the Company owns 70 and leases nine. The Company's principal
executive offices, which it owns, are located in Norcross, Georgia. The Company
believes that its existing production capacity is adequate to service existing
demand for the Company's products. The Company considers its plants and
equipment to be in good condition.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation incidental to its business from time
to time. The Company is not currently a party to any litigation that management
believes, if determined adversely to the Company, would have a material adverse
effect on the Company's financial condition or results of operations. For
additional information regarding litigation to which the Company is a party,
which is incorporated by reference into this item, see "Item
1 -- Business -- Environmental Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
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NAME AGE POSITIONS HELD
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Bradley Currey, Jr...... 68 Chairman of the Board, Chief Executive Officer and Director
Jay Shuster............. 44 President, Chief Operating Officer and Director
Edward E. Bowns......... 55 Executive Vice President and General Manager of Industrial
Products Group*
David E. Dreibelbis..... 46 Executive Vice President and General Manager of the Mill
Group*
David C. Nicholson...... 44 Senior Vice President, Chief Financial Officer and Secretary
Russell M. Currey....... 37 Senior Vice President of Marketing and Planning
Vincent D'Amelio........ 47 Executive Vice President and General Manager of the Plastic
Packaging Division
Paul England............ 43 Executive Vice President and General Manager of the Uncoated
Paperboard Division
Steve Flanagan.......... 44 Executive Vice President and General Manager of the Recycled
Fiber Division
Nicholas G. George...... 48 Executive Vice President and General Manager of the Folding
Carton Division
James K. Hansen......... 60 Executive Vice President and General Manager of the Coated
Paperboard Division
R. Evan Hardin.......... 36 Treasurer
John H. Morrison........ 55 Executive Vice President and General Manager of the
Corrugated Packaging and Display Division
Paul G. Saari........... 43 Vice President of Finance
John D. Skelton II...... 44 Executive Vice President and General Manager of Laminated
Paperboard Products Division
Richard E. Steed........ 47 President and Chief Executive Officer of RTS
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* The Mill Group consists of the Recycled Fiber, Uncoated Paperboard and Coated
Paperboard Divisions and the Industrial Products Group consists of the
Laminated Paperboard Products, Plastic Packaging and Corrugated Packaging and
Display Divisions and RTS.
Bradley Currey, Jr. has served as Chief Executive Officer of the Company
since January 1989 and Chairman of the Board since July 1993. Mr. Currey served
as President of the Company from 1978 until October 1995. He has been a director
of the Company since 1967. Mr. Currey joined the Company in 1976 and prior to
that time was Executive Vice President and a director of Trust Company Bank of
Georgia (currently SunTrust Bank, Atlanta). Mr. Currey is also a director of
Genuine Parts Co., an auto parts
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wholesaler, and Poe & Brown, Inc., an insurance agency. Mr. Currey is the father
of Russell M. Currey and brother of Robert B. Currey, a director of the Company.
Jay Shuster has served as President of the Company since October 1995 and
Chief Operating Officer of the Company since June 1991. Mr. Shuster served as an
Executive Vice President of the Company from June 1991 until October 1995. Mr.
Shuster was elected a director of the Company in January 1992. From January 1989
until June 1991, Mr. Shuster was Executive Vice President and General Manager of
the Consumer Packaging Group. Mr. Shuster served as Executive Vice President and
General Manager of the Folding Carton Division from December 1986 until January
1989. Mr. Shuster joined the Company in May 1979.
Edward E. Bowns has served as Executive Vice President and General Manager
of the Industrial Products Group since November 1990. From February 1986 until
November 1990, Mr. Bowns served as Executive Vice President and General Manager
of the Partition Division. Mr. Bowns joined the Company in October 1980.
David E. Dreibelbis has served as Executive Vice President and General
Manager of the Mill Group since September 1992. From July 1985 until September
1992, Mr. Dreibelbis was Executive Vice President and General Manager of the
Recycled Fiber Division. Mr. Dreibelbis joined the Company in April 1979.
David C. Nicholson has served as Senior Vice President of the Company since
September 1994 and as Chief Financial Officer and Secretary of the Company since
December 1986. Mr. Nicholson served as Vice President of the Company from
December 1986 to September 1994. Mr. Nicholson joined the Company in November
1983 and has served in various other capacities, including Treasurer from
December 1986 until January 1988, Controller and Director of Mergers and
Acquisitions.
Russell M. Currey has served as Senior Vice President of Marketing and
Planning since December 1994. Mr. Currey served as Executive Vice President and
General Manager of the Recycled Fiber Division from September 1992 until
December 1994. From February 1990 until September 1992, Mr. Currey served as
Manager of Strategic Development for the Mill Group. From July 1986 until
February 1990, he was General Manager of one of the Company's recycled fiber
plants. Mr. Currey joined the Company in July 1983. Mr. Currey is the son of
Bradley Currey, Jr. and the nephew of Robert B. Currey, a director of the
Company.
Vincent D'Amelio has served as Executive Vice President and General Manager
of the Plastic Packaging Division since July 1998. From 1994 until July 1998, he
was Vice-President for Manufacturing for the Plastic Packaging Division. Mr.
D'Amelio joined the Company in 1994.
Paul England has served as Executive Vice President and General Manager of
the Uncoated Paperboard Division since September 1997. Mr. England served as
Executive Vice President and General Manager of the Recycled Fiber Division from
September 1994 until September 1997. From September 1989 to September 1994, Mr.
England served in various capacities, including General Manager of one of the
Company's paperboard mills. Mr. England joined the Company in September 1989.
Steve Flanagan has served as Executive Vice President and General Manager
of the Recycled Fiber Division since July 1998. From 1983 until 1995, he was
General Manager of one of the Company's recycled fiber plants. From 1995 until
July 1998, Mr. Flanagan served as Regional Manager, Southwest Region for the
Recycled Fiber Division. Mr. Flanagan joined the Company in 1983.
Nicholas G. George has served as Executive Vice President and General
Manager of the Folding Carton Division since June 1991. From January 1991 until
June 1991 he was Vice President and General Sales Manager of the Folding Carton
Division. From July 1986 until January 1991, he was Vice President of Folding
Sales, Western Area. Mr. George joined the Company in May 1980.
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James K. Hansen has served as Executive Vice President and General Manager
of the Coated Paperboard Division since September 1997. Mr. Hansen served as
Executive Vice President and General Manager of the Mill Division from May 1990
until September 1997. From 1984 until May 1990, he was General Manager of one of
the Company's paperboard mills. Mr. Hansen joined the Company in April 1979.
R. Evan Hardin has served as Treasurer of the Company since September 1994.
Mr. Hardin joined the Company in March 1988 and has served in various other
capacities, including Assistant Treasurer and Financial Analyst.
John H. Morrison has served as Executive Vice President and General Manager
of the Corrugated Packaging and Display Division since March 1986. From 1967
until March 1986, Mr. Morrison was employed by Union Camp Corporation, serving
in various capacities, including General Manager of a corrugated manufacturing
plant.
Paul G. Saari has served as Vice President Finance of the Company since
July 1994 and as Assistant Secretary of the Company since January 1988. From
February 1988 to July 1994 he served as Treasurer of the Company and from June
1987 until February 1988, Mr. Saari served as Controller of the Company. Mr.
Saari joined the Company in August 1984.
John D. Skelton II has served as Executive Vice President and General
Manager of the Laminated Paperboard Products Division since July 1998. From
December 1991 until July 1998, he served as Executive Vice President and General
Manager of the Plastic Packaging Division. From January 1991 until December
1991, he served as Vice President of Folding Carton Sales, Western Area. From
1981 until 1991, Mr. Skelton served as General Manager of several of the
Company's plants. Mr. Skelton joined the Company in July 1976.
Richard E. Steed has served as the President and Chief Executive Officer of
RTS since September 1997. From December 1991 until September 1997, Mr. Steed
served as Executive Vice President and General Manager of the Partition
Division. From December 1986 until December 1991, Mr. Steed served as Executive
Vice President and General Manager of the Plastic Packaging Division. Mr. Steed
joined the Company in December 1975.
All executive officers of the Company are elected annually by and serve at
the discretion of either the Board of Directors, the Chairman of the Board or
the President of the Company. Mr. Steed is elected annually and serves at the
discretion of the Managing Board of RTS.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The dividend and market price information under the heading "Financial and
Operating Highlights" on the inside front cover, and the shareholder information
under the heading "Shareholder Information -- Common Stock" on page 49, of the
Annual Report to Shareholders for the year ended September 30, 1998 are
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information under the heading "Five Year Selected Financial and
Operating Highlights" for the years ended September 30, 1994 through 1998 on
page 16 of the Annual Report to Shareholders for the year ended September 30,
1998 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the heading "Management Discussion and Analysis of
Results of Operations and Financial Condition" on pages 17 through 27 of the
Annual Report to Shareholders for the year ended September 30, 1998 is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and
commodity prices. To modify the risk from these interest rate and commodity
price fluctuations, the Company enters into various hedging transactions.
INTEREST RATES
The Company is exposed to changes in interest rates, primarily as a result
of its short-term and long-term debt with both fixed and floating interest
rates. The Company uses interest rate agreements effectively to cap the LIBOR
rate on portions of the amount outstanding under the revolving credit facility.
In addition, the Company has used an interest rate swap agreement effectively to
fix the LIBOR rate on $100,000,000 of variable rate borrowings.
11
<PAGE> 12
The following table summarizes information on instruments and transactions
that are sensitive to interest rate fluctuations. The table presents principal
cash flows and related weighted average interest rates by expected maturity
dates. The carrying value of the Company's variable rate debt approximates its
fair value. The fair value of the fixed rate financial instruments is estimated
based on quoted market prices. The interest rate swap agreement is settled
quarterly.
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST (SWAP) RATE/CAP STRIKE PRICE
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FAIR
VALUE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 9/30/98
---------- ---------- ---------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES:
Long-term debt,
including current
portion:
Fixed rate............ $ 5,462 $ 324 $ 197 $ 218 $ 241 $ 100,746 $107,188 $107,438
Average interest
rate................ 7.3% 7.3% 7.3% 7.3% 7.3% 7.3%
Variable rate,
revolving credit
facility............ $ 38,000 -- -- $ 331,000 -- -- $369,000 $369,000
Average interest
rate................ LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR
+ + + + + +
spread spread spread spread spread spread
Variable rate,
industrial
development bonds... -- -- -- -- -- $ 32,150 $ 32,150 $ 32,150
Average interest
rate................ open open open open open open
market market market market market market
(tax-free) (tax-free) (tax-free) (tax-free) (tax-free) (tax-free)
INTEREST RATE DERIVATIVE
FINANCIAL INSTRUMENTS
RELATED TO DEBT:
Interest rate swap:
Pay fixed/receive
variable............ -- -- -- -- -- $ 100,000 $100,000 $ 4,451
Average pay rate...... 5.8% 5.8% 5.8% 5.8% 5.8% 5.8%
Average receive
rate................ 90-day 90-day 90-day 90-day 90-day 90-day
LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR
Interest rate caps:
Notional amount....... -- $ 75,000 $ 75,000 -- -- -- $150,000 $ 3
Strike rate........... -- 7.5% 8.0% -- -- --
Forward rate
(beginning of
period)............. 5.4% 4.6% 4.8% -- -- --
</TABLE>
Spread range is 0.25% -- 0.875%, currently .750%
COMMODITIES
The Company sells recycled corrugating medium ("Medium") to various
customers. The principal raw material used in the production of Medium is old
corrugated containers ("OCC"). Medium and OCC prices and costs fluctuate widely
due to changing market forces. The impact of these price and cost fluctuations
has not been material to the overall consolidated financial statements; however,
the Company does make use of swap agreements to synthetically manage the selling
prices and raw material costs of a portion of its recycled medium business and
to limit the Company's exposure to falling prices and rising costs.
12
<PAGE> 13
The following table outlines the terms of the three commodity swaps that
were outstanding at September 30, 1998. These swaps are settled quarterly.
<TABLE>
<S> <C>
Board Swap #1
Contract Volume............................................. 24,000 short tons per year
Average sales price (per ton)............................... Medium price(1)
Contract sales price (per ton).............................. $380
Expiration Date............................................. December 31, 2002
Board Swap #2
Contract Volume............................................. 12,000 short tons per year
Weighted average price (per ton)............................ Spread(2)
Contract sales price (per ton).............................. $268
Expiration Date............................................. March 31, 2003
Board Swap #3
Contract Volume............................................. 12,000 short tons per year
Weighted average price (per ton)............................ Spread(2)
Contract sales price (per ton).............................. $270
Expiration Date............................................. March 31, 2003
</TABLE>
- ---------------
(1) Containerboard: 26 Lb. Semichemical Medium: Price (Eastern U.S.) as reported
in the Paper Packaging Monitor.
(2) Spread represents the difference between the Medium price (Containerboard:
26 Lb. Semichemical Medium: Price (Eastern U.S.) as reported in the Pulp
Packaging Monitor) and the OCC price (Recovered Paper: Corrugated: OCC (11)
Price as reported in the Recycled Materials Monitor).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Registrant and its subsidiaries
included in the Annual Report to Shareholders for the year ended September 30,
1998 are incorporated herein by reference:
Consolidated Statements of Income for the years ended September 30, 1998,
1997 and 1996.
Consolidated Balance Sheets as of September 30, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended September 30,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
The information in Note 12, "Financial Results by Quarter (Unaudited)" on
page 45 of the Annual Report to Shareholders for the years ended September 30,
1998 and 1997 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections under the heading "Election of Directors" entitled "Nominees
for Election -- Term Expiring 2002," "Incumbent Directors -- Term Expiring 2001"
and "Incumbent Directors -- Term Expiring 2000" in the Proxy Statement for the
Annual Meeting of Shareholders to be held January 28, 1999 are incorporated
herein by reference for information on the directors of the Registrant. See Item
X in Part I hereof for information regarding the executive officers of the
Registrant. The section under the heading "Other Matters" entitled "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the
Annual Meeting of Shareholders to be held on January 28, 1999 is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section under the heading "Election of Directors" entitled
"Compensation of Directors" and the sections under the heading "Executive
Compensation" entitled "Summary Compensation Table," "Option Grants Table,"
"Aggregated Options Table" and "Pension Plan Table" and the section entitled
"Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement for the Annual Meeting of Shareholders to be held January 28, 1999 are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the heading "Common Stock Ownership by Management and
Principal Shareholders" in the Proxy Statement for the Annual Meeting of
Shareholders to be held on January 28, 1999 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Certain Transactions" in the Proxy
Statement for the Annual Meeting of Shareholders to be held January 28, 1999 is
incorporated herein by reference.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(A) 1. FINANCIAL STATEMENTS.
The following Consolidated Financial Statements of Rock-Tenn Company and
its consolidated subsidiaries and the Report of the Independent Auditors,
included in the Registrant's Annual Report to Shareholders for the year ended
September 30, 1998 are incorporated by reference in Part II, Item 8:
Consolidated Statements of Income for the years ended September 30,
1998, 1997 and 1996.
Consolidated Balance Sheets as of September 30, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended September 30,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
2. FINANCIAL STATEMENT SCHEDULE OF ROCK-TENN COMPANY.
The following financial statement schedule is included in Part IV of this
report:
Schedule II -- Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or not
required.
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
2.1 -- Asset Acquisition Agreement by and between Rock-Tenn
Converting Company, a wholly owned subsidiary of the
Registrant, and Alliance Display and Packaging Company dated
January 31, 1995 (incorporated by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K executed as
of February 6, 1995).
2.2 -- Stock Purchase Agreement dated January 21, 1997 between
Rock-Tenn Company and the Shareholders of Wabash Corporation
(incorporated by reference to the Registrant's Current
Report on Form 8-K/A dated January 21, 1997).
3.1 -- Restated and Amended Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, File No.
33-73312).
3.2 -- Articles of Amendment to the Registrant's Restated and
Amended Articles of Incorporation (incorporated by reference
to Exhibit 2 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995, Commission File
No. 0-23340).
3.3 -- Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on
Form S-1, File No. 33-73312).
4.1 -- Credit Agreement dated January 21, 1997 by and among
Rock-Tenn Company, SunTrust Bank, Atlanta and the other
banks and lending institutions party to such Credit
Agreement from time to time.
4.2 -- First Amendment to Credit Agreement dated February 20, 1997
by and among Rock-Tenn Company, SunTrust Bank, Atlanta, in
its capacity as a Lender, and SunTrust Bank, Atlanta, in its
capacity as agent for the Lenders.
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
4.3 -- Second Amendment to Credit Agreement dated June 6, 1997 by
and among Rock-Tenn Company, the Lenders under the Credit
Agreement and SunTrust Bank, Atlanta.
4.4 -- Agreement to Provide Other Debt Instruments.
10.1 -- ISO Stock Option Plan (incorporated by reference to Exhibit
10.10 to the Registrant's Registration Statement on Form
S-1, File No. 33-73312).
10.2 -- Rock-Tenn Company 1987 Stock Option Plan (incorporated by
reference to Exhibit 10.11 to the Registrant's Registration
Statement on Form S-1, File No. 33-73312).
10.3 -- Rock-Tenn Company 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1, File No. 33-73312).
10.4 -- Rock-Tenn Company 1993 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-1, File No.
33-73312).
10.5 -- Rock-Tenn Company Key Employee Incentive Bonus Plan as
amended on October 27, 1994 (incorporated by reference to
Exhibit 10.16 to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1994, Commission File No.
0-23340).
10.6 -- Rock-Tenn Company Supplemental Executive Retirement Plan
Effective as of October 1, 1994 (incorporated by reference
to Exhibit 10.17 to the Registrant's Annual Report on Form
10-K for the year ended September 30, 1994, Commission File
No. 0-23340).
10.7 -- Demand Promissory Note for $18,500,000 dated January 31,
1995 between the Registrant and Alliance Display and
Packaging Company (incorporated by reference to Exhibit 10
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, Commission File No. 0-23340).
10.8 -- Joint Venture Agreement dated September 5, 1997 between
Rock-Tenn Company, Rock-Tenn Partition Company, Sonoco
Products Company and Sonoco Partitions, Inc. (incorporated
by reference to Exhibit 10.8 to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1997).
10.9 -- Contribution Agreement dated as of September 5, 1997 by and
among Rock-Tenn Company, Rock-Tenn Partition Company and RTS
Packaging, LLC (incorporated by reference to Exhibit 10.9 to
the Registrant's Annual Report on Form 10-K for the year
ended September 30, 1997).
10.10 -- Amended and Restated Operating Agreement of RTS Packaging,
LLC dated as of September 5, 1997 between Rock-Tenn
Partition Company and Sonoco Partitions, Inc. (incorporated
by reference to Exhibit 10.10 to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1997).
10.11 -- Consulting Agreement dated January 21, 1997 between Eugene
U. Frey and the Company (incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1997).
12 -- Statement re: Computation of Ratio of Earnings to Fixed
Changes.
13 -- Annual Report to Shareholders submitted herewith but not
"filed," except for those portions expressly incorporated by
reference herein.
21 -- Subsidiaries of the Registrant.
23 -- Report and Consent of Ernst & Young LLP.
27 -- Financial Data Schedule (for SEC use only).
99 -- Audited Financial Statements for the Rock-Tenn Company 1993
Employee Stock Purchase Plan for the years ended September
30, 1998, 1997 and 1996.
</TABLE>
16
<PAGE> 17
(B) REPORTS ON FORM 8-K.
Not applicable.
(C) SEE ITEM 14(A)(3) AND SEPARATE EXHIBIT INDEX ATTACHED HERETO.
(D) NOT APPLICABLE.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROCK-TENN COMPANY
Date: December 18, 1998 By: /s/ BRADLEY CURREY, JR.
------------------------------------
Bradley Currey, Jr.
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------- ---------------------------- -----------------
<C> <S> <C>
/s/ BRADLEY CURREY, JR. Principal Executive Officer December 18, 1998
- ----------------------------------------------------- and Director, Chairman of
Bradley Currey, Jr. the Board and Chief
Executive Officer
/s/ DAVID C. NICHOLSON Principal Financial and December 18, 1998
- ----------------------------------------------------- Accounting Officer, Senior
David C. Nicholson Vice President, Chief
Financial Officer and
Secretary
/s/ STEPHEN G. ANDERSON Director December 18, 1998
- -----------------------------------------------------
Stephen G. Anderson
/s/ J. HYATT BROWN Director December 18, 1998
- -----------------------------------------------------
J. Hyatt Brown
/s/ MARY LOUISE MORRIS BROWN Director December 18, 1998
- -----------------------------------------------------
Mary Louise Morris Brown
/s/ ROBERT B. CURREY Director December 18, 1998
- -----------------------------------------------------
Robert B. Currey
/s/ A.D. FRAZIER Director December 18, 1998
- -----------------------------------------------------
A.D. Frazier
/s/ EUGENE U. FREY Director December 18, 1998
- -----------------------------------------------------
Eugene U. Frey
/s/ LAWRENCE L. GELLERSTEDT, III Director December 18, 1998
- -----------------------------------------------------
Lawrence L. Gellerstedt, III
/s/ JOHN D. HOPKINS Director December 18, 1998
- -----------------------------------------------------
John D. Hopkins
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------- ---------------------------- -----------------
<C> <S> <C>
/s/ JAMES W. JOHNSON Director December 18, 1998
- -----------------------------------------------------
James W. Johnson
/s/ RANDOLPH SEXTON Director December 18, 1998
- -----------------------------------------------------
Randolph Sexton
/s/ JAY SHUSTER Director December 18, 1998
- -----------------------------------------------------
Jay Shuster
/s/ JOHN W. SPIEGEL Director December 18, 1998
- -----------------------------------------------------
John W. Spiegel
</TABLE>
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
- ------- ----------------------- ----------
<S> <C> <C> <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)
2.2 -- Stock Purchase Agreement dated January 21, 1997 between
Rock-Tenn Company and the Shareholders of Wabash Corporation
(incorporated by reference to the Registrant's Current
Report on Form 8-K/A dated January 21, 1997)
3.1 -- Restated and Amended Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, File No.
33-73312)
3.2 -- Articles of Amendment to the Registrant's Restated and
Amended Articles of Incorporation (incorporated by reference
to Exhibit 2 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995, Commission File
No. 0-23340)
3.3 -- Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on
Form S-1, File No. 33-73312)
4.1 -- Credit Agreement dated January 21, 1997 and among Rock-Tenn
Company, SunTrust Bank, Atlanta and the other banks and
lending institutions party to such Credit Agreement from
time to time
4.2 -- First Amendment to Credit Agreement dated February 20, 1997
by and among Rock-Tenn Company, SunTrust Bank, Atlanta, in
its capacity as a Lender, and SunTrust Bank, Atlanta, in its
capacity as agent for the Lenders
4.3 -- Second Amendment to Credit Agreement dated June 6, 1997 by
and among Rock-Tenn Company, the Lenders under the Credit
Agreement and SunTrust Bank, Atlanta
4.4 -- Agreement to Provide Other Debt Instruments................. 23
10.1 -- ISO Stock Option Plan (incorporated by reference to Exhibit
10.10 to the Registrant's Registration Statement on Form
S-1, File No. 33-73312)
10.2 -- Rock-Tenn Company 1987 Stock Option Plan (incorporated by
reference to Exhibit 10.11 to the Registrant's Registration
Statement on Form S-1, File No. 33-73312)
10.3 -- Rock-Tenn Company 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1, File No. 33-73312)
10.4 -- Rock-Tenn Company 1993 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-1, File No.
33-73312)
10.5 -- Rock-Tenn Company Key Employee Incentive Bonus Plan as
amended on October 27, 1994 (incorporated by reference to
Exhibit 10.16 to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1994, Commission File No.
0-23340)
10.6 -- Rock-Tenn Company Supplemental Executive Retirement Plan
Effective as of October 1, 1994 (incorporated by reference
to Exhibit 10.17 to the Registrant's Annual Report on Form
10-K for the year ended September 30, 1994, Commission File
No. 0-23340)
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
- ------- ----------------------- ----------
<S> <C> <C> <C>
10.7 -- Demand Promissory Note for $18,500,000 dated January 31,
1995 between the Registrant and Alliance Display and
Packaging Company (incorporated by reference to Exhibit 10
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, Commission File No. 0-23340)
10.8 -- Joint Venture Agreement dated September 5, 1997 between
Rock-Tenn Company, Rock-Tenn Partition Company, Sonoco
Products Company and Sonoco Partitions, Inc. (incorporated
by reference to Exhibit 10.8 to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1997)
10.9 -- Contribution Agreement dated as of September 5, 1997 by and
among Rock-Tenn Company, Rock-Tenn Partition Company and RTS
Packaging, LLC (incorporated by reference to Exhibit 10.9 to
the Registrant's Annual Report on Form 10-K for the year
ended September 30, 1997)
10.10 -- Amended and Restated Operating Agreement of RTS Packaging,
LLC dated as of September 5, 1997 between Rock-Tenn
Partition Company and Sonoco Partitions, Inc. (incorporated
by reference to Exhibit 10.10 to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1997)
10.11 -- Consulting Agreement dated January 21, 1997 between Eugene
U. Frey and the Company (incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1997)
12 -- Statements re: Computation of Ratio of Earnings to Fixed
Charges..................................................... 24
13 -- Annual Report to Shareholders submitted herewith but not
"filed," except for those portions expressly incorporated by
reference herein
21 -- Subsidiaries of the Registrant.............................. 25
23 -- Report and Consent of Ernst & Young LLP..................... 26
27 -- Financial Data Schedule (for SEC use only)
99 -- Financial Statements for the Rock-Tenn Company 1993 Employee
Stock Purchase Plan for the years ended September 30, 1997,
1996 and 1995............................................... 27
</TABLE>
21
<PAGE> 22
SCHEDULE II
ROCK-TENN COMPANY
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
- ------------------------------------------ ---------- ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1998:
Allowance for Doubtful Accounts, Returns
and Discounts........................ $3,632 $10,088 -- $9,903 $3,817
Reserve for Facility Closures and
Consolidation........................ 4,640 1,903(3) -- 3,597 2,946
Year Ended September 30, 1997(4):
Allowance for Doubtful Accounts, Returns
and Discounts........................ $3,094 $12,454 $589(1) $12,505 $3,632
Reserve for Facility Closures and
Consolidation........................ 1,176 1,090(3) 6,736(2) 4,362 4,640
Year Ended September 30, 1996(4):
Allowance for Doubtful Accounts, Returns
and Discounts........................ $2,144 $6,028 -- $5,078 $3,094
Reserve for Facility Closures and
Consolidation........................ -- 1,926(3) -- 750 1,176
</TABLE>
- ---------------
(1) Reserve recorded in connection with Waldorf acquisition.
(2) Reserve recorded in connection with Waldorf and Davey acquisitions and the
formation of RTS Packaging, LLC.
(3) Reserve recorded in connection with plant closings and employee
terminations, net of reversals of $377 and $247 in fiscal 1997 and fiscal
1998, respectively.
(4) Prior year amounts have been changed to conform to current year
presentation.
22
<PAGE> 1
EXHIBIT 4.4
Rock-Tenn Company has excluded from filing herewith instruments relating to
(i) the $5,850,000 Industrial Development Revenue Bonds (Rock-Tenn Converting
Company Project), Series 1986, issued by the Waxahachie Industrial Development
Authority; (ii) the $6,750,000 Economic Development Revenue Bonds (Rock-Tenn
Company, Mill Division Inc. Project), Series 1995, issued by the City of
Columbus, Indiana; (iii) the $3,300,000 Economic Development Revenue Bonds
(Rock-Tenn Converting Company Facility), Series 1994, issued by the Maryland
Industrial Development Financing Authority; (iv) the $4,000,000 Industrial
Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1995,
issued by the Industrial Development Board of the City of Tullahoma, Tennessee;
(v) the $2,750,000 Industrial Development Revenue Bonds (Rock-Tenn Converting
Company Project), Series 1995, issued by the Industrial Development Board of the
County of Wilson; (vi) the $2,500,000 Industrial Development Revenue Bonds
(Rock-Tenn Converting Company Project), Series 1995, issued by the Development
Authority of DeKalb County; (vii) the $2,500,000 Industrial Development Revenue
Bonds (Rock-Tenn Converting Company Project), Series 1993, issued by the City of
Harrison, Arkansas; (viii) the $1,500,000 Industrial Development Revenue Bonds
(Rock-Tenn Company Mill Division, Inc.), Series 1996, issued by the Development
Authority of DeKalb County; (ix) the $1,500,000 Industrial Development Revenue
Bonds (Rock-Tenn Converting Company Project), Series 1996, issued by the Hart
County Industrial Development Authority; (x) the $3,500,000 Industrial
Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1997,
issued by the Union County Industrial Facilities and Pollution Control Financing
Authority; and (xi) the $25,000,000 Senior Unsecured Notes Purchase Agreement,
dated as of July 1, 1992, between Rock-Tenn Company and Great-West Life and
Annuity Insurance Company. Rock-Tenn Company hereby agrees to furnish a copy of
the constituent agreements relating to these bonds to the Securities and
Exchange Commission upon request.
23
<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,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expenses............................. $ 2,736 $ 8,122 $10,772 $26,466 $ 34,622
Amortization of debt issuance costs........... 91 265 206 320 360
Interest capitalized during period............ -- -- -- 1,214 888
Portion of rent expenses representative of
interest................................... 1,035 1,443 2,316 2,584 3,034
------- ------- ------- ------- --------
Fixed charges................................. $ 3,862 $ 9,830 $13,294 $30,584 $ 38,904
======= ======= ======= ======= ========
Earnings:
Pretax income from continuing operations...... $60,978 $67,922 $82,469 $37,756 $ 74,613
Fixed charges................................. 3,862 9,830 13,294 30,584 38,904
------- ------- ------- ------- --------
Earnings...................................... $64,840 $77,752 $95,763 $68,340 $113,517
======= ======= ======= ======= ========
Ratio of earnings to fixed charges.............. 16.79 7.91 7.20 2.23 2.92
======= ======= ======= ======= ========
</TABLE>
24
<PAGE> 1
EXHIBIT 13
Rock-Tenn Overview
Rock-Tenn has two core businesses. The Company supplies packaging and laminated
paperboard products to consumer and industrial markets throughout North America.
In addition, we produce 100% recycled paperboard, which is the principal raw
material used by our converting operations.
Since its founding in 1936, Rock-Tenn Company has expanded its existing
businesses and acquired related businesses with a careful focus on developing
niche markets that utilize recycled paperboard. The Company's long track record
of success has been achieved by avoiding businesses with which Rock-Tenn has
little experience, and entering businesses in which the Company has unique
competence.
Headquartered in Norcross, Georgia, Rock-Tenn employs approximately
9,300 people and operates 77 manufacturing facilities throughout the United
States, Canada and Mexico. Rock-Tenn's Class A common stock is traded on the New
York Stock Exchange under the symbol RKT.
Rock-Tenn
At-A-Glance...Foldout
Our Five Strengths...1
Letter to Shareholders...2
A Foundation for Value...4
Integrated Operations...6
Market Leadership...8
Multiple Packaging
Solutions...10
Solid Growth Strategy...12
Directors and Officers...14
Financial Review...15
Locations...48
Shareholder Information...49
FINANCIAL AND OPERATING HIGHLIGHTS
ROCK-TENN COMPANY
<TABLE>
<CAPTION>
Year Ended September 30,
(In Thousands, Except Per Share Amounts) 1998 1997 % change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,293,606 $1,109,693 17%
Income before income taxes 74,613 37,756 98%
Net income 42,020 16,101 161%
Diluted earnings per common share 1.20 .47 155%
Dividends paid per common share .30 .30 -
Book value per common share 11.49 10.80 6%
Total assets 1,111,481 1,113,686 -
Long-term debt, including current maturities 508,338 533,622 (5%)
Shareholders' equity 397,415 371,212 7%
Cash provided by operating activities 125,688 106,377 18%
Capital expenditures 81,666 87,016 (6%)
Cash paid for purchases of businesses - 301,287 (100%)
- ----------------------------------------------------------------------------------------
</TABLE>
PRICE RANGE OF CLASS A COMMON STOCK
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
- ------------------------------------------------------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $20.94 $19.13 $23.25 $17.50
Second Quarter $21.81 $15.75 $20.00 $16.50
Third Quarter $16.88 $12.56 $18.25 $13.75
Fourth Quarter $15.06 $10.00 $22.00 $17.00
- ------------------------------------------------------------------------------------
</TABLE>
ROCK-TENN COMPANY OPERATIONS
[NATIONAL MAP OF ROCK-TENN COMPANY OPERATIONS]
<PAGE> 2
FIVE YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
ROCK-TENN COMPANY
<TABLE>
<CAPTION>
Year Ended September 30,
(In Thousands, Except Per Share Amounts) 1998 1997(b)(c) 1996 1995(d) 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,293,606 $1,109,693 $876,111 $902,878 $705,849
Income before income taxes 74,613 37,756 82,469 67,922 60,978
Net income 42,020 16,101 51,125 41,432 37,501
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share(a) 1.20 .47 1.50 1.21 1.10
Dividends paid per common share(a) .30 .30 .27 .27 .15
Book value per common share(a) 11.49 10.80 10.54 9.29 8.46
- -----------------------------------------------------------------------------------------------------------------------------
Total assets 1,111,481 1,113,686 581,688 555,254 413,748
Long-term debt, including current maturities 508,338 533,622 146,604 162,087 61,210
Shareholders' equity 397,415 371,212 349,155 307,898 281,959
- -----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 125,688 106,377 123,530 77,604 57,955
Capital expenditures 81,666 87,016 72,151 73,844 71,672
Cash paid for purchases of businesses - 301,287 - 61,579 34,978
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(a) Gives effect to a 10% stock dividend paid on November 15, 1996.
(b) Effective October 1, 1996, the Company changed its method of depreciation
for assets placed in service after September 30, 1996 to the straight-line
method. This change was applied on a prospective basis to such assets
acquired after that date. The effect of this change was to increase net
income by $3,011,000 in fiscal 1997.
(c) Reflects (i) the results of operations of Waldorf Corporation, Rite Paper
Products, Inc., and The Davey Company beginning from the respective dates of
acquisition, (ii) the results of operations of RTS Packaging, LLC from the
date of formation and (iii) a $16.2 million charge to earnings for plant
closing and other costs.
(d) Reflects the results of operations of Olympic Packaging, Inc., beginning
January 17, 1995, and Alliance Display and Packaging, beginning January 31,
1995, the dates on which the Company acquired all of the outstanding stock
of Olympic and substantially all of the net assets of Alliance,
respectively.
16
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
General
The Company's core businesses, converted products and paperboard, are cyclical
because of general industry supply and demand factors and tend to fluctuate with
the general business cycle of the U.S. economy. These businesses are also
seasonal with the first fiscal quarter generally experiencing lower sales and
earnings due to reduced demand from customers during the period. See Note 12 of
Notes to Consolidated Financial Statements.
Unit production costs and earnings from converted products generally vary
significantly with shipment levels. Vertical integration enables the Company to
maintain operating rates at its paperboard mills during periods of reduced
demand for recycled paperboard. The Company's strategy has been to operate its
paperboard mills at high operating rates in order to lower unit production
costs. During fiscal 1998, 1997 and 1996, the Company's paperboard mills ran at
operating rates of 89.5%, 88.8% and 85.7%, respectively.
Historically, costs of recovered paper, virgin paperboard and
containerboard, the Company's principal raw materials, and the Company's selling
prices have fluctuated significantly due to market conditions. The Company is
not able to predict whether these costs or selling prices will rise or fall in
the future. The Company seeks to manage its raw material costs through the
following measures. First, ongoing modernization of manufacturing facilities has
reduced waste, which has helped reduce raw materials costs. Second, the Company
has sought to maximize its use of the expertise developed by the Recycled Fiber
Division's recovered paper buyers in order to purchase recovered paper at lower
costs. Third, the Company has invested in equipment that has enabled it to use
lower cost grades of recovered paper in the production of its recycled
paperboard while maintaining the quality of the end product.
On January 21, 1997, the Company acquired all of the outstanding capital
stock of the parent of Waldorf Corporation ("Waldorf"), a manufacturer of
folding cartons and 100% recycled paperboard and a manufacturer of corrugating
medium. On June 9, 1997, the Company acquired substantially all of the assets of
Rite Paper Products, Inc. ("Rite Paper"), a manufacturer of laminated paperboard
components primarily for the ready-to-assemble furniture industry. On July 9,
1997, the Company acquired substantially all of the assets and certain of the
liabilities of The Davey Company ("Davey"), a manufacturer of recycled
paperboard book covers used by the book publishing industry. On September 5,
1997, the Company and Sonoco Products Company combined their respective fiber
partition business assets into a new entity named RTS Packaging, LLC ("RTS
Packaging"), which is owned 65% by the Company. See Note 2 of Notes to
Consolidated Financial Statements.
SEGMENT AND MARKET INFORMATION
The Company operates principally in two industry segments: converted products
and paperboard. The converted products segment is comprised of facilities that
produce folding cartons, fiber partitions, corrugated containers, corrugated
displays, thermoformed plastic products and laminated paperboard products. In
the folding carton and corrugated container markets, the Company competes with a
significant number of national and regional packaging suppliers. In the fiber
partitions, corrugated displays, thermoformed plastic products and laminated
paperboard products markets, the Company competes with a smaller number of
national, regional and local companies offering highly specialized products.
During fiscal 1998, the Company sold converted products to over 5,000 customers
with no customer accounting for more than 10% of the Company's net sales. The
Company sells converted products to several large national customers which
annually purchase $25 to $45 million of converted products from the Company;
however, a majority of the Company's converted products sales are to customers
which annually purchase less than $10 million of converted products from the
Company. Within the converted products market, conditions have become highly
competitive as large national customers have begun consolidating their supplier
relationships. As a result of this trend, the Company regularly participates in
bidding for sales opportunities to national customers. The loss of business or
the award of new business from national customers may have a significant impact
on the Company's results of operations.
The paperboard segment consists of facilities that manufacture 100%
recycled clay-coated and uncoated paperboard (referred to herein as boxboard)
and corrugating medium (referred to herein as medium) and that collect recovered
17
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
paper. In the paperboard segment, the Company competes with integrated and
non-integrated national, regional and local companies manufacturing various
grades of paperboard. During fiscal 1998, the Company sold paperboard to over
1,000 customers. A significant percentage of the Company's sales of boxboard are
made to the Company's converted products segment. The current trend in the
paperboard industry is for a higher degree of integration between paperboard
production and converted products sales. The Company's paperboard segment's
sales volumes may therefore be directly impacted by changes in demand for the
Company's converted products.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
(In Millions) 1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Net sales (aggregate):
Converted products $1,063.7 $ 938.7 $ 779.7
Paperboard 461.1 391.8 281.4
- --------------------------------------------------------------
Total $1,524.8 $1,330.5 $1,061.1
- --------------------------------------------------------------
Net sales (intersegment):
Converted products $ 0.2 $ 1.2 $ 0.4
Paperboard 231.0 219.6 184.6
- --------------------------------------------------------------
Total $ 231.2 $ 220.8 $ 185.0
- --------------------------------------------------------------
Net sales
(unaffiliated customers):
Converted products $1,063.5 $ 937.5 $ 779.3
Paperboard 230.1 172.2 96.8
- --------------------------------------------------------------
Total $1,293.6 $1,109.7 $ 876.1
- --------------------------------------------------------------
Operating income:
Converted products $ 53.2 $ 26.4 $ 35.2
Paperboard 69.4 46.4 64.4
- --------------------------------------------------------------
122.6 72.8 99.6
Corporate expense (8.7) (8.6) (7.5)
- --------------------------------------------------------------
Income from operations 113.9 64.2 92.1
Interest expense (35.0) (26.8) (10.9)
Interest and other income 1.0 0.7 1.3
Minority interest
in income of
consolidated subsidiary (5.3) (0.4) -
- --------------------------------------------------------------
Income before income taxes $ 74.6 $ 37.7 $ 82.5
- --------------------------------------------------------------
</TABLE>
Results of Operations
Quarterly information, set forth in the following tables, is provided to assist
in evaluating trends in the Company's results of operations. For additional
discussion of quarterly information, see the Company's quarterly reports filed
on Form 10-Q.
Net Sales (Unaffiliated Customers)
Net sales for fiscal 1998 increased 16.6% to $1,293.6 million from $1,109.7
million for fiscal 1997. Net sales increased primarily as a result of
acquisitions completed during fiscal 1997 and price increases offset by lower
volumes for operations owned during both periods.
Net sales for fiscal 1997 increased 26.7% to $1,109.7 million from $876.1
million for fiscal 1996. Net sales increased primarily as a result of the
Waldorf acquisition.
Net Sales (Aggregate) - Converted Products Segment
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
(In Millions) Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 $ 193.1 $ 193.3 $ 193.7 $ 199.6 $ 779.7
1997 184.4 231.5 251.7 271.1 938.7
1998 260.6 268.0 263.3 271.8 1,063.7
- ------------------------------------------------------------------------------
</TABLE>
Net sales of converted products before intersegment eliminations for fiscal
1998 increased 13.3% to $1,063.7 million from $938.7 million for fiscal 1997.
The increase was primarily the result of acquisitions completed during fiscal
1997 and certain price increases. The Company experienced volume decreases in
the latter part of fiscal 1998, which were primarily attributable to lower sales
to a national customer. Separately, the Company has been notified that another
national customer will phase out purchases during the first half of fiscal 1999.
The Company currently believes that the impact of lower volumes with these
national customers will be offset in future periods by the award of new business
from other customers. However, there can be no assurance regarding the amount or
timing of any such awards. See Segment and Market Information.
Net sales of converted products before intersegment eliminations for fiscal
1997 increased 20.4% to $938.7 million from $779.7 million for fiscal 1996. The
increase was primarily the result of the Waldorf acquisition.
Net Sales (Aggregate) - Paperboard Segment
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
(In Millions) Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 $ 72.9 $ 71.9 $ 69.9 $ 66.7 $281.4
1997 66.5 100.4 109.3 115.6 391.8
1998 121.4 118.7 111.8 109.2 461.1
- --------------------------------------------------------------
</TABLE>
18
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
Net sales of paperboard before intersegment eliminations for fiscal 1998
increased 17.7% to $461.1 million from $391.8 million for fiscal 1997. The
increase was the result of the Waldorf acquisition, significant price and volume
increases on medium and price increases on boxboard. See Operating Income -
Paperboard Segment. The increase was offset in part by volume decreases in the
latter part of fiscal 1998 attributable to lower volume with one national
customer within the converted products segment discussed above. The phase out of
a national customer's purchases within the converted products segment during the
first half of fiscal 1999 will also result in a reduction in boxboard volumes.
The Company currently believes that the impact of the lower volumes with these
national customers will be offset in the future by awards of new business from
other converted products customers and from sales of boxboard to other
converters. However, there can be no assurance regarding the amount or timing of
any such awards. See Segment and Market Information.
Net sales of paperboard before intersegment eliminations for fiscal 1997
increased 39.2% to $391.8 million from $281.4 million for fiscal 1996. The
increase was primarily the result of the Waldorf acquisition.
Cost of Goods Sold
Cost of goods sold for fiscal 1998 increased 13.7% to $950.2 million from
$835.9 million for fiscal 1997. Cost of goods sold as a percentage of net sales
for fiscal 1998 decreased to 73.5% from 75.3% for fiscal 1997. The decrease in
cost of goods sold as a percentage of net sales was primarily the result of
higher average selling prices and increased manufacturing efficiencies, which
were partially offset by increased costs of recovered paper. See Operating
Income - Paperboard Segment.
Cost of goods sold for fiscal 1997 increased 33.0% to $835.9 million from
$628.6 million for fiscal 1996. Cost of goods sold as a percentage of net sales
for fiscal 1997 increased to 75.3% from 71.7% for fiscal 1996. The increase in
cost of goods sold as a percentage of net sales was primarily the result of
lower average selling prices during fiscal 1997 and a higher cost of goods sold
as a percentage of net sales for the business acquired in the Waldorf
acquisition compared to the Company's existing business. In addition, the medium
business acquired in the Waldorf acquisition incurred significantly lower
margins than the Company's average margins in fiscal 1996.
Substantially all U.S. inventories of the Company are valued at the lower
of cost or market with cost determined on the last-in, first-out (LIFO)
inventory valuation method, which management believes generally results in a
better matching of current costs and revenues than under the first-in, first-out
(FIFO) inventory valuation method. In periods of decreasing costs, the LIFO
method generally results in lower cost of goods sold than under the FIFO method.
In periods of increasing costs, the results are generally the opposite.
Since some of the Company's competitors principally use the FIFO method,
the following supplemental data is presented to illustrate the comparative
effect of LIFO and FIFO accounting on the Company's results of operations. Cost
of goods sold determined under the LIFO method was $1.2 million higher, the same
as and $5.9 million lower than it would have been under the FIFO method for
fiscal 1998, 1997 and 1996, respectively. Net income was $0.7 million lower, the
same as and $3.7 million higher than it would have been under the FIFO method
for fiscal 1998, 1997 and 1996, respectively. These supplemental FIFO earnings
reflect the after tax effect of LIFO each year.
Gross Profit
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
(% of Net Sales) Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 26.5% 27.8% 29.5% 29.1% 28.3%
1997 25.7 23.9 24.6 24.7 24.7
1998 25.8 25.8 27.7 26.8 26.5
- ------------------------------------------------------------------
</TABLE>
Gross profit for fiscal 1998 increased 25.4% to $343.4 million from $273.8
million for fiscal 1997. Gross profit as a percentage of net sales increased to
26.5% for fiscal 1998 from 24.7% for fiscal 1997. See Cost of Goods Sold.
Gross profit for fiscal 1997 increased 10.6% to $273.8 million from $247.5
million for fiscal 1996. Gross profit as a percentage of net sales decreased to
24.7% for fiscal 1997 from 28.3% for fiscal 1996. See Cost of Goods Sold.
19
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 1998 increased 17.6% to
$227.5 million from $193.4 million for fiscal 1997. Selling, general and
administrative expenses as a percentage of net sales for fiscal 1998 increased
to 17.6% from 17.4% for fiscal 1997. The increase in selling, general and
administrative expenses as a percentage of net sales for fiscal 1998 resulted
from increased incentive compensation expenses.
Selling, general and administrative expenses for fiscal 1997 increased
27.4% to $193.4 million from $151.8 million for fiscal 1996. Selling, general
and administrative expenses as a percentage of net sales for fiscal 1997
increased to 17.4% from 17.3% for fiscal 1996. The increase in selling, general
and administrative expenses as a percentage of net sales for fiscal 1997
resulted from decreased average selling prices and increased freight costs,
increased salary and benefit costs and an increase in goodwill amortization
expense resulting from the Waldorf acquisition.
Plant Closings and Other Costs
During the fourth quarter of fiscal 1998, the Company began implementing
certain cost reduction initiatives designed to reduce overhead and production
costs and improve operating efficiency. In connection with these cost reduction
initiatives, the Company recorded a $2.0 million charge primarily for severance
and related costs associated with staff reductions. During fiscal 1999, the
Company expects to incur $5.7 million of costs principally for severance related
costs in connection with additional cost reduction initiatives. A significant
portion of these costs will be incurred during the first half of fiscal 1999 in
connection with the closing of the Company's Taylorsville, North Carolina
folding carton operation and its Otsego, Michigan laminated converted products
operation and consolidation of these businesses into its other existing
facilities.
During fiscal 1997, in connection with the Waldorf acquisition, the Company
closed its folding carton plant at Mundelein, Illinois. The Mundelein facility
was acquired in the acquisition of Olympic Packaging. In connection with this
closing, the Company incurred a charge of approximately $12.8 million during
fiscal 1997 which consisted primarily of the non-cash write-off of goodwill
associated with the Company's Olympic Packaging subsidiary.
The write-off of goodwill was required based upon the decision to close the
Mundelein facility and the determination, based on an analysis of estimated
future cash flows, that such goodwill would not be recoverable. The Company
incurred additional costs of approximately $1.6 million during fiscal 1997
principally for employee termination and related charges associated with closing
the Mundelein facility. In addition, during fiscal 1997, management decided to
close a plastics recycling facility located in Indianapolis, Indiana. As a
result, the Company recorded charges of approximately $1.8 million related to
the losses on disposal of machinery and equipment.
During fiscal 1996, the Company announced a facility closing and
consolidation plan. This plan was developed to reduce the operating losses
historically incurred at the Company's Lynchburg, Virginia, converting facility
and was intended to optimize the utilization of certain other Company assets. As
part of this plan, the Company closed two fiber partition plants, opened one new
fiber partition plant and relocated a laminated paperboard book cover panels
operation from Lynchburg to one of the closed plants. In connection with this
plan, the Company incurred expenses of approximately $3.6 million consisting
primarily of employee severance, employee relocation and training costs, asset
impairment, equipment and inventory relocation costs and lease termination
costs.
Segment Operating Income
Operating Income - Converted Products Segment
<TABLE>
<CAPTION>
Net Sales Operating Return
(In Millions, Except Percentages) (Aggregate) Income on Sales
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $ 193.1 $ 6.6 3.4%
Second Quarter 193.3 7.6 3.9
Third Quarter 193.7 9.7 5.0
Fourth Quarter 199.6 11.3 5.7
- --------------------------------------------------------------------------------
Fiscal 1996 $ 779.7 $ 35.2 4.5%
- --------------------------------------------------------------------------------
First Quarter $ 184.4 $ 4.9 2.7%
Second Quarter 231.5 (4.6) (2.0)
Third Quarter 251.7 9.1 3.6
Fourth Quarter 271.1 17.0 6.3
- --------------------------------------------------------------------------------
Fiscal 1997 $ 938.7 $ 26.4 2.8%
- --------------------------------------------------------------------------------
First Quarter $ 260.6 $ 9.6 3.7%
Second Quarter 268.0 11.8 4.4
Third Quarter 263.3 14.1 5.4
Fourth Quarter 271.8 17.7 6.5
- --------------------------------------------------------------------------------
Fiscal 1998 $ 1,063.7 $ 53.2 5.0%
- --------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
Operating income attributable to the converted products segment for fiscal
1998 increased 101.5% to $53.2 million from $26.4 million for fiscal 1997.
Operating margin for fiscal 1998 was 5.0% and 2.8% for fiscal 1997. Excluding
$2.0 million and $16.2 million of plant closing and other related costs during
fiscal 1998 and 1997, respectively, operating income attributable to the
converted products segment for fiscal 1998 increased 29.6% to $55.2 million from
$42.6 million for fiscal 1997. Excluding the effect of $2.0 million and $16.2
million of plant closing and other related costs during fiscal 1998 and 1997,
respectively, the operating margin for fiscal 1998 and fiscal 1997 was 5.2% and
4.5%, respectively. The increase in operating margin, excluding the effect of
the plant closure and other related costs, was the result of average selling
price increases and operating efficiencies.
Operating income attributable to the converted products segment for fiscal
1997 decreased 25.0% to $26.4 million from $35.2 million for fiscal 1996.
Operating margin for fiscal 1997 was 2.8% and was 4.5% for fiscal 1996.
Excluding $16.2 million and $3.6 million of plant closing and other related
costs during fiscal 1997 and 1996, respectively, operating income attributable
to the converted products segment for fiscal 1997 increased 9.8% to $42.6
million from $38.8 million for fiscal 1996. Excluding the effect of $16.2
million and $3.6 million of plant closing and other related costs during fiscal
1997 and 1996, respectively, operating margin for fiscal 1997 and 1996 was 4.5%
and 5.0%, respectively. The converted products business acquired in the Waldorf
acquisition experienced a lower operating margin in fiscal 1997 than the
Company's converted products segment in fiscal 1996. The Company's folding
carton (excluding those facilities acquired in the Waldorf acquisition),
partition and plastics businesses experienced a higher operating margin in
fiscal 1997 than in fiscal 1996. The higher operating margin achieved in these
businesses was primarily the result of increased productivity and higher volumes
which resulted in better absorption of fixed overhead costs. During the fourth
quarter of fiscal 1997, the Company began implementing price increases with
respect to most of its converted products to recover cost increases in
paperboard.
Operating Income - Paperboard Segment
<TABLE>
<CAPTION>
Weighted
Boxboard Average Medium Average Average
Net Sales Operating Tons Boxboard Tons Medium Recovered
(Aggregate) Income Return Shipped Price Shipped Price Paper Cost
(In Millions) (In Millions) On Sales (In Thousands) (Per Ton) (In Thousands) (Per Ton) (Per Ton)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 72.9 $16.8 23.0% 148.0 $466 - - $65
Second Quarter 71.9 16.5 22.9 155.1 438 - - 53
Third Quarter 69.9 16.3 23.3 161.5 407 - - 43
Fourth Quarter 66.7 14.8 22.2 162.0 392 - - 44
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal 1996 $281.4 $64.4 22.9% 626.6 $425 - - $51
- --------------------------------------------------------------------------------------------------------------------------------
First Quarter $ 66.5 $11.0 16.5% 160.3 $389 - - $52
Second Quarter 100.4 12.2 12.2 221.6 384 24.8 $234 57
Third Quarter 109.3 12.4 11.3 241.3 377 29.8 217 50
Fourth Quarter 115.6 10.8 9.3 240.4 380 43.2 275 64
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal 1997 $391.8 $46.4 11.8% 863.6 $382 97.8 $247 $56
- --------------------------------------------------------------------------------------------------------------------------------
First Quarter $121.4 $18.0 14.8% 242.0 $406 45.0 $330 $70
Second Quarter 118.7 18.3 15.4 236.2 408 45.6 347 68
Third Quarter 111.8 18.3 16.4 225.3 405 40.8 338 59
Fourth Quarter 109.2 14.8 13.6 220.0 398 43.9 318 58
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal 1998 $461.1 $69.4 15.1% 923.5 $404 175.3 $332 $64
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
Operating income attributable to the paperboard segment for fiscal 1998
increased 49.6% to $69.4 million from $46.4 million for fiscal 1997. Operating
margin for fiscal 1998 increased to 15.1% from 11.8% in fiscal 1997. These
increases were primarily the result of the Waldorf acquisition, significant
price and volume increases for medium and price increases for boxboard, which
were offset somewhat by higher weighted average recovered paper costs.
Operating income attributable to the paperboard segment for fiscal 1997
decreased 28.0% to $46.4 million from $64.4 million for fiscal 1996. Operating
margins for fiscal 1997 declined to 11.8% from 22.9% in fiscal 1996. The
decreases in operating income and margin for fiscal 1997 were primarily the
result of significant losses incurred by the medium business acquired in the
Waldorf acquisition, an increase in weighted average recovered paper costs and
lower average selling prices, which were partially offset by higher volumes.
Interest Expense
Interest expense for fiscal 1998 increased to $35.0 million from $26.8 million
for fiscal 1997 and from $10.9 million for fiscal 1996. The increase in interest
expense was primarily due to an increase in the outstanding borrowings during
such periods resulting from the Waldorf acquisition and the Rite Paper
acquisition.
Provision for Income Taxes
Provision for income taxes for fiscal 1998 increased to $32.6 million from $21.7
million for fiscal 1997. Provision for income taxes for fiscal 1997 decreased to
$21.7 million from $31.3 million for fiscal 1996. Excluding the effect of the
$12.8 million non-cash write-off of the goodwill associated with the Olympic
Packaging acquisition during fiscal 1997, which is not deductible for income tax
purposes, the Company's effective tax rate increased to 43.7% for fiscal 1998
compared to 42.8% for fiscal 1997 and compared to 38.0% for fiscal 1996. This
increase in the effective tax rate in fiscal 1998 and 1997 was primarily due to
the effect of amortization of goodwill associated with the Waldorf acquisition
that is not deductible for income tax purposes.
Net Income and Basic and Diluted Earnings
Per Common Share
Net income for fiscal 1998 increased 160.9% to $42.0 million from $16.1 million
for fiscal 1997. Net income as a percentage of net sales increased to 3.2% for
fiscal 1998 from 1.5% for fiscal 1997. Diluted earnings per share for fiscal
1998 increased to $1.20 from $.47 for fiscal 1997.
Net income for fiscal 1997 decreased 68.5% to $16.1 million from $51.1
million for fiscal 1996. Net income as a percentage of net sales decreased to
1.5% for fiscal 1997 from 5.8% for fiscal 1996. Diluted earnings per share for
fiscal 1997 decreased to $.47 from $1.50 for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Capital Expenditures
The Company has funded its working capital requirements and capital expenditures
(including acquisitions) from net cash provided by operating activities,
borrowings under term notes and bank credit facilities and proceeds received in
connection with the issuance of industrial revenue bonds and debt and equity
securities. In fiscal 1997, the Company entered into a revolving credit facility
under which it has aggregate borrowing availability of $450.0 million. At
September 30, 1998, the Company had $369.0 million outstanding under its
revolving credit facility. Cash and cash equivalents, $5.8 million at September
30, 1998, increased from $3.3 million at September 30, 1997.
Net cash provided by operating activities for fiscal 1998 was $125.7
million compared to $106.4 million for fiscal 1997. This increase was primarily
the result of increased earnings before depreciation and amortization and a
smaller change in operating assets and liabilities. Net cash used by financing
activities aggregated $44.7 million for fiscal 1998 and consisted primarily of
repayments of debt and quarterly dividend payments. Net cash provided by
financing activities aggregated $233.7 million for fiscal 1997 and consisted
primarily of borrowings under the Company's $450.0 million revolving credit
facility, net of scheduled repayments of long-term debt, repayments of certain
acquired indebtedness of Waldorf
22
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
and Davey and quarterly dividend payments. Net cash used for investing
activities was $78.4 million for fiscal 1998 compared to $387.5 million for
fiscal 1997 and consisted primarily of capital expenditures for fiscal 1998 and
cash paid for the Waldorf acquisition and capital expenditures for fiscal 1997.
Net cash provided by operating activities for fiscal 1997 was $106.4
million compared to $123.5 million for fiscal 1996. This decrease was primarily
the result of decreased earnings before depreciation and amortization and less
significant decreases in net operating asset requirements than compared to
fiscal 1996. Net cash provided by financing activities aggregated $233.7 million
for fiscal 1997 and consisted primarily of borrowings under the Company's $450.0
million revolving credit facility, net of scheduled repayments of long-term
debt, repayments of certain acquired indebtedness of Waldorf and Davey and
quarterly dividend payments. Net cash used for financing activities aggregated
$26.4 million for fiscal 1996 and consisted primarily of repayments of long-term
debt and quarterly dividend payments.
The Company's capital expenditures aggregated $81.7 million for fiscal
1998. These expenditures were used primarily for the purchase and upgrading of
certain machinery and equipment in all of the Company's divisions, building
improvements in three of the Company's divisions and completion of a new
building at the Company's home office.
The Company estimates that its capital expenditures will aggregate
approximately $77.0 million in fiscal 1999. These expenditures will be used for
the purchase and upgrading of certain machinery and equipment in essentially all
of the Company's divisions and building expansions and improvements in one of
the Company's divisions.
The Company anticipates that it will be able to fund its capital
expenditures, acquisitions, interest expense, stock repurchases, dividends and
working capital needs for the foreseeable future from cash generated from
operations, borrowings under its revolving credit facility, proceeds from the
issuance of debt or equity securities or other additional long-term debt
financing.
Derivative Instruments
The Company enters into a variety of derivative transactions. Generally, the
Company designates at inception that derivatives are a hedge of risks associated
with specific assets, liabilities or future commitments and monitors each
derivative to determine if it remains an effective hedge. The effectiveness of
the derivative as a hedge is based on changes in its value being highly
correlated with changes in value of the underlying hedged item. The Company
includes amounts received or paid in operations when the underlying transaction
settles. The Company does not enter into or hold derivatives for trading or
speculative purposes.
The Company uses interest rate cap agreements and interest rate swap
agreements to manage synthetically the interest rate characteristics of a
portion of its outstanding debt and partially to limit the Company's exposure to
rising interest rates. Amounts to be received or paid as a result of interest
rate cap agreements and interest rate swap agreements are accrued and recognized
as an adjustment of interest expense related to the designated debt. Interest
rate cap purchase costs are amortized to interest expense ratably during the
life of the agreement.
The Company uses commodity swap agreements to manage synthetically the
selling prices and raw material costs of a portion of its medium business and to
limit the Company's exposure to falling prices and rising costs. Amounts to be
received or paid as a result of these swap agreements are recognized in the
period in which the related sale is made.
Acquisitions
The Company historically has expanded its business through the acquisition of
other related businesses. The recycled paperboard and converted paperboard
products industries have undergone significant consolidation in recent years,
and the Company believes it will be able to capitalize on this trend in the
future.
The Company, however, is currently in the process of integrating the
operations it acquired during fiscal 1997 into the Company's other operations.
Consequently, although the Company cannot predict the extent to which it will
pursue future acquisitions, the Company expects that it will be less likely to
pursue additional acquisitions in the near term.
23
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
On January 21, 1997, the Company completed the Waldorf acquisition for
approximately $239.0 million in cash. In addition, in connection with the
Waldorf acquisition, the Company (i) made certain payments on the closing date
aggregating $32.6 million relating to the settlement of a contingent interest
agreement with a former creditor of Waldorf and the termination of Waldorf's
Stock Appreciation Rights Plan and (ii) accrued as a cost of the purchase $5.3
million in connection with the planned termination of approximately 120
employees of Waldorf, principally certain senior executives and other employees
at the Waldorf corporate office. The Waldorf acquisition was financed with
available cash and borrowings under the Company's $450.0 million revolving
credit facility.
On June 9, 1997, the Company completed the Rite Paper acquisition. This
acquisition was financed with borrowings under the Company's $450.0 million
revolving credit facility.
On July 9, 1997, the Company completed the Davey acquisition. The
acquisition was financed through the issuance of 867,510 shares of the Company's
Class A common stock.
On September 5, 1997, the Company and Sonoco Products Company combined
their respective fiber partition business assets into RTS Packaging. Pursuant to
the agreement, the Company owns 65% of the outstanding interests of RTS
Packaging.
Stock Repurchase Program
The Board of Directors has authorized the Company to repurchase from time to
time prior to July 31, 2003 up to 1.5 million shares of Class A common stock in
open market transactions on the New York Stock Exchange. In addition, the Board
has authorized the Company to repurchase from time to time shares of Class B
common stock pursuant to certain first offer rights contained in the Company's
Restated and Amended Articles of Incorporation, provided that the aggregate
number of shares of Class A and Class B common stock purchased under this plan
may not exceed 1.5 million shares. During fiscal 1998, the Company repurchased
290,100 shares of Class A common stock and no Class B common stock under this
plan. Under a previously authorized plan which expired on July 31, 1998, the
Company repurchased 40,000 shares of Class A common stock and no Class B common
stock during fiscal 1998.
YEAR 2000
The Company is utilizing both internal and external resources to evaluate the
potential impact of the situation commonly referred to as the "Year 2000
problem." The Year 2000 problem, which is common to most businesses, concerns
the inability of computer systems and devices to properly recognize and process
date-sensitive information when the year changes to 2000. The Company depends
upon its information technology ("IT") and non-IT systems (which are systems
used to run manufacturing equipment that contain embedded hardware or software
that must handle dates and may not properly record dates after 1999) to conduct
and manage the Company's business. Unless remediated, Year 2000 related issues
may materially adversely affect the results of operations, financial condition
and cash flow of the Company and/or one or more of the Company's suppliers or
customers. While the Company obtains its raw materials, equipment and services
from a number of suppliers and sells its products to a number of customers for a
wide variety of applications, if a sufficient number of these suppliers or
customers experience Year 2000 problems that prevent or substantially impair
their ability to continue to transact business with the Company as they
currently do, the Company would be required to find alternative suppliers and/or
customers for its products. Any delay or inability in finding such alternatives
could have a material adverse effect on the Company's results of operations,
financial condition and cash flow.
The Company currently has a team dedicated to identifying, evaluating and
resolving the Company's potential Year 2000 issues. The Company's Year 2000
program includes six stages: education, inventory, assessment, remediation,
testing and implementation. The education stage involved identifying Year 2000
leaders at each of the Company's facilities and educating Company personnel on
the specific issues associated with the Year 2000 problem. During the inventory
stage, Company personnel identified any system (IT and non-IT) that could
potentially have a Year 2000 problem and developed
24
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
software that is now being used to centrally track these identified systems. The
assessment stage involves determining if there is a Year 2000 problem with the
specific system (IT and non-IT). Remediation involves deciding what action to
take if there is a Year 2000 problem, such as modifying or replacing the system,
and actually fixing the problem. Testing is performed on the system once the
remediation is complete. When it is determined that the system is Year 2000
compliant, the system is implemented.
The Company expects to have substantially completed all phases of its Year
2000 program by June 30, 1999, which will leave six months for additional
internal testing and troubleshooting prior to 2000. The Company is approximately
90% and 60% complete with the assessment stage relating to IT and non-IT
systems, respectively. With respect to IT systems that are known to have
required remediation, approximately 60% of such systems have been remediated,
tested and implemented and are currently Year 2000 compliant, and with respect
to non-IT systems that are known to have required remediation, approximately 50%
of such systems have been remediated, tested and implemented and are currently
Year 2000 compliant. Based on the results of the Company's Year 2000 program,
the Company will develop contingency plans as necessary.
The Company currently believes that it will be able to modify, upgrade or
replace all of its IT and non-IT systems affected by the Year 2000 problem on a
timely basis. In the event that the Company does not remediate on a timely basis
any material Year 2000 problem, the Company may be unable to, among other
things, take customer orders, manufacture and ship products, invoice customers
or collect payments. Under a number of the Company's supply agreements, the
Company is required to indemnify and hold harmless customers for damages
incurred by such customers arising from the Company's failure to resolve its
Year 2000 problems. The amount of any potential liability and/or lost revenue
cannot be reasonably estimated at this time; however, such amounts could be
material.
The Company has also begun a program to assess the Year 2000 readiness of
its suppliers. This program has involved identifying suppliers that are critical
to the Company's operations as well as suppliers that would be
hard to replace and conducting a survey of such suppliers to begin assessing
their Year 2000 readiness. Based upon the results of this assessment, the
Company will develop contingency plans as deemed necessary. The Company cannot
reasonably estimate the magnitude of the impact on the Company of the Year 2000
problems that may be experienced by any of the Company's suppliers; however, the
impact of any such problems could have a material adverse effect on the
Company's results of operations, financial condition and cash flow. Further, the
Company does not propose to assess the Year 2000 problems, if any, of its
customers. To the extent customers experience Year 2000 problems that are not
remediated on a timely basis, the Company anticipates potential material
fluctuations in the demand for its products.
While the Company believes the occurrence of such a scenario is unlikely, a
possible worst case scenario might include the inadvertent failure of the
Company to remediate the process controllers (which are non-IT systems) on one
or more of the Company's paper machines. Depending on the number of machines
affected, such event could have an adverse impact on the Company's manufacture
of paperboard and its ability to supply its converting operations, which,
depending on its duration, could have a material adverse effect on the Company's
results of operations, financial condition and cash flow. The Company is in the
process of assessing the process controllers on all of its paper machines and
has involved external process controller vendors to assist the Company in
testing these systems.
Costs associated with the Year 2000 program (excluding costs relating to
capital improvements to IT and non-IT systems that are not directly related to
remediating Year 2000 problems in such systems) are being expensed as incurred.
Funding for the program is being provided through the Company's operating cash
flows. To date, the Company has spent approximately $1.0 million in connection
with the Year 2000 program and expects to spend an additional $2.0 million to
$5.0 million to complete the program. There can be no assurance that the cost of
the Company's Year 2000 program will not materially exceed expectations.
25
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
EXPENDITURES FOR
ENVIRONMENTAL COMPLIANCE
The Company does not believe that future compliance with environmental and
health and safety laws and regulations will have a material adverse effect on
its results of operations or financial condition. However, environmental, health
and safety laws and regulations are becoming increasingly stringent.
Consequently, unforeseen expenditures required to comply with such laws and
regulations, including remediation costs or unforeseen environmental
liabilities, could have a material adverse effect on the Company's results of
operations or financial condition. In addition, the Company cannot with
certainty assess at this time the impact upon its operations or capital
expenditure requirements of the future emissions standards and enforcement
practices under the 1990 amendments to the Clean Air Act. However, although
there can be no assurance, the Company believes that any such impact or capital
expenditures will not have a material adverse effect on the Company's results of
operations or financial condition. The Company estimates that it will spend an
additional $1.5 million to $4.0 million for capital expenditures during fiscal
1999 in connection with other matters relating to environmental compliance.
In addition, the Company may choose to modify or replace the coal fired
boilers at two of its facilities in order to operate cost effectively while
complying with emissions regulations under the Clean Air Act. The Company
estimates that these improvements will cost approximately $3.0 million, however,
the Company may spend more on these improvements to reduce its energy costs at
such facilities.
The Company has been identified as a potentially responsible party ("PRP")
at nine Superfund sites pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), or comparable
state statutes. Except with respect to the Muncie Racetrack site ("Muncie
Site"), the Kalamazoo River site ("Kalamazoo Site"), and the Chemical Handling
Corporation site ("Chemical Handling Site"), no remediation costs or allocations
have been determined with respect to such sites. With respect to the Muncie
Site, approximately $3.2 million has been spent to date by certain PRPs other
than the Company in connection with soil remediation activities and studies.
The Company has paid its final allocation of liability of approximately $9,300
for the surface contamination at the site. This amount represented 0.3% of the
site remediation costs. The Company believes that no further soil remediation
activities will be required. However, additional costs may be required in
connection with the investigation and remediation of groundwater contamination,
and the Company does not currently have sufficient information to estimate such
costs.
On December 1, 1995, a suit was filed by a private party against, among
others, the Company in the United States District Court for the Western District
of Michigan alleging that the Company is jointly and severally liable under
federal and state law for the release of certain hazardous materials at the
Allied Paper, Inc./Portage Creek/ Kalamazoo River Superfund Site. The Company
has entered into a settlement agreement pursuant to which the Company paid
$325,000 and received releases from certain past, present and future
environmental claims and actions involving the Kalamazoo Site.
With respect to the Chemical Handling Site, the Company was found to have
only minimal usage of the Site. Therefore, on August 28, 1998, the Company
signed a consent decree pursuant to which the Company paid approximately
$41,000. The consent decree releases the Company from liability to the United
States government associated with past response costs at the Chemical Handling
Site. It is not anticipated that there will be any further clean-up costs at
this site.
Based upon currently available information and the opinions of the
Company's environmental compliance managers and General Counsel, although there
can be no assurance, the Company believes that any liability it may have at any
site will not have a material adverse effect on the Company's results of
operations or financial condition.
NEW ACCOUNTING STANDARDS
AND DEPRECIATION METHOD
Depreciation Change
Effective October 1, 1996, the Company changed its method of depreciation for
machinery and equipment placed in service after September 30, 1996 to the
straight-line method. This change was applied on a
26
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ROCK-TENN COMPANY
prospective basis to such assets acquired after that date. The Company's
previous policy of depreciation for additions of machinery and equipment was the
150% declining balance method. Assets placed in service prior to the effective
date of the change continue to be depreciated using accelerated methods. The
Company changed its method of depreciation based upon 1) management's shift in
operating style over the last several years to focus on capital and
technological improvements and related changes in maintenance, 2) management's
belief that straight-line provides a better matching of costs and revenues, and
3) the fact that the straight-line method is the predominant industry practice.
Given these circumstances, management believes the straight-line method is
preferable. There is no cumulative effect of this change. The effect of this
change on net income for fiscal 1997 was to increase net income by approximately
$3.0 million.
New Accounting Standards
Statement of Financial Accounting Standards No. 130 ("SFAS 130") establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Statement of
Financial Accounting Standards No. 131 ("SFAS 131") establishes standards for
disclosures of segment information about products and services, geographic
areas, major customers, and certain interim disclosures of segment information
which is not required by accounting standards currently applied by the Company.
These statements are required to be adopted in fiscal 1999. The Company does not
anticipate that SFAS 130 will have a material impact on the Company's
consolidated financial statements. The Company is currently evaluating SFAS 131
and has not yet determined its impact on the Company's consolidated financial
statements. Financial Accounting Standards No. 133 ("SFAS 133") establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS 133 is required to be adopted in fiscal 2000. The Company is
currently evaluating SFAS 133 and has not yet determined its impact on the
Company's consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Statements herein regarding, among other things, estimated capital expenditures
for fiscal 1999, the anticipated impact and cost of remediating Year 2000
problems, expected expenditures for environmental, health and safety law
compliance, awards of new business and costs expected to be incurred as a result
of certain cost reduction initiatives constitute forward-looking statements
within the meaning of the Securities Act of 1933 and the Securities Exchange Act
of 1934. Such statements are subject to certain risks and uncertainties that
could cause actual amounts to differ materially from those projected. With
respect to such forward-looking statements, management has made assumptions
regarding, among other things, the amount and timing of expected capital
expenditures, the extent of the Company's and certain third parties' Year 2000
problems, the costs to remedy such problems and the impact of the failure to
remedy such problems, the estimated cost of compliance with environmental,
health and safety laws, the expected resolution of various pending environmental
matters, the amount and timing of awards of new business and the estimated costs
expected to be incurred in connection with certain cost reduction initiatives.
Such statements are subject to certain risks including, among others, that the
amount of necessary capital expenditures has been underestimated, the extent of
the Company's Year 2000 problems and the costs to remedy, and the likely impact
of, such problems has been underestimated, the cost of compliance with
environmental, health and safety laws has been underestimated, expected outcomes
of various pending environmental matters are inaccurate, the amount and timing
of awards of new business is overstated and the costs associated with certain
cost reduction initiatives have been underestimated. In addition, the Company's
performance in future periods is subject to other risks including, among others,
decreases in demand for the Company's products, increases in raw material costs,
fluctuations in selling prices and adverse changes in general market and
industry conditions. Management believes these estimates are reasonable;
however, undue reliance should not be placed on such estimates which are based
on current expectations.
27
<PAGE> 14
Consolidated Statements of Income
ROCK-TENN COMPANY
<TABLE>
<CAPTION>
Year Ended September 30,
(In Thousands, Except Per Share Data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,293,606 $1,109,693 $876,111
Cost of goods sold 950,167 835,877 628,622
- ---------------------------------------------------------------------------------------------------------------
Gross profit 343,439 273,816 247,489
Selling, general and administrative expenses 227,548 193,389 151,752
Plant closing and other costs 1,997 16,251 3,580
- ---------------------------------------------------------------------------------------------------------------
Income from operations 113,894 64,176 92,157
Interest expense (34,982) (26,787) (10,978)
Interest and other income 974 718 1,290
Minority interest in income of consolidated subsidiary (5,273) (351) -
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 74,613 37,756 82,469
Provision for income taxes (Note 7) 32,593 21,655 31,344
- ---------------------------------------------------------------------------------------------------------------
Net income $ 42,020 $ 16,101 $ 51,125
===============================================================================================================
Basic earnings per share (Note 1) $ 1.21 $ .48 $ 1.54
===============================================================================================================
Diluted earnings per share (Note 1) $ 1.20 $ .47 $ 1.50
===============================================================================================================
</TABLE>
See accompanying notes.
28
<PAGE> 15
Consolidated Balance Sheets
ROCK-TENN COMPANY
<TABLE>
<CAPTION>
September 30,
(In Thousands, Except Share and Per Share Data) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,769 $ 3,345
Accounts receivable (net of allowances of $3,817 and $3,632) 118,164 115,162
Inventories (Note 1) 88,019 94,035
Other current assets 4,200 5,073
- ---------------------------------------------------------------------------------------------------------------
Total current assets 216,152 217,615
Property, plant and equipment, at cost (Note 1):
Land and buildings 178,168 163,528
Machinery and equipment 740,498 696,039
Transportation equipment 14,957 13,636
Leasehold improvements 4,386 4,117
- ---------------------------------------------------------------------------------------------------------------
938,009 877,320
Less accumulated depreciation and amortization (376,470) (326,146)
- ---------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 561,539 551,174
- ---------------------------------------------------------------------------------------------------------------
Goodwill 317,389 325,697
Other assets 16,401 19,200
- ---------------------------------------------------------------------------------------------------------------
$1,111,481 $1,113,686
===============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 45,924 $ 54,471
Accrued compensation and benefits 42,040 34,500
Current maturities of long-term debt (Note 4) 43,462 41,282
Other current liabilities 21,054 21,892
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 152,480 152,145
Long-term debt due after one year (Note 4) 464,876 492,340
Deferred income taxes (Note 7) 82,248 78,288
Other long-term items 14,462 19,701
Commitments and contingencies (Notes 6 and 10)
Shareholders' equity (Note 3):
Preferred stock, $.01 par value; 50,000,000 shares authorized;
no shares outstanding at September 30, 1998 and 1997 - -
Class A common stock, $.01 par value; 175,000,000 shares authorized;
22,851,838 outstanding at September 30, 1998 and 22,582,976 outstanding at
September 30, 1997, Class B common stock, $.01 par value; 60,000,000
shares authorized; 11,724,972 outstanding at September 30, 1998
and 11,791,350 outstanding at September 30, 1997 346 344
Capital in excess of par value 128,904 126,363
Retained earnings 274,039 245,592
Other (5,874) (1,087)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 397,415 371,212
- ---------------------------------------------------------------------------------------------------------------
$1,111,481 $1,113,686
===============================================================================================================
</TABLE>
See accompanying notes.
29
<PAGE> 16
Consolidated Statements of Shareholders' Equity
ROCK-TENN COMPANY
<TABLE>
<CAPTION>
Class A and Class B Capital in
(In Thousands, Except Share Common Stock Excess of Retained
and Per Share Data) Shares Amount Par Value Earnings Other Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 30,120,261 $301 $ 48,682 $260,252 $(1,337) $307,898
Net income - - - 51,125 - 51,125
Cash dividends - $.27 per share - - - (9,064) - (9,064)
Sales of common stock 212,566 2 2,489 - - 2,491
Purchases of Class A common stock (217,000) (2) (364) (3,650) - (4,016)
Foreign currency
translation adjustments - - - - (658) (658)
Pension adjustments - - - - 1,379 1,379
Effect of 10% stock dividend
paid on November 15, 1996 3,011,583 30 59,072 (59,102) - -
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 33,127,410 331 109,879 239,561 (616) 349,155
Net income - - - 16,101 - 16,101
Cash dividends - $.30 per share - - - (10,070) - (10,070)
Sales of common stock 383,416 4 4,055 - - 4,059
Income tax benefit from
exercise of stock options - - 272 - - 272
Stock issued in conjunction
with acquisition 863,500 9 12,157 - - 12,166
Foreign currency
translation adjustments - - - - (520) (520)
Pension adjustments - - - - 49 49
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 34,374,326 344 126,363 245,592 (1,087) 371,212
Net income - - - 42,020 - 42,020
Cash dividends - $.30 per share - - - (10,388) - (10,388)
Sales of common stock 532,584 5 3,771 - - 3,776
Purchases of Class A common stock (330,100) (3) (1,230) (3,185) - (4,418)
Foreign currency
translation adjustments - - - - (4,787) (4,787)
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 34,576,810 $346 $128,904 $274,039 $(5,874) $397,415
===============================================================================================================
</TABLE>
See accompanying notes.
30
<PAGE> 17
Consolidated Statements of Cash Flows
ROCK-TENN COMPANY
<TABLE>
<CAPTION>
Year Ended September 30,
(In Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 42,020 $ 16,101 $ 51,125
Items in income not affecting cash:
Depreciation and amortization 70,827 62,117 48,564
Plant closing and other costs - 14,686 -
Deferred income taxes 3,974 5,017 5,105
Loss (gain) on disposal of plant and equipment and other 604 (373) (459)
Minority interest in income of consolidated subsidiary 5,273 351 -
Change in operating assets and liabilities (excluding acquisitions):
Accounts receivable (3,866) (7,343) 10,043
Inventories 5,223 (253) 4,990
Other assets 1,219 17,408 5,657
Accounts payable (8,224) 7,484 (1,238)
Accrued liabilities 8,638 (8,818) (257)
- -----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 125,688 106,377 123,530
Financing activities:
Net (repayments) additions to revolving credit facilities (17,000) 385,570 432
Additions to long-term debt - 5,000 1,933
Repayments of long-term debt (8,285) (150,775) (17,863)
Debt issuance costs - (124) (281)
Sales of common stock 3,776 4,059 2,491
Purchases of common stock (4,418) - (4,016)
Cash dividends paid to shareholders (10,388) (10,070) (9,064)
Distribution to minority interest (8,400) - -
- -----------------------------------------------------------------------------------------------------------------------------
Cash (used for) provided by financing activities (44,715) 233,660 (26,368)
Investing activities:
Cash paid for purchases of businesses, net of cash received - (301,287) -
Capital expenditures (81,666) (87,016) (72,151)
Proceeds from sale of property, plant and equipment 2,700 1,364 2,172
Decrease (increase) in unexpended industrial revenue bond proceeds 610 (610) 2,210
- -----------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (78,356) (387,549) (67,769)
Effect of exchange rate changes on cash (193) (19) (49)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,424 (47,531) 29,344
Cash and cash equivalents at beginning of year 3,345 50,876 21,532
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,769 $ 3,345 $ 50,876
=============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds $ 25,916 $ 784 $ 22,288
Interest, net of amounts capitalized 37,258 29,249 10,719
</TABLE>
See accompanying notes.
31
<PAGE> 18
Notes to Consolidated Financial Statements
ROCK-TENN COMPANY
1. Description of Business and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Description of Business. The Company manufactures and distributes converted
products, including folding cartons, fiber partitions, corrugated containers and
displays and laminated paperboard products, 100% recycled paperboard, and
recycled corrugating medium primarily to nondurable goods producers. The Company
performs periodic credit evaluations of its customers' financial condition and
generally does not require collateral. Receivables generally are due within 30
days. The Company services a diverse customer base primarily in North America
and, therefore, has limited exposure from credit loss to any particular customer
or industry segment.
Consolidation. The consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results will differ from those estimates and the
differences could be material.
Revenue Recognition. The Company recognizes revenue when title to the goods sold
passes to the buyer, which is generally at the time of shipment.
Derivatives. The Company enters into a variety of derivative transactions.
Generally, the Company designates at inception that derivatives are a hedge of
risks associated with specific assets, liabilities or future commitments and
monitors each derivative to determine if it remains an effective hedge. The
effectiveness of the derivative as a hedge is based on changes in its value
being highly correlated with changes in value of the underlying hedged item. The
Company includes amounts received or paid in operations when the underlying
transaction settles. The Company does not enter into or hold derivatives for
trading or speculative purposes.
The Company uses interest rate cap agreements and interest rate swap
agreements to synthetically manage the interest rate characteristics of a
portion of its outstanding debt and partially to limit the Company's exposure to
rising interest rates. Amounts to be received or paid as a result of interest
rate cap agreements and interest rate swap agreements are accrued and recognized
as an adjustment of interest expense related to the designated debt. Interest
rate cap purchase costs are amortized to interest expense ratably during the
life of the agreement.
The Company uses commodity swap agreements to manage synthetically the
selling prices and raw material costs of a portion of its recycled corrugating
medium business and to limit the Company's exposure to falling prices and rising
costs. Amounts to be received or paid as a result of these swap agreements are
recognized in the period in which the related sale is made.
Cash Equivalents. The Company considers all highly liquid investments with a
maturity of three months or less from the date of purchase to be cash
equivalents. The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents approximate fair market values.
Inventories. Substantially all U.S. inventories are stated at the lower of cost
or market, with cost determined on the last-in, first-out (LIFO) basis. All
other inventories are valued at lower of cost or market, with cost determined
using methods which approximate cost computed on a first-in, first-out (FIFO)
basis. These other inventories represent approximately 13.1% and 12.2% of FIFO
cost at September 30, 1998 and 1997, respectively.
Inventories at September 30, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Finished goods and work in process $ 68,735 $ 64,933
Raw materials 29,139 37,474
Supplies 12,048 12,318
- ----------------------------------------------------------
Inventories at FIFO cost 109,922 114,725
LIFO reserve (21,903) (20,690)
- ----------------------------------------------------------
Net inventories $ 88,019 $ 94,035
- ----------------------------------------------------------
</TABLE>
It is impracticable to segregate the LIFO reserve between raw materials,
finished goods and work in process.
32
<PAGE> 19
Property, Plant and Equipment. Property, plant and equipment are stated at cost.
Cost includes major expenditures for improvements and replacements which extend
useful lives or increase capacity and interest costs associated with significant
capital additions. For the years ended September 30, 1998, 1997 and 1996, the
Company capitalized interest of approximately $888,000, $1,214,000 and none,
respectively. For financial reporting purposes, depreciation and amortization is
provided on both the declining balance and straight-line methods over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------
Buildings and building improvements 15-40 years
Machinery and equipment 3-20 years
Leasehold improvements Term of lease
Transportation equipment 3-8 years
- -------------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended September 30, 1998, 1997 and 1996
was approximately $59,525,000, $53,698,000 and $44,889,000, respectively.
Effective October 1, 1996, the Company changed its method of depreciation
for machinery and equipment placed in service after September 30, 1996 to the
straight-line method. This change was applied on a prospective basis to assets
acquired after that date. The Company's previous policy of depreciation for
additions of machinery and equipment was the 150% declining balance method.
Assets placed in service prior to the effective date of the change continue to
be depreciated using accelerated methods. The Company changed its method of
depreciation based upon 1) management's shift in operating style over the last
several years to focus on capital and technological improvements and related
changes in maintenance, 2) management's belief that the straight-line method
provides a better matching of costs and revenues, and 3) the fact that the
straight-line method is the predominant industry practice. Given the Company's
circumstances, management believes the straight-line method is preferable. There
is no cumulative effect of this change. The effect of this change on net income
for the year ended September 30, 1997 was to increase net income by
approximately $3,011,000 or $.09 per diluted share.
Basic and Diluted Earnings Per Share. The following table sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $42,020,000 $16,101,000 $51,125,000
Denominator:
Denominator for
basic earnings per
share - weighted
average shares 34,595,662 33,513,557 33,201,461
Effect of dilutive
stock options 547,880 829,841 812,597
Denominator for
diluted earnings per
share - weighted
average shares
and assumed
conversions 35,143,542 34,343,398 34,014,058
- --------------------------------------------------------------------------
Basic earnings
per share $ 1.21 $ .48 $ 1.54
- --------------------------------------------------------------------------
Diluted earnings
per share $ 1.20 $ .47 $ 1.50
- --------------------------------------------------------------------------
</TABLE>
Goodwill and Other Intangible Assets. The Company has classified as goodwill the
excess of the acquisition cost over the fair values of the net assets of
businesses acquired. Goodwill is amortized on a straight-line basis over periods
ranging from twenty to forty years. Accumulated amortization relating to
goodwill at September 30, 1998 and 1997 was $19,740,000 and $10,321,000,
respectively.
Other intangible assets primarily represent costs allocated to non-compete
agreements, financing costs and patents. These assets are amortized on a
straight-line basis over their estimated useful lives. Accumulated amortization
relating to intangible assets, excluding goodwill, was approximately $4,512,000
and $3,440,000 at September 30, 1998 and 1997, respectively.
Asset Impairment. The Company generally accounts for long-lived asset impairment
under Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This Statement requires that long-lived assets and certain identifiable
intangibles to be
33
<PAGE> 20
held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the Company estimates
the future cash flows expected to result from the use of the asset. If the sum
of the estimated expected future cash flows is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Measurement of an impairment loss is based on the estimated fair
value of the asset. Long-lived assets to be disposed of are generally recorded
at the lower of their carrying amount or estimated fair value less cost to sell.
Foreign Currency Translation. Assets and liabilities of the Company's foreign
operations are generally translated from the foreign currency at the rate of
exchange in effect as of the balance sheet date. Earnings from foreign
operations are indefinitely reinvested in the respective operations. Revenues
and expenses are generally translated at average monthly exchange rates
prevailing during the year. Resulting translation adjustments are reflected in
shareholders' equity.
New Accounting Standards. In 1997, the FASB issued Statement of Financial
Accounting Standards No. 130 ("SFAS 130") and Statement of Financial Accounting
Standards No. 131 ("SFAS 131"). SFAS 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 131 establishes standards for disclosures of
segment information about products and services, geographic areas, major
customers, and certain interim disclosures of segment information which is not
required by accounting standards currently used by the Company. These statements
are required to be adopted in fiscal 1999. The Company does not anticipate that
SFAS 130 will have a material impact on the Company's consolidated financial
statements. The Company is currently evaluating SFAS 131 and has not yet
determined its impact on the Company's consolidated financial statements. In
1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 is required to be adopted in
fiscal 2000. The Company is currently evaluating SFAS 133 and has not yet
determined its impact on the Company's consolidated financial statements.
Reclassifications. Certain reclassifications have been made to prior year
amounts to conform with the current year presentation.
2. Acquisitions of Businesses and Other Matters
On January 21, 1997, the Company acquired all of the outstanding capital stock
of the parent of Waldorf Corporation ("Waldorf"), a manufacturer of folding
cartons and 100% recycled paperboard and a manufacturer of recycled corrugating
medium, for approximately $239,000,000, financed primarily with borrowings under
the Company's credit facility. In addition, the Company (i) made certain
payments aggregating $32,600,000 in connection with the settlement of a
contingent interest agreement with a former creditor of Waldorf and the
termination of Waldorf's Stock Appreciation Rights Plan and (ii) accrued as a
cost of the purchase $5,293,000 in connection with the planned termination of
approximately 120 employees of Waldorf, principally certain senior executives
and other employees at the Waldorf corporate office. The Company paid $4,753,000
in 1998 and 1997 related to these terminations and expects to make payments of
approximately $690,000 during fiscal 1999. The remaining accrual was adjusted to
expense in fiscal 1998.
On June 9, 1997, the Company acquired substantially all of the assets of
Rite Paper Products, Inc. ("Rite Paper"), a manufacturer of component paperboard
pieces primarily for the ready-to-assemble furniture industry.
On July 9, 1997, the Company acquired substantially all of the assets and
certain of the liabilities of The Davey Company ("Davey"), a manufacturer of
recycled paperboard book covers used by the book manufacturing industry. The
acquisition was financed through the issuance of 867,510 shares of the Company's
Class A common stock (fair value of approximately $12,200,000).
34
<PAGE> 21
On September 5, 1997, the Company and Sonoco Products Company combined
their respective fiber partition business assets into a new entity named RTS
Packaging, LLC ("RTS Packaging"). The Company owns 65% of RTS Packaging.
The consolidated statements of income for fiscal 1997 include the results
of operations of Waldorf, Rite Paper, Davey and RTS Packaging from the
respective dates of acquisition or formation, as the case may be, and the
transactions have been accounted for under the purchase method of accounting.
The goodwill arising from these purchase transactions is being amortized over
forty years. The assets acquired and liabilities assumed are as follows (in
thousands):
<TABLE>
<S> <C>
- -----------------------------------------------------------
Value of assets acquired $ 575,997
Deferred tax and other liabilities (102,264)
Long-term debt assumed (147,226)
- -----------------------------------------------------------
Net purchase price $ 326,507
===========================================================
</TABLE>
The following pro forma information gives effect to the acquisitions of
Waldorf and Davey as if both had occurred at the beginning of the years
presented below. The pro forma information is provided for informational
purposes only. It is based on historical information and does not necessarily
reflect the actual results of operations that would have occurred had such
acquisitions actually occurred at the beginning of such years nor is it
necessarily indicative of future results of operations of the combined
enterprise (in thousands, except per share data, unaudited):
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Net sales $1,231,215 $1,252,797
Net income 14,402 57,811
Diluted earnings per share .41 1.66
- ----------------------------------------------------------
</TABLE>
The Rite Paper and RTS Packaging transactions are immaterial for pro forma
presentation purposes and are not reflected in the aforementioned pro forma
financial information.
During fiscal 1998, the Company notified approximately 40 people of their
termination. In conjunction with these terminations, the Company recorded costs
of $1,997,000, substantially all of which will be paid in fiscal 1999. As of
September 30, 1998, the Company has a remaining liability of approximately
$1,974,000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward-Looking Statements."
During fiscal 1997, in connection with the Waldorf acquisition, management
decided to close the Company's folding carton plant at Mundelein, Illinois. The
Mundelein facility was acquired in the acquisition of Olympic Packaging. In
connection with this closing, the Company incurred a charge of approximately
$12,784,000 during fiscal 1997, which consisted primarily of the non-cash
write-off of goodwill associated with the Company's Olympic Packaging
subsidiary. The write-off of goodwill was required based upon the decision to
close the Mundelein facility and the determination, based on an analysis of
estimated future cash flows, that such goodwill would not be recoverable. For
the year ended September 30, 1997, the Company charged to expense approximately
$1,622,000 principally for the termination of approximately 150 employees and
other related charges associated with closing the Mundelein facility. Of the
$1,622,000, losses of $207,000 were incurred in fiscal 1997 and payments of
approximately $186,000 and $1,029,000 were made in fiscal 1998 and 1997,
respectively. The remaining accrual was adjusted in fiscal 1998. The Mundelein
facility had revenue and operating losses of $19,032,000 and $1,242,000,
respectively, in fiscal 1997 and $30,440,000 and $1,197,000, respectively, in
fiscal 1996. In addition, during fiscal 1997, management decided to close a
plastics recycling facility located in Indianapolis, Indiana. For the year ended
September 30, 1997, the Company charged to expense approximately $1,750,000
related to this closing, primarily relating to losses on disposal of the
equipment. Severance costs were immaterial. Revenue and operating losses were
immaterial to the overall consolidated financial statements.
On June 24, 1996, the Company announced a facility closing and
consolidation plan. This plan was developed to reduce the operating losses
historically incurred at the Company's Lynchburg converting facility and is
intended to optimize the utilization of certain other Company assets. As part of
this plan, the Company closed two fiber partition plants, opened one new fiber
partition plant and relocated a laminated paperboard book cover panels operation
from Lynchburg to one of the closed plants. In connection with this plan, the
Company incurred expenses of approximately $3,580,000 consisting primarily of
employee severance, employee relocation and training costs, equipment and
inventory relocation costs and lease termination costs. All such expenses were
charged to income from operations.
35
<PAGE> 22
Of the $3,580,000, losses of $1,654,000 were incurred in fiscal 1996 and
payments of approximately $8,000, $744,000 and $750,000 were made in fiscal
1998, 1997 and 1996, respectively. The remaining accrual was adjusted in fiscal
1998 and 1997. As of September 30, 1998 no amounts were accrued related to this
plan. The employment of approximately 150 employees was terminated in connection
with these closures and consolidation.
3. Shareholders' Equity
Capitalization. The Company's capital stock consists of Class A common stock
("Class A Common") and Class B common stock ("Class B Common"). Holders of Class
A Common have one vote per share and holders of Class B Common have 10 votes per
share. Holders of Class B Common are entitled to convert their shares into Class
A Common at any time on a share-for-share basis, subject to certain rights of
first refusal by the Company and its management committee. During fiscal 1998,
approximately 157,000 Class B Common shares were converted to Class A Common
shares.
The Company also has authorized preferred stock, of which no shares have
been issued. The terms and provisions of such shares will be determined by the
Board of Directors upon any issuance of such shares.
Stock Option Plans. The Company's 1993 Stock Option Plan allows for the granting
of options to certain key employees for the purchase of a maximum of 2,200,000
shares of Class A Common. Options which have been granted under this plan vest
in increments over a period of up to three years and have 10 year terms.
The Incentive Stock Option Plan, the 1987 Stock Option Plan and the 1989
Stock Option Plan provided for the granting of options to certain key employees
for an aggregate of 4,320,000 shares of Class A Common and 1,440,000 shares of
Class B Common. The Company will not grant any additional options under the
Incentive Stock Option Plan, the 1987 Stock Option Plan or the 1989 Stock Option
Plan.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, generally no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
which also requires that the information be determined as if the Company had
accounted for its employee stock options granted subsequent to September 30,
1995 under the fair value method of that Statement. The pro forma information is
not likely to be representative of the effect on reported net income for future
years, as future years will include the effect of additional vesting options.
The fair values for the options granted subsequent to September 30, 1995 was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for fiscal 1998 and 1997,
respectively: risk-free interest rate of 4.8% and 6.3%, a dividend yield of 2.0%
for both years, volatility factor of the expected market price of the Company's
common stock of .32 and .28, and an expected life of the option of 10 years. No
options were granted during fiscal 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair values estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair values of its employee stock options.
For purposes of pro forma disclosures, the estimated fair values of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 40,730 $ 15,165 $ 51,125
Pro forma earnings
per share
Basic 1.18 .45 1.54
Diluted 1.16 .44 1.50
- --------------------------------------------------------------------
</TABLE>
36
<PAGE> 23
The table below summarizes the changes in all stock options during the
periods indicated:
<TABLE>
<CAPTION>
Class B Common Class A Common
----------------------------------------- -------------------------------------------
Weighted Average Weighted Average
Shares Price Range Exercise Price Shares Price Range Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
September 30, 1995 310,435 $2.77-8.20 $5.29 1,264,800 $ 2.75-18.25 $10.24
Exercised (23,200) $3.60-8.20 $5.75 (42,000) $ 4.75-8.20 $ 7.10
Effect of stock dividend issued
November 15, 1996 28,724 $2.52-7.45 - 122,280 $ 2.50-16.59 -
- ---------------------------------------------------------------------------------------------------------------------------
Options outstanding at
September 30, 1996 315,959 $2.52-7.45 $4.78 1,345,080 $ 2.50-16.59 $ 9.41
Exercised or forfeited (14,080) $2.52-3.27 $2.74 (124,520) $ 2.50-18.30 $ 4.21
Granted - - - 757,100 $ 17.50-20.31 $19.49
- ---------------------------------------------------------------------------------------------------------------------------
Options outstanding at
September 30, 1997 301,879 $2.52-7.45 $4.87 1,977,660 $ 2.50-20.31 $13.60
Exercised or forfeited (99,660) $2.52-7.45 $3.62 (246,420) $ 2.50-18.30 $ 3.71
Granted - - - 519,200 $ 11.13-18.75 $11.48
- ---------------------------------------------------------------------------------------------------------------------------
Options outstanding at
September 30, 1998 202,219 $3.27-7.45 $5.49 2,250,440 $ 3.26-20.31 $14.19
Options exercisable at
September 30, 1998 202,219 $3.27-7.45 $5.49 1,126,840 $ 3.26-18.30 $12.43
Options available for future
grant at September 30, 1998 - - - 315,400 - -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning options outstanding
and exercisable at September 30, 1998:
<TABLE>
<CAPTION>
Class B Common Class A Common
-------------------------- --------------------------------------------------------
Weighted Weighted Weighted Weighted Average
Number Average Average Average Remaining
Range of Outstanding Exercise Number Exercise Number Exercise Contractual Life
Exercise Prices and Exercisable Price Outstanding Price Exercisable Price (Both Classes)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 3.26-6.09 152,719 $4.85 280,040 $ 4.83 280,040 $ 4.83 2.0
$ 7.42-7.45 49,500 $7.45 99,000 $ 7.44 99,000 $ 7.44 4.8
$11.13 - - 495,000 $11.13 - - 10.0
$15.23-17.50 - - 613,400 $15.40 605,900 $15.37 6.5
$18.30-20.31 - - 763,000 $19.51 141,900 $18.30 8.6
- ----------------------------------------------------------------------------------------------------------------------------
202,219 $5.49 2,250,440 $14.19 1,126,840 $12.43 7.0
============================================================================================================================
</TABLE>
37
<PAGE> 24
The estimated weighted average fair value of options granted during fiscal
1998 and 1997, respectively, with option prices equal to the market price on the
date of grant was $4.46 and $7.61. No options were granted during fiscal 1996.
Employee Stock Purchase Plan. Under the Amended and Restated 1993 Employee Stock
Purchase Plan, 1,320,000 shares of Class A Common are reserved for purchase by
substantially all qualifying employees of the Company. In fiscal 1998, 1997 and
1996, approximately 207,000, 196,000 and 147,000 shares, respectively, were
purchased by employees under this plan.
4. Long-term Debt
- --------------------------------------------------------------------------------
Long-term debt at September 30, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
September 30,
(In Thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility (a) $369,000 $386,000
7.25% notes, due August 2005,
net of unamortized discount
of $94 and $108(b) 99,906 99,892
Industrial revenue bonds,
bearing interest at
variable rates (4.65% at
September 30, 1998),
due through December 2037(c) 32,150 32,150
Other notes 7,282 15,580
- --------------------------------------------------------------------------------
508,338 533,622
Less current maturities of
long-term debt 43,462 41,282
- --------------------------------------------------------------------------------
Long-term debt due
after one year $464,876 $492,340
================================================================================
</TABLE>
(a) The Company has a revolving credit facility, provided by a syndicate of
banks, which provides aggregate borrowing availability of up to $450,000,000
through 2002. Borrowings outstanding under the facility bear interest based upon
LIBOR plus an applicable margin. This rate was 6.38% and 6.24% at September 30,
1998 and 1997, respectively. Annual facility fees range from .075% to .3% of the
aggregate borrowing availability, based on the Company's consolidated funded
debt to total capitalization ratio. Under the agreements covering this loan,
restrictions exist as to the maintenance of financial ratios, creation of
additional long-term and short-term debt, certain leasing arrangements, mergers,
acquisitions, disposals and other matters. The agreements also provide that the
payment of cash dividends, acquisition of common shares and redemption of
preferred stock cannot exceed amounts based on an earnings formula. The Company
is in compliance with such restrictions.
In October 1997, the Company entered into two interest rate agreements
effectively to cap the LIBOR rate on portions of the amount outstanding under
the revolving credit facility. Under the agreements, $75,000,000 is capped at
8.00% per annum until October 7, 2000 while another $75,000,000 is capped at
7.50% per annum until October 7, 1999. The costs associated with these interest
rate agreements are being amortized over the terms of the agreements.
In April 1998, the Company entered into an interest rate swap agreement
effectively to fix the LIBOR rate on $100,000,000 of variable rate borrowings at
5.79% per annum until April 2005.
(b) In August 1995, the Company sold $100,000,000 in aggregate principal amount
of its 7.25% notes due August 1, 2005 (the "Notes"). The Notes are not
redeemable prior to maturity and are not subject to any sinking fund
requirements. The Notes are unsubordinated, unsecured obligations. The indenture
related to the Notes restricts the Company and its subsidiaries from incurring
certain liens and entering into certain sale and leaseback transactions, subject
to a number of exceptions. Debt issuance costs of approximately $908,000 are
being amortized over the term of the Notes. In May 1995, the Company entered
into an interest rate adjustment transaction in order effectively to fix the
interest rate on the Notes subsequently issued in August 1995. The costs
associated with the interest rate adjustment transaction of $1,530,000 are being
amortized over the term of the Notes. Giving effect to the amortization of the
original issue discount, the debt issuance costs and the costs associated with
the interest rate adjustment transaction, the effective interest rate on the
Notes is approximately 7.51%.
(c) Payments of principal and interest on these industrial revenue bonds are
guaranteed by a letter of credit issued by a bank. Restrictions on the Company
similar to those
38
<PAGE> 25
described in (a) above exist under the terms of the agreements. The bonds are
remarketed periodically based on the interest rate period selected by the
Company. In the event the bonds cannot be remarketed, the bank has agreed to
extend long-term financing to the Company in an amount sufficient to retire the
bonds.
The amount of consolidated net earnings available for dividends and other
restricted payments, as defined in debt agreements, was approximately
$182,878,000 at September 30, 1998.
As of September 30, 1998, $331,000,000 of the $369,000,000 outstanding
under the revolving credit facility has been classified as long-term debt since
the Company has the ability to continue to finance this amount pursuant to the
terms of the revolving credit facility and does not intend to repay this amount
with cash from operations during the ensuing year. As of September 30, 1998, the
aggregate maturities of long-term debt for the succeeding five years are as
follows (in thousands):
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 43,462
2000 324
2001 197
2002 331,218
2003 241
Thereafter 132,896
- --------------------------------------------------------------------------------
Total long-term debt $ 508,338
- --------------------------------------------------------------------------------
</TABLE>
In fiscal 1996, one of the Company's Canadian subsidiaries entered into a
revolving credit facility with a Canadian bank. The facility provides borrowing
availability of up to Canadian $2,000,000 and can be renewed on an annual basis.
There are no facility fees related to this arrangement. As of September 30, 1998
and 1997, there were no amounts outstanding under this facility.
5. Financial Instruments
- --------------------------------------------------------------------------------
At September 30, 1998 and 1997, the fair market value of the Notes was
approximately $100,250,000 and $102,310,000, respectively, based on quoted
market prices. At September 30, 1998, the carrying amount for variable rate
long-term debt approximates fair market value since the interest rates on these
instruments are reset periodically.
At September 30, 1998, the fair values of the two interest rate cap
agreements were immaterial. At September 30, 1998, the fair value of the
interest rate swap agreement was $4,451,000. There is no carrying amount
associated with these instruments.
In fiscal 1998, the Company entered into three separate swap agreements to
synthetically manage the selling prices and raw material costs of a portion of
its recycled corrugating medium business and to limit the Company's exposure to
falling prices and rising costs. The agreements together hedge 12,000 tons of
recycled corrugating medium each quarter and expire during fiscal 2003. These
swap agreements were entered into through privately negotiated transactions
for which there is no readily accessible market. It is impracticable to estimate
the fair values as they are based upon future costs and prices which cannot be
reasonably estimated. There is no carrying amount associated with these
instruments.
6. Leases and Other Agreements
- --------------------------------------------------------------------------------
The Company leases certain manufacturing and warehousing facilities and
equipment (primarily transportation equipment) under various operating leases.
As of September 30, 1998, future minimum lease payments, including certain
maintenance charges on transportation equipment, under all noncancelable leases,
are as follows (in thousands):
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 7,364
2000 6,335
2001 5,014
2002 3,625
2003 2,961
Thereafter 8,491
- --------------------------------------------------------------------------------
Total future minimum lease payments $33,790
- -------------------------------------------------------------------------------
</TABLE>
Rental expense for the years ended September 30, 1998, 1997 and 1996 was
approximately $12,264,000, $10,503,000 and $8,653,000, respectively, including
lease payments under cancelable leases.
39
<PAGE> 26
7. Income Taxes
- --------------------------------------------------------------------------------
The Company accounts for income taxes under the liability method which requires
the recognition of deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. The recognition of future tax benefits is required to the extent that
realization of such benefits is more likely than not.
The provisions for income taxes consist of the following components (in
thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $25,360 $13,676 $23,552
State 2,498 2,694 2,927
Foreign 761 268 (240)
- --------------------------------------------------------------------------------
Total current 28,619 16,638 26,239
- --------------------------------------------------------------------------------
Deferred income taxes:
Federal 3,359 3,989 3,912
State 265 349 46
Foreign 350 679 1,147
- --------------------------------------------------------------------------------
Total deferred 3,974 5,017 5,105
- --------------------------------------------------------------------------------
Provision for income taxes $32,593 $21,655 $31,344
================================================================================
</TABLE>
The differences between the statutory federal income tax rate and the
Company's effective income tax rate are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
State taxes,
net of federal benefit 3.7 3.9 2.7
Non-deductible
amortization and write-off
of goodwill (see Note 2) 3.5 18.3 -
Other, net (primarily
non-taxable items) 1.5 0.2 0.3
- --------------------------------------------------------------------------------
Effective tax rate 43.7% 57.4% 38.0%
===============================================================================-
</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,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Accruals and allowances $ 9,092 $10,077
Other 5,955 4,002
- --------------------------------------------------------------------------------
Total 15,047 14,079
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment 77,266 74,281
Deductible intangibles 2,343 2,533
Inventory and other 17,686 15,553
- --------------------------------------------------------------------------------
Total 97,295 92,367
- --------------------------------------------------------------------------------
Net deferred income tax liability $82,248 $78,288
================================================================================
</TABLE>
The Company has not recorded any valuation allowances for deferred income
tax assets.
The components of the income before income taxes are (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $71,356 $34,916 $80,798
Foreign 3,257 2,840 1,671
- --------------------------------------------------------------------------------
Income before
income taxes $74,613 $37,756 $82,469
================================================================================
</TABLE>
40
<PAGE> 27
8. Retirement Plans
- --------------------------------------------------------------------------------
The Company has a number of defined benefit pension plans covering essentially
all employees who are not covered by certain collective bargaining agreements.
The benefits are based on years of service and, for certain plans, compensation.
The Company's practice is to fund amounts deductible for federal income tax
purposes.
In addition, under several labor contracts the Company makes payments based
on hours worked into multi-employer pension plan trusts established for the
benefit of certain collective bargaining employees.
The Company's projected benefit obligations, fair value of assets, and net
periodic pension cost includes the following components (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligations
at beginning of year $146,808 $102,168
Service cost 7,460 6,027
Interest cost on projected
benefit obligations 11,008 9,647
Amendments (8,410) 322
Actuarial loss 12,714 642
Acquisitions and other 1,861 31,878
Benefits paid (5,252) (3,876)
- --------------------------------------------------------------------------------
Projected benefit obligations
at end of year $166,189 $146,808
================================================================================
Fair value of assets at
beginning of year $159,048 $101,843
Actual return on plan assets 35,945 25,308
Acquisitions and other 2,427 34,571
Employer contribution 2,894 1,202
Benefits paid (5,252) (3,876)
- --------------------------------------------------------------------------------
Fair value of assets at end of year $195,062 $159,048
================================================================================
Funded status $ 28,873 $ 12,240
Net unrecognized asset (909) (1,360)
Net unrecognized gain (23,420) (16,466)
Unrecognized prior service
(income) cost (5,029) 2,638
- --------------------------------------------------------------------------------
Net accrued pension cost included
in consolidated balance sheets $ (485) $ (2,948)
================================================================================
</TABLE>
The amounts required to be recognized in the consolidated income statements
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 7,460 $ 6,027 $ 4,327
Interest cost on projected
benefit obligations 11,008 9,647 7,235
Expected return on plan assets (14,870) (10,449) (7,615)
Net amortization
of the initial asset (385) (399) (395)
Net amortization of (gain) loss (110) (7) 98
Net amortization of prior
service (income) cost (436) 445 432
- ---------------------------------------------------------------------------------
Total Company defined
benefit plan expense 2,667 5,264 4,082
Multi-employer plans
for collective
bargaining employees 237 163 166
- ---------------------------------------------------------------------------------
Net periodic pension cost $ 2,904 $ 5,427 $ 4,248
=================================================================================
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.0%, 7.5% and 7.5% as of September 30, 1998,
1997 and 1996, respectively. The expected increase in compensation levels used
in determining the actuarial present value of the projected benefit obligations
was 4.0% as of September 30, 1998, 1997 and 1996. The expected long-term rate of
return on assets, net of administrative expenses, used in determining net
pension expense was 9% for all years presented. The projected benefit
obligations, accumulated benefit obligation and fair value of assets for
underfunded plans was $2,392,000, $2,392,000 and $2,352,000, respectively, as of
September 30, 1998. The projected benefit obligations, accumulated benefit
obligation and fair value of assets for underfunded plans was $1,312,000,
$1,312,000 and $1,244,000, respectively, as of September 30, 1997.
41
<PAGE> 28
Effective October 1, 1997, the Company implemented an employee savings plan
which permits participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. The Company matches 50% of
contributions up to a maximum of 6% of compensation as defined by the plan.
During fiscal 1998, the Company recorded matching expense of $4,001,000 related
to the plan, including matching expense related to employees of the former
Waldorf operations. As a result of the new employee savings plan, effective
January 1, 1998, the Company amended its defined benefit plans to lower pension
benefits. Net periodic pension cost was approximately $1,600,000 lower during
fiscal 1998 as a result of the reduced benefits.
The Company has a Supplemental Executive Retirement Plan ("SERP") which
provides unfunded supplemental retirement benefits to certain executives of the
Company. The SERP provides for incremental pension payments partially to offset
the reduction in amounts that would have been payable from the Company's
principal pension plan if it were not for limitations imposed by federal income
tax regulations. Expense relating to the plan of $219,000, $174,000 and $162,000
was recorded for the years ended September 30, 1998, 1997 and 1996,
respectively. Amounts accrued as of September 30, 1998 and 1997 related to the
plan were $688,000 and $482,000, respectively.
9. Related Party Transactions
- --------------------------------------------------------------------------------
A director of the Company is the chairman and a significant shareholder of the
insurance agency that brokers substantially all insurance for the Company. The
insurance premiums paid by the Company may vary significantly from year to year
with the claims arising during such years. For the years ended September 30,
1998, 1997 and 1996, payments were approximately $4,898,000, $3,831,000 and
$3,239,000, respectively.
A director of the Company is the former Chairman of the construction
company that built a new building for the Company. For the years ended September
30, 1998 and 1997, payments approximated $2,733,000 and $5,335,000,
respectively, and were capitalized as property, plant and equipment.
10. Commitments and Contingencies
- --------------------------------------------------------------------------------
Capital Additions. Estimated costs for completion of authorized capital
additions under construction as of September 30, 1998 total approximately
$26,000,000.
Stock Repurchase Plan. The Board of Directors has approved a stock repurchase
plan for the repurchase of a maximum of 1,500,000 shares in aggregate of Class A
Common or Class B Common prior to July 31, 2003. During fiscal 1998, the Company
repurchased 290,100 shares of Class A Common under this plan. Under a previously
authorized plan which expired on July 31, 1998, the Company repurchased 40,000,
none and 217,000 shares of Class A Common during fiscal 1998, 1997 and 1996,
respectively.
Environmental and Other Matters. The Company is subject to many federal, state,
local and foreign environmental laws and regulations. The Company is currently
involved in the assessment of various sites, two of which the Company has an
ownership interest in and all others of which are owned by third parties.
Environmental expenditures which relate to an existing condition caused by past
operations and which have no significant future economic benefit to the Company
are expensed. Future environmental-related expenditures cannot be reliably
determined in many circumstances due to the early stages of investigations, the
uncertainty of specific remediation methods, changing environmental laws and
interpretations and other matters. Such costs are accrued at the time the
expenditure becomes probable and the costs can be reasonably estimated. Costs
are accrued based upon estimates determined by management.
42
<PAGE> 29
The Company has been named as a potentially responsible party at nine
sites. At such sites, a variety of potentially responsible parties are involved.
Management believes that it is probable that the parties associated with these
sites will fulfill their obligations.
Expenses associated with and amounts accrued for environmental assessment
and remediation have not been material for the three years ended September 30,
1998. It is possible that costs in excess of amounts accrued may be incurred;
however, management believes that such additional amounts will not have a
material effect on the Company's financial position and results of operations.
On December 1, 1995, a suit was filed by a private party against, among
others, the Company in the United States District Court for the Western District
of Michigan alleging that the Company is jointly and severally liable under
federal and state law for the release of certain hazardous materials at the
Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site. The Company
has entered into a settlement agreement pursuant to which the Company paid
$325,000 and received releases from certain past, present and future
environmental claims and actions involving this site.
In addition, the Company is involved in various other legal proceedings and
matters arising in the normal course of business. It is the opinion of
management, after consultation with legal counsel, that the resolutions of these
matters would not have a material adverse effect on the financial position or
the results of operations of the Company.
11. Segment Information
- --------------------------------------------------------------------------------
The Company operates principally in two business segments. The converted
products segment is comprised of facilities that produce folding cartons,
laminated paperboard products, fiber partitions, corrugated containers,
corrugated displays, and thermoformed plastic products. The paperboard segment
consists of facilities that manufacture 100% recycled clay-coated and uncoated
paperboard and corrugating medium and that collect recovered paper. Intersegment
sales are accounted for at prices that approximate market prices. Certain
operations included in the converted products segment are located in foreign
countries and had operating income of $4,293,000, $4,483,000 and $2,944,000 for
fiscal years ended September 30, 1998, 1997 and 1996, respectively. For fiscal
1998, foreign operations represented approximately 4.1%, 3.8% and 5.4% of total
net sales to unaffiliated customers, total income from operations and total
identifiable assets, respectively. For fiscal 1997, foreign operations
represented approximately 4.8%, 7.0% and 5.3% of total net sales to unaffiliated
customers, total income from operations and total identifiable assets,
respectively. In fiscal 1996, these operations represented approximately 6.1%,
3.2% and 8.9% of total net sales to unaffiliated customers, total income from
operations and total identifiable assets, respectively.
Operating profit includes all costs and expenses directly related to the
segment involved. The corporate portion of operating profit includes corporate
general and administrative expenses.
Assets are assigned to segments based on use. Corporate assets primarily
consist of cash and cash equivalents and property, plant and equipment.
43
<PAGE> 30
Following is a tabulation of business segment information for each of the past
three fiscal years (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (aggregate):
Converted products $ 1,063,749 $ 938,711 $ 779,696
Paperboard 461,123 391,805 281,402
- -----------------------------------------------------------------------------------------------------------
Total $ 1,524,872 $ 1,330,516 $ 1,061,098
===========================================================================================================
Less net sales (intersegment):
Converted products $ 286 $ 1,194 $ 429
Paperboard 230,980 219,629 184,558
- -----------------------------------------------------------------------------------------------------------
Total $ 231,266 $ 220,823 $ 184,987
===========================================================================================================
Net sales (unaffiliated customers):
Converted products $ 1,063,463 $ 937,517 $ 779,267
Paperboard 230,143 172,176 96,844
- -----------------------------------------------------------------------------------------------------------
Total $ 1,293,606 $ 1,109,693 $ 876,111
===========================================================================================================
Operating income:
Converted products (a) $ 53,233 $ 26,412 $ 35,218
Paperboard 69,374 46,382 64,431
- -----------------------------------------------------------------------------------------------------------
122,607 72,794 99,649
Corporate expense (8,713) (8,618) (7,492)
- -----------------------------------------------------------------------------------------------------------
Income from operations 113,894 64,176 92,157
Minority interest in consolidated subsidiary (5,273) (351) -
Interest expense (34,982) (26,787) (10,978)
Interest and other income 974 718 1,290
- -----------------------------------------------------------------------------------------------------------
Income before income taxes $ 74,613 $ 37,756 $ 82,469
===========================================================================================================
Indentifiable assets:
Converted products $ 639,217 $ 644,339 $ 414,331
Paperboard 461,432 457,845 110,769
Corporate 10,832 11,502 56,588
- -----------------------------------------------------------------------------------------------------------
Total $ 1,111,481 $ 1,113,686 $ 581,688
===========================================================================================================
Depreciation and amortization: (a)
Converted products $ 44,820 $ 55,143 $ 35,262
Paperboard 25,314 21,101 12,855
Corporate 693 559 447
- -----------------------------------------------------------------------------------------------------------
Total $ 70,827 $ 76,803 $ 48,564
===========================================================================================================
Capital expenditures, including assets acquired:
Converted products $ 57,749 $ 135,825 $ 45,433
Paperboard 23,638 135,365 26,480
Corporate 279 210 238
- -----------------------------------------------------------------------------------------------------------
Total $ 81,666 $ 271,400 $ 72,151
===========================================================================================================
</TABLE>
(a) The Company incurred $1,997,000, $16,251,000 and $3,580,000 in fiscal
1998, 1997 and 1996, respectively, in plant closing and other costs
(See Note 2). These costs related to the converted products segment and
the applicable amounts are reflected in the segment's operating income
and depreciation and amortization.
(b) The effect of the change in depreciation methods from the 150%
declining balance method to the straight-line method for machinery and
equipment placed in service during fiscal 1997 was to increase
operating income by $4,936,000. The depreciation change resulted in a
decrease in depreciation expense in each of the segments as follows:
$2,689,000 in the converted products segment, $2,227,000 in the
paperboard segment, and $20,000 in the corporate expenses.
44
<PAGE> 31
12. Financial Results by Quarter (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $316,475 $327,854 $320,078 $329,199
Gross profit 81,841 84,693 88,812 88,093
Net income 8,677 9,786 11,800 11,757
Basic earnings per share 0.25 0.28 0.34 0.34
Diluted earnings per share 0.25 0.28 0.34 0.34
- --------------------------------------------------------------------------------
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales $208,318 $275,397 $300,302 $325,676
Gross profit 53,593 65,744 73,818 80,661
Net income (loss) 7,399 (7,191) 6,212 9,681
Basic earnings (loss) per share 0.22 (0.22) 0.19 0.28
Diluted earnings (loss) per share 0.22 (0.22) 0.18 0.28
- --------------------------------------------------------------------------------
</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
basic and diluted earnings per share by quarter will not necessarily total the
annual basic and diluted earnings per share.
The results of operations for the fourth quarter of fiscal 1998 includes
expenses of approximately $1,997,000 incurred by the Company as a result of the
facility closing (See Note 2).
The results of operations for the second, third and fourth quarters of
fiscal 1997 include expenses of approximately $12,784,000, $2,700,000 and
$767,000, respectively, incurred by the Company as a result of the facility
closings and related items (See Note 2).
45
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
[LOGO ERNST & YOUNG LLP]
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
ROCK-TENN COMPANY
We have audited the accompanying consolidated balance sheets of Rock-Tenn
Company as of September 30, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended September 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Rock-Tenn
Company at September 30, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
October 1, 1996, the Company changed its method of accounting for depreciation
of machinery and equipment placed in service subsequent
to September 30, 1996.
ERNST & YOUNG LLP
Atlanta, Georgia
October 20, 1998
46
<PAGE> 33
MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR FINANCIAL INFORMATION
ROCK-TENN COMPANY
The management of Rock-Tenn Company has the responsibility for preparing the
accompanying consolidated financial statements and for their integrity and
objectivity. The statements were prepared in accordance with generally accepted
accounting principles. The financial statements include amounts that are based
on management's best estimates and judgments. Management also prepared the other
information in the annual report and is responsible for its accuracy and
consistency with the financial statements.
Rock-Tenn Company has established and maintains a system of internal
control to safeguard assets against loss or unauthorized use and to ensure the
proper authorization and accounting for all transactions. This system includes
appropriate reviews by the Company's internal audit department and management as
well as written policies and procedures that are communicated to employees with
significant roles in the financial reporting process and updated as necessary.
The Board of Directors, through its Audit Committee, is responsible for
ensuring that both management and the independent auditors fulfill their
respective responsibilities with regard to the financial statements. The Audit
Committee, composed entirely of directors who are not officers or employees of
the Company, meets periodically with both management and the independent
auditors to assure that each is carrying out its responsibilities. The
independent auditors and the Company's internal audit department have full and
free access to the Audit Committee and meet with it, with and without management
present, to discuss auditing and financial reporting matters.
The Company's financial statements have been audited by Ernst & Young LLP,
independent auditors, elected by the shareholders. The opinion of the
independent auditors, based upon their audits of the consolidated financial
statements, is contained in this Annual Report.
As part of its audit of the Company's financial statements, Ernst & Young
LLP considered the Company's internal control structure in determining the
nature, timing and extent of audit tests to be applied. Management has
considered Ernst & Young LLP's recommendations concerning the Company's system
of internal control and has taken actions that we believe are cost-effective in
the circumstances to respond appropriately to these recommendations. Management
believes that, as of September 30, 1998, the Company's system of internal
control is adequate to accomplish the objectives discussed herein.
/S/ Bradley Currey, Jr.
Bradley Currey, Jr.
Chairman of the
Board of Directors
and Chief Executive Officer
/S/ David C. Nicholson
David C. Nicholson
Senior Vice President and
Chief Financial Officer
47
<PAGE> 34
Locations
ROCK-TENN COMPANY
<TABLE>
<CAPTION>
Converted Products Segment Paperboard Segment
- --------------------------- --------------------------
<S> <C> <C>
Folding Carton Corrugated Packaging Coated Paperboard
Division & Display Division Division
Augusta, GA Dothan, AL Battle Creek, MI
Baltimore, MD Gallatin, TN Dallas, TX
Chicago, IL Greenville, SC Delaware Water Gap, PA
Chicopee, MA Hunt Valley, MD Sheldon Springs, VT
Clinton, IA Mundelein, IL St. Paul, MN
Conway, AR Norcross, GA*
El Paso, TX Tullahoma, TN Uncoated Paperboard
Eutaw, AL Winston-Salem, NC Division
Greenville, TX Chattanooga, TN
Harrison, AR RTS Packaging, LLC Cincinnati, OH
Kimball, TN Charleroi, PA Eaton, IN
Knoxville, TN Dallas, TX Lynchburg, VA
Lebanon, TN Downington, PA Otsego, MI
Madison, WI Eaton, IN
Marshville, NC Hartwell, GA Recycled Fiber
Milwaukee, WI Hillside, IL Division
Norcross, GA Merced, CA Atlanta, GA
Springfield, OH Monterrey, Nuevo Leon, Mexico Chattanooga, TN
Stone Mountain, GA Orange, CA Cincinnati, OH
St. Paul, MN Scarborough, ME Cleveland, TN
Taylorsville, NC Tukwila, WA Dallas, TX
Warwick, Quebec, Canada Des Moines, IA
Waxahachie, TX Plastic Packaging Fort Worth, TX
Division Huntsville, AL
Laminated Paperboard Conyers, GA Indianapolis, IN
Products Division Franklin Park, IL Knoxville, TN
Aurora, IL Maple Grove, MN
Columbus, IN Montreal, Quebec, Canada
Dallas, TX Shelbyville, TN
Jersey City, NJ Sheldon Springs, VT
Lynchburg, VA St. Paul, MN
Macon, GA
Otsego, MI *2 Locations
Vineland, NJ
Wright City, MO
</TABLE>
48
<PAGE> 35
SHAREHOLDER INFORMATION
Rock-Tenn Company
HOME OFFICE
504 Thrasher St.
Norcross, GA 30071
770-448-2193
TRANSFER AGENT AND REGISTRAR
Wachovia Bank of North Carolina, N.A.
c/o Boston Equiserve, L.P.
P.O. Box 8217
Boston, MA 02266-8217
800-633-4236
INVESTOR RELATIONS
Investor Relations Department
P.O. Box 4098
Norcross, GA 30091
770-448-2193
Fax: 770-263-3582
ANNUAL MEETING
Northeast Atlanta Hilton
5993 Peachtree Industrial Blvd.
Norcross, GA 30092
Thursday, January 28, 1999
9:00 A.M.
LEGAL COUNSEL
King & Spalding
191 Peachtree St.
Atlanta, GA 30303
AUDITORS
Ernst & Young LLP
600 Peachtree St.
Suite 2800
Atlanta, GA 30308
DIRECT DEPOSIT OF DIVIDENDS
Rock-Tenn shareholders may have their
quarterly cash dividends automatically
deposited to checking, savings or money
market accounts through the automatic
clearinghouse system. If you wish to
participate in the program, please contact:
Wachovia Bank of North Carolina, N.A.
c/o Boston Equiserve, L.P.
P.O. Box 8217
Boston, MA 02266-8217
800-633-4236
COMMON STOCK
Rock-Tenn Class A common stock trades
on the New York Stock Exchange under
the symbol RKT. There is not an established
public trading market for the
Company's Class B common stock.
As of December 1, 1998, there were
approximately 4,373 Class A common
shareholders of record and 137 Class B
common shareholders of record.
FORM 10-K REPORT
A copy of the Company's annual report
on Form 10-K for the year ended
September 30, 1998, as filed with the
Securities and Exchange Commission
is available at no charge to shareholders
of record, by writing to:
Investor Relations
Rock-Tenn Company
P.O. Box 4098
Norcross, GA 30091
49
<PAGE> 1
EXHIBIT 21
ROCK-TENN COMPANY
SUBSIDIARIES OF ROCK-TENN COMPANY
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
------------------------------------------------------------ ---------------
<C> <S> <C>
1. Rock-Tenn Company, Mill Division, Inc. Tennessee
2. Dominion Paperboard Products, Ltd. Quebec, Canada
3. Rock-Tenn Company of Texas Georgia
4. Rock-Tenn Converting Company Georgia
5. Rock-Tenn Company of Arkansas Georgia
6. Ling Industries, Inc. Quebec, Canada
7. Rock-Tenn Company of California, Inc. Delaware
8. Rock-Tenn Company of Illinois, Inc. Illinois
9. Concord Industries, Inc. Illinois
10. Waldorf Corporation Delaware
11. Wabash Corporation Delaware
12. Wabash Development, Inc. Delaware
13. Waldorf Realty, Inc. Delaware
14. Best Recycling, Inc. Iowa
15. RTS Packaging, LLC Delaware
16. Rock-Tenn Recycling Company Quebec, Canada
17. Rock-Tenn Partition Company Georgia
18. RTS Empaques S. de R.L. de C.V. Mexico
19. Waldorf Corporation of Minnesota Delaware
20. RTS Embalajes de Chile Limitada Santiago, Chile
</TABLE>
25
<PAGE> 1
EXHIBIT 23
REPORT AND CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Rock-Tenn Company of our report dated October 20, 1998, included in the
1998 Annual Report to Shareholders of Rock-Tenn Company.
Our audits also include the financial statement schedule of Rock-Tenn
Company listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent (a) to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-83304) pertaining to the Rock-Tenn Company 1993
Employee Stock Option Plan, the Rock-Tenn Company 1993 Employee Stock Purchase
Plan, the Rock-Tenn Company Incentive Stock Option Plan, the Rock-Tenn Company
1989 Stock Option Plan, and the Rock-Tenn Company 1987 Stock Option Plan, and
the Registration Statement (Form S-3 No. 33-93934) of Rock-Tenn Company of our
report dated October 20, 1998, with respect to the consolidated financial
statements incorporated herein by reference; and (b) to the use of our report
included in the preceding paragraph with respect to the financial statement
schedule included in this Annual Report (Form 10-K) for the year ended September
30, 1998, and our report dated November 23, 1998, with respect to the financial
statements of the Rock-Tenn Company 1993 Employee Stock Purchase Plan filed as
an Exhibit to this Annual Report (Form 10-K) for the year ended September 30,
1998.
ERNST & YOUNG LLP
Atlanta Georgia
December 15, 1998
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 5,769
<SECURITIES> 0
<RECEIVABLES> 121,981
<ALLOWANCES> 3,817
<INVENTORY> 88,019
<CURRENT-ASSETS> 216,152
<PP&E> 938,009
<DEPRECIATION> 376,470
<TOTAL-ASSETS> 1,111,481
<CURRENT-LIABILITIES> 152,480
<BONDS> 464,876
0
0
<COMMON> 346
<OTHER-SE> 397,069
<TOTAL-LIABILITY-AND-EQUITY> 1,111,481
<SALES> 1,293,606
<TOTAL-REVENUES> 1,293,606
<CGS> 950,167
<TOTAL-COSTS> 950,167
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,982
<INCOME-PRETAX> 74,613
<INCOME-TAX> 32,593
<INCOME-CONTINUING> 42,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,020
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.20
</TABLE>
<PAGE> 1
EXHIBIT 99
ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. 28
Statements of Financial Condition as of September 30, 1998
and 1997.................................................. 29
Statements of Changes in Plan Equity for the three years
ended September 30, 1998.................................. 30
Notes to Financial Statements............................... 31
</TABLE>
27
<PAGE> 2
REPORT OF INDEPENDENT AUDITORS
Compensation and Options Committee of the Board of Directors
Rock-Tenn Company
We have audited the accompanying statements of financial condition of the
Rock-Tenn Company 1993 Employee Stock Purchase Plan as of September 30, 1998 and
1997 and the related statements of changes in plan equity for each of the three
years in the period ended September 30, 1998. These financial statements are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Rock-Tenn Company 1993
Employee Stock Purchase Plan at September 30, 1998 and 1997 and the changes in
Plan equity for each of the three years in the period ended September 30, 1998,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
November 23, 1998
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<PAGE> 3
ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Assets:
Receivable from Rock-Tenn Company -- Notes 1 and 2... $465,301 $510,348
======== ========
Liabilities and equity:
Obligations to purchase Rock-Tenn Company common
stock -- Notes 1
and 2............................................. 465,301 510,348
Plan equity.......................................... -- --
-------- --------
Total liabilities and equity................................ $465,301 $510,348
======== ========
</TABLE>
See notes to financial statements
29
<PAGE> 4
ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF CHANGES IN PLAN EQUITY
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Participant contributions............................... $ 2,867,976 $ 2,834,682 $ 2,107,505
Purchases of Rock-Tenn Company common stock -- Note 1... (2,809,359) (2,789,931) (2,106,192)
Amounts refunded to Plan participants................... (58,617) (44,751) (1,313)
----------- ----------- -----------
Plan equity at end of year.............................. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
See notes to financial statements
30
<PAGE> 5
ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF THE PLAN:
In 1993, the Board of Directors of Rock-Tenn Company (the "Company")
adopted the Rock-Tenn Company 1993 Employee Stock Purchase Plan (the "Plan").
The Plan was effective beginning on January 1, 1994. On October 23, 1997, the
Company's Board of Directors voted to amend and restate the Plan, thereby
increasing the number of shares reserved for purchase under the Plan to
1,320,000. The amended and restated Rock-Tenn Company 1993 Employee Stock
Purchase Plan was approved by Rock-Tenn Company shareholders on January 22,
1998.
The Plan permits eligible employees to make regular, systematic purchases
of the Company's Class A common stock directly from the Company through payroll
deductions. Substantially all regular, full-time employees of the Company and
its subsidiaries are eligible to participate in the Plan upon completion of at
least two years of employment as defined by the Plan. Voluntary employee
contributions are deducted from participants' compensation each pay period and
are held for the participants' accounts. All funds held by the Company under the
Plan are included in the general assets of the Company.
On the first day of each of the four purchase periods (November 1, February
1, May 1 and August 1), participants in the Plan are granted an option to
purchase shares of the Company's Class A common stock. On the last day of each
purchase period (January 31, April 30, July 31 and October 31), the Company uses
the funds accumulated in each participant's account in the Plan to purchase
shares of the Company's Class A common stock for the participant. The purchase
price per share to the participant is equal to 85% of the market value, as
defined, of the Company's Class A common stock on the first or last day of the
purchase period, whichever amount is lower. For the purchase periods ending
October 31, 1997, January 31, 1998, April 30, 1998 and July 31, 1998 there was a
total of 206,984 shares of the Company's Class A common stock purchased for
participants under the Plan. For the purchase periods ending October 31, 1996,
January 31, 1997, April 30, 1997 and July 31, 1997, there was a total of 195,627
shares of the Company's Class A common stock purchased for participants under
the Plan. For the purchase periods ending October 31, 1995, January 31, 1996,
April 30, 1996 and July 31, 1996, there was a total of 147,366 shares of the
Company's Class A common stock purchased for participants under the Plan. Stock
certificates for all shares of the Company's Class A Common Stock purchased
under the Plan are issued to participants at the end of each purchase period.
Any participant may terminate contributions and withdraw from the Plan at
any time. Even though there are no current intentions to do so, the Board of
Directors can terminate the Plan at any time. Stock purchase transactions in
process at the time of such termination cannot be modified or canceled without
the written consent of the participants.
NOTE 2 -- SIGNIFICANT ACCOUNT POLICIES:
Basis of Accounting
The accompanying financial statements have been prepared on the accrual
basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires Plan management to make estimates and
assumptions that affect the reported amounts of Plan assets and liabilities and
disclosure of any contingent assets and liabilities at the date of the financial
statements and the reported amounts of changes in Plan equity during the
reporting period. Actual results will differ from those estimates and the
differences could be material.
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<PAGE> 6
ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Plan Administration
The Plan is administered by the Compensation and Options Committee of the
Company's Board of Directors, which consists of three outside directors.
Plan Expenses
Administrative expenses of the Plan are paid by the Company.
NOTE 3 -- FEDERAL INCOME TAXES:
The Plan qualifies as an Employee Stock Purchase Plan under Section 423 of
the Internal Revenue Code of 1986. Issuance of shares under this Plan are not
intended to result in taxable income to participants in the Plan based on
provisions in Section 423 of the Internal Revenue Code.
NOTE 4 -- YEAR 2000 ISSUE (UNAUDITED):
The Company has developed a plan to modify its internal information
technology to be ready for the Year 2000 and has begun converting critical data
processing systems. The Company expects the project to be substantially complete
by early 1999. The Company does not expect this project to have a significant
effect on Plan operations.
32
