ROCK TENN CO
FORM 10-K (Annual Report)
Filed 12/20/2000 For Period Ending 9/30/2000
Address 504 THRASHER ST NORCROSS, Georgia 30071 Telephone 770-448-2193 CIK 0000230498 Industry Paper & Paper Products Sector Basic Materials Fiscal Year 09/30 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM______TO______
COMMISSION FILE NUMBER 0-23340 ROCK-TENN COMPANY (Exact name of registrant as specified in its charter)
GEORGIA 62-0342590 (state or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.)
504 THRASHER STREET, NORCROSS, GEORGIA 30071 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (770) 448-2193
Securities Registered Pursuant to Section 12(B) of the Act: CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
Securities Registered Pursuant to Section 12(G) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 7, 2000 (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 $68 million.
As of December 7, 2000, the registrant had 22,457,514 and 10,813,265 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, 2000 are incorporated by reference in Part II. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on January 26, 2001 are incorporated by reference in Parts III and IV. INDEX TO FORM 10-K
ROCK-TENN COMPANY
PAGE REFERENCE ------PART I Item 1. Business...... 3 Item 2. Properties...... 7 Item 3. Legal Proceedings...... 8 Item 4. Submission of Matters to a Vote of Securityholders...... 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...... 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 11
PART III Item 10. Directors and Executive Officers of the Registrant...... 12 Item 11. Executive Compensation...... 12 Item 12. Security Ownership of Certain Beneficial Owners and Management...... 12 Item 13. Certain Relationships and Related Transactions...... 12
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 13
2 PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, "we", "us", "our" or "Rock-Tenn" refers to the business of Rock-Tenn Company and its subsidiaries, including RTS Packaging, LLC, which we refer to as RTS. We own 65% of RTS and conduct our partition products business through RTS.
GENERAL
We are a leading converter of recycled and virgin paperboard and a leading manufacturer of recycled clay-coated and specialty paperboard. Our paperboard converting businesses include folding cartons, solid fiber partitions, plastic packaging and other products, corrugated packaging and corrugated sheet stock. We also produce corrugating medium and laminated paperboard products, as well as collect and sell recycled fiber. We operate 66 converting operations, 12 paperboard mills and one distribution facility. These facilities are located in 24 states, Canada, Mexico and Chile.
PRODUCTS
We report our results of operations in three industry segments: (1) packaging products, (2) paperboard and (3) specialty corrugated packaging and display. For financial information relating to our segments, please see the information set forth in Note 11 to our audited consolidated financial statements incorporated by reference into "Item 8 -- Financial Statements and Supplementary Data" in this Annual Report. At the end of fiscal 2000, we evaluated the composition of our segments. As a result, all previously reported financial information relating to our segments has been restated to reflect the new composition of each segment.
PACKAGING PRODUCTS
We primarily manufacture three lines of packaging products:
- folding cartons,
- solid fiber partitions, and
- plastic packaging.
Folding Cartons. We believe that we are the third largest producer of folding cartons in North America. Customers use our folding cartons to package frozen, dry and perishable food items, paper goods, hardware products, textile, automotive, apparel and other products. We manufacture folding cartons from recycled or virgin paperboard, which we print, coat, die-cut and glue in accordance with customer specifications. We then ship finished cartons to customers' plants for packing and sealing. We operate 19 folding carton plants and one distribution facility. Sales of folding cartons to unaffiliated customers accounted for 40.5%, 42.9% and 45.3% of our net sales in fiscal 2000, 1999 and 1998, respectively.
Partition Products. We believe that we are the largest manufacturer of solid fiber partitions in North America, which we market principally to glass container manufacturers. We manufacture fiber partitions from 100% recycled specialty paperboard. Our solid fiber partitions come in varying thicknesses to meet different structural requirements for high speed casing, uncasing and filling lines due to their precision die-cut construction. We focus on developing high quality, value-added partition products for specific applications to meet customers' packaging needs. We operate 12 solid fiber partition plants. Sales of fiber partition products to unaffiliated customers accounted for 9.3%, 10.3% and 10.8% of our net sales in fiscal 2000, 1999 and 1998, respectively.
Plastic Packaging Products. We manufacture custom thermoformed plastic converted products and extruded plastic roll stock for sale to the food service, industrial products, consumer products, healthcare and food processor markets. We use contact heat and radiant heat thermoforming equipment to manufacture thermoformed products from plastic roll stock in a wide range of thicknesses, expanding the range of product
3 applications. We also operate extruders to manufacture plastic roll stock in a wide range of resins and colors. We use virgin and recycled plastic resin purchased from third parties in the extrusion process, including high impact polystyrene, high density polyethylene, polypropylene, polyethylene terephthalate (PET) and K resin blends. We operate two plastic packaging plants. Sales of plastic packaging products to unaffiliated customers accounted for 4.3%, 3.6% and 3.5% of our net sales in fiscal 2000, 1999 and 1998, respectively.
PAPERBOARD
We collect recovered paper and produce four paperboard products:
- 100% recycled clay-coated paperboard,
- 100% recycled specialty paperboard,
- 100% recycled corrugating medium, and
- laminated paperboard.
Clay-Coated and Specialty Paperboard and Corrugating Medium. We are the second largest U.S. manufacturer of 100% recycled paperboard (excluding linerboard, medium and paperboard used in the manufacture of gypsum wallboard). We market our recycled clay-coated and specialty paperboard to manufacturers of folding cartons, solid fiber partitions, laminated paperboard products, tube and core products, set-up boxes and other paperboard products. We also manufacture recycled corrugating medium, which we market to corrugated sheet manufacturers. We operate 12 paperboard mills. Sales of recycled paperboard (including corrugating medium) to unaffiliated customers accounted for 17.3%, 16.4% and 15.5% of our net sales in fiscal 2000, 1999 and 1998, respectively.
Laminated Paperboard Products. We believe we are the largest U.S. producer of laminated paperboard products for the book cover and furniture markets and that customers recognize our expertise in laminating recycled paperboard. We convert uncoated paperboard into specialty laminated paperboard products for use in book covers and binders, furniture, automotive components, fiber drums and other industrial products. We operate six laminated paperboard products plants. Sales of laminated paperboard products to unaffiliated customers accounted for 9.3%, 11.2% and 12.6% of our net sales in fiscal 2000, 1999 and 1998, respectively.
Recycled Fiber. We operate 14 paper recovery facilities that collect paper from a number of sources including factories, commercial printers, office buildings, retail stores and paper converters as well as from other wastepaper collectors. After sorting and baling, we transfer collected paper to our paperboard mills for processing or sell it principally to other U.S. manufacturers of recycled paperboard. Several of our paper recovery facilities are located near our paperboard mills. This helps minimize freight costs and provides an additional source of supply of recovered paper for our operations, which is the principal raw material used to produce recycled paperboard. We also operate a marketing and brokerage group for servicing large national accounts. Sales of recovered paper to unaffiliated customers accounted for 3.3%, 2.1% and 2.0% of our net sales in fiscal 2000, 1999 and 1998, respectively.
SPECIALTY CORRUGATED PACKAGING AND DISPLAY
We manufacture corrugated packaging and corrugated sheet stock in a range of flute configurations and structural designs. We market corrugated packages and corrugated sheet stock products primarily in the Southeastern U.S. To make corrugated sheet stock, we simultaneously feed linerboard and corrugating medium into a corrugator that flutes the medium to specified sizes, glues the linerboard and fluted medium together and slits and cuts the resulting corrugated paperboard into sheets in accordance with customer specifications. We market corrugated sheets to corrugated box manufacturers. We also convert corrugated sheets into corrugated products ranging from one-color protective cartons to graphically brilliant point-of-purchase containers and displays. We operate one corrugator and five corrugated packaging plants.
4 We believe we are the second largest manufacturer of temporary promotional displays in North America. We manufacture promotional displays for sale to many of the largest national consumer products companies and to smaller national and regional consumer products companies. We also provide contract packing services for completed displays, which may include customer products. We operate one corrugated display manufacturing facility, six contract packing facilities and nine display sales and design centers. Sales of our corrugated packaging and display products to unaffiliated customers accounted for 16.0%, 13.5% and 10.3% of our net sales in fiscal 2000, 1999 and 1998, respectively.
SALES AND MARKETING
In fiscal 2000, we sold:
- packaging products to approximately 3,200 customers,
- recovered paper and paperboard products to approximately 1,800 customers, and
- specialty corrugated packaging and display products to approximately 1,100 customers.
None of our customers accounted for more than 5% of our net sales in fiscal 2000. We generally manufacture our products pursuant to customers' orders. Some of our products are marketed to key customers. The loss of any key customer could have an adverse effect on the net income attributable to the applicable segment and, depending on the significance of such product line to our operations, our results of operations. We believe that we have strong relationships with our customers.
Each of our product lines is marketed through its own sales force. Each sales force maintains direct sales relationships with customers. We also market several product lines, including folding cartons and book covers, through independent sales representatives and independent distributors, respectively. Sales personnel are supervised by regional sales managers, plant general managers or the general manager for the particular product line, who support and coordinate the sales activities within their designated area. We pay our paperboard and laminated paperboard products sales personnel a base salary, and we generally pay our packaging products sales personnel a base salary plus commission. We pay our independent sales representatives on a commission basis.
COMPETITION
The packaging products and paperboard industries are highly competitive, and no single company dominates either industry. Our competitors include large, vertically integrated packaging products and paperboard companies and numerous smaller companies. In the folding carton and specialty corrugated container markets, we compete with a significant number of national, regional and local packaging suppliers. In the fiber partition, point-of-purchase display, thermoformed plastic packaging and laminated paperboard products markets, we compete with a smaller number of national, regional and local companies offering highly specialized products. We also compete with foreign companies in the book cover market. In the paperboard segment, we compete with integrated and non-integrated national, regional and local companies manufacturing various grades of recycled and recycled content paperboard. Our paperboard also competes with virgin paperboard.
The primary competitive factors in the packaging products and paperboard industries are price, design, product innovation, quality and service, with varying emphasis on these factors depending on the product line and customer preferences. We believe that we compete effectively with respect to each of these factors. However, to the extent any of our competitors becomes more successful with respect to any key competitive factor, our business could be materially adversely affected.
The packaging products and recycled paperboard industries have undergone significant consolidation in recent years. We believe that current trends within these industries will result in further consolidation. Within the packaging products industry, larger corporate customers with an expanded geographic presence have tended in recent years to seek suppliers who can, because of their broad geographic presence, efficiently and economically supply all of the customers' packaging needs. In addition, during recent years, purchasers of
5 recycled paperboard and packaging products have demanded higher quality products meeting stricter quality control requirements. These market trends could adversely affect our results of operations or, alternatively, favor our products depending on our competitive position in specific product lines.
GOVERNMENTAL REGULATION
HEALTH AND SAFETY REGULATIONS
Our operations are subject to federal, state, local and foreign laws and regulations relating to workplace safety and worker health including the Occupational Safety and Health Act and regulations promulgated thereunder. This Act, among other things, establishes asbestos and noise standards and regulates the use of hazardous chemicals in the work place. Although we do not use asbestos in manufacturing our products, some of our facilities contain asbestos. For those facilities where asbestos is present we have properly contained this asbestos or we have implemented comprehensive operations and maintenance plans for those facilities. We do not believe that future compliance with health and safety laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows.
ENVIRONMENTAL REGULATION
We are subject to various federal, state, local and foreign environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances. These laws and regulations include, among others, the Comprehensive Environmental Response, Compensation and Liability Act, which we refer to as CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the U.S. Environmental Protection Agency. In addition, some states in which we operate have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies.
We do not believe that future compliance with these environmental laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. However, environmental laws and regulations are becoming increasingly stringent. Consequently, our compliance and remediation costs could increase materially. In addition, we cannot currently assess with certainty the impact that the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act will have on our operations or capital expenditure requirements. However, we believe that any such impact or capital expenditures will not have a material adverse effect on our results of operations, financial condition or cash flows.
We estimate that we will spend $1.0 to $2.0 million for capital expenditures during fiscal year 2001 in connection with matters relating to environmental compliance.
In addition, we may choose to modify or replace the coal-fired boilers at two of our facilities in order to operate cost effectively while complying with emissions regulations under the Clean Air Act. We estimate these improvements will cost approximately $9.0 million.
We have been identified as a potentially responsible party, which we refer to as a PRP, at eight active "superfund" sites pursuant to CERCLA or comparable state statutes. No remediation costs or allocations have been determined with respect to such sites other than costs that were not material to us. Based upon currently available information and the opinions of our environmental compliance managers and general counsel, although there can be no assurance, we believe that any liability we may have at any site will not have a material adverse effect on our results of operations, financial condition or cash flows.
On February 9, 1999, we received a letter from the Michigan Department of Environmental Quality, which we refer to as MDEQ, in which MDEQ alleges that we are in violation of the Michigan Natural Resources and Environmental Protection Act, as well as the facility's wastewater discharge permit at one of our Michigan facilities. The letter alleges that we exceeded several numerical limitations for chemical parameters outlined in the wastewater permit and violated other wastewater discharge criteria. MDEQ further
6 alleges that we are liable for contamination contained on the facility property as well as for contributing contamination to the Kalamazoo River site. The letter requests that we commit, in the form of a binding agreement, to undertake the necessary and appropriate response activities and response actions to address contamination in both areas. We have agreed to enter into an administrative consent order pursuant to which improvements will be made to the facility's wastewater treatment system and we will pay a $75,000 fine for the alleged violations. We have also agreed to pay an additional $30,000 for past and future oversight costs incurred by the State of Michigan. Once the final order has been executed, we expect to pay this additional amount in three equal payments over the next three years. The cost of making upgrades to the process waste system and wastewater treatment systems is estimated to be approximately $1,000,000. Nothing contained in the order will constitute an admission of liability or any factual finding, allegation or legal conclusion on our part. The order is expected to be completed during the first quarter of fiscal 2001.
EMPLOYEES
At September 30, 2000, we had 8,669 employees. Of these employees, 6,745 were hourly and 1,924 were salaried. Approximately 3,105 of our hourly employees are covered by union collective bargaining agreements, which generally have three-year terms. We have not experienced any work stoppages in the past 10 years, and management believes that our relations with our employees are good.
ITEM 2. PROPERTIES
The following table shows information about our paperboard mills:
FISCAL 2000 PRODUCTION CAPACITY LOCATION OF MILL (IN TONS) PAPERBOARD PRODUCED ------St. Paul, MN...... 185,000 Recycled corrugating medium Battle Creek, MI...... 134,000 Clay-coated recycled paperboard Aurora, IL...... 32,000 Specialty recycled paperboard Dallas, TX...... 169,000 Clay-coated and specialty recycled paperboard Lynchburg, VA...... 116,000* Specialty recycled paperboard St. Paul, MN...... 167,000 Clay-coated recycled paperboard Chattanooga, TN...... 130,000 Specialty recycled paperboard Otsego, MI...... 87,000 Specialty recycled paperboard Sheldon Springs, VT (Missisquoi 98,000 Clay-coated recycled paperboard Mill)...... Eaton, IN...... 59,000 Specialty recycled paperboard Cincinnati, OH...... 51,000 Specialty recycled paperboard Stroudsburg, PA...... 52,000 Clay-coated recycled paperboard
* Reflects a lower production capacity than fiscal 1999 because of the temporary shutdown of one of our two paperboard machines at our Lynchburg, Virginia paperboard mill. This paperboard machine is being converted to manufacture gypsum wallboard facing paper and is owned by Seven Hills Paperboard, LLC, an entity in which we own 49% of the equity.
In addition to our paperboard mills set forth above, we also operate 66 converting operations and one distribution facility that are located in 22 states (mainly in the Southwestern, Southeastern, Midwestern and Northeastern U.S.), Canada, Mexico and Chile. Of our facilities, we own 68 and lease 11. Our principal executive offices, which we own, are located in Norcross, Georgia. We believe that our existing production capacity is adequate to service existing demand for our products. We consider our plants and equipment to be in good condition.
7 ITEM 3. LEGAL PROCEEDINGS
We are a party to litigation incidental to our business from time to time. We are not currently a party to any litigation that management believes, if determined adversely to us, would have a material adverse effect on our results of operations, financial condition or cash flows. For additional information regarding litigation to which we are a party, which is incorporated by reference into this item, see "Item 1 -- Business -- Environmental Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of our company are as follows:
NAME AGE POSITION HELD ------James A. Rubright...... 54 Chairman of the Board and Chief Executive Officer Edward E. Bowns...... 57 Executive Vice President and General Manager of the Specialty Packaging and Display Group* David E. Dreibelbis...... 48 Executive Vice President and General Manager of the Paperboard Group* Nicholas G. George...... 50 Executive Vice President and General Manager of the Folding Carton Group Steven C. Voorhees...... 46 Executive Vice President and Chief Financial Officer Russell M. Currey...... 39 Senior Vice President of Marketing and Planning Vincent J. D'Amelio...... 49 Executive Vice President and General Manager of the Plastic Packaging Division Terry W. Durham...... 45 Executive Vice President and General Manager of the Laminated Paperboard Products Division James L. Einstein...... 55 Executive Vice President and General Manager of the Alliance Division Paul J. England...... 45 Executive Vice President and General Manager of the Specialty Paperboard Division Stephen P. Flanagan...... 46 Executive Vice President and General Manager of the Recycled Fiber Division James K. Hansen...... 62 Executive Vice President and General Manager of the Coated Paperboard Division John H. Morrison...... 57 Executive Vice President and General Manager of the Corrugated Packaging Division Richard E. Steed...... 49 President and Chief Executive Officer of RTS
* The paperboard group consists of the recycled fiber, specialty paperboard, coated paperboard and laminated paperboard products divisions and the specialty packaging and display group consists of the plastic packaging, corrugated packaging and Alliance divisions and RTS.
James A. Rubright has served as chairman of the board since January 2000 and chief executive officer since October 1999. Mr. Rubright served as vice-chairman of the board from October 1999 until January 2000. Prior to joining our company, Mr. Rubright served as executive vice president of Sonat, Inc. with responsibility for Sonat's interstate natural gas pipeline group since May 1997 and energy services businesses since May 1998. Mr. Rubright served as senior vice president, general counsel and chief accounting officer of Sonat, Inc. from May 1995 to May 1997.
8 Edward E. Bowns has served as executive vice president and general manager of our specialty packaging and display group since November 2000. From November 1990 to October 2000, Mr. Bowns was executive vice president and general manager of our industrial products group. From February 1986 until November 1990, Mr. Bowns served as executive vice president and general manager of our partition division. Mr. Bowns joined our company in October 1980 and has served in various other capacities.
David E. Dreibelbis has served as executive vice president and general manager of our paperboard group since November 2000. From September 1992 to October 2000, Mr. Dreibelbis was the executive vice president and general manager of our mill group. From July 1985 until September 1992, Mr. Dreibelbis was executive vice president and general manager of our recycled division. Mr. Dreibelbis joined our company in April 1979.
Nicholas G. George has served as executive vice president and general manager of our folding carton group since June 1991. Mr. George was vice president and general sales manager of our folding carton group from January 1991 until June 1991. Mr. George was vice president of folding sales, western area, from July 1986 until January 1991. Mr. George joined our company in May 1980.
Steven C. Voorhees has served as executive vice president and chief financial officer since September 2000. From November 1999 to August 2000, Mr. Voorhees served as managing partner of Kinetic Partners LLC, a power plant development and energy consulting firm. From July 1980 to October 2000, Mr. Voorhees served as an executive of Sonat, Inc., an energy company. From 1995 to 2000, Mr. Voorhees served in a variety of executive positions including executive vice president of Sonat Marketing, a natural gas marketing company, executive vice president of Sonat Power Marketing, a natural gas marketing company and as executive vice president of Sonat Power, a power plant development company. During this time period Mr. Voorhees also served on the board of directors of Citrus Corp., a joint venture of Sonat, Inc. and Enron Corp. holding their respective interest in Florida Gas Transmission Company.
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 our recycled fiber division from September 1992 until August 1994. From February 1990 until September 1992, Mr. Currey served as manager of strategic development for our paperboard group. From July 1986 until February 1990, he was general manager of one of our recycled fiber plants. Mr. Currey joined our company in July 1983. Mr. Currey is the son of Bradley Currey, Jr. and is the nephew of Robert B. Currey, both of whom are directors of our company.
Vincent J. D'Amelio has served as executive vice president and general manager of our plastic packaging division since July 1998. From 1994 until July 1998, he was vice president of manufacturing for our plastic packaging division. Mr. D'Amelio joined our company in 1994.
Terry W. Durham has served as executive vice president and general manager of our laminated paperboard products division since August 2000. From September 1997 through July 2000, Mr. Durham served as senior vice president and chief operating officer of RTS. From April 1992 through August 1997, Mr. Durham was division general manager of the fiber partition division of Sonoco Products Company.
James L. Einstein has served as executive vice president and general manager of our Alliance division since November 2000. From January 1995 until October 2000, Mr. Einstein served as vice president and regional manager of our display operations. Prior to joining our company, Mr. Einstein served as president and chief executive officer of Alliance Display and Packaging Company from 1991 until 1995.
Paul J. England has served as executive vice president and general manager of our specialty paperboard division since September 1997. Mr. England served as executive vice president and general manager of our recycled fiber division from September 1994 until September 1997. From September 1989 to September 1994, Mr. England served in various capacities, including general manager of one of our paperboard mills. Mr. England joined our company in September 1989.
Stephen P. Flanagan has served as executive vice president and general manager of our recycled fiber division since July 1998. From 1983 until 1995, he was general manager of one of our recycled fiber plants.
9 From 1995 until July 1998, Mr. Flanagan served as regional manager, southwest region, for our recycled fiber division. Mr. Flanagan joined our company in 1983.
James K. Hansen has served as executive vice president and general manager of our coated paperboard division since September 1997. Mr. Hansen served as executive vice president and general manager of our mill division from May 1990 until September 1997. From 1984 until May 1990, he was general manager of one of our paperboard mills. Mr. Hansen joined our company in April 1979.
John H. Morrison has served as executive vice president and general manager of our corrugated packaging division since November 2000. From March 1986 to October 2000, Mr. Morrison was executive vice president and general manager of our corrugated packaging and display division. 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.
Richard E. Steed has served as the president and chief executive officer of RTS since September 1997. From December 1991 until September 1997, Mr. Steed served as executive vice president and general manager of our partition division. From December 1986 until December 1991, Mr. Steed served as executive vice president and general manager of our plastic packaging division. Mr. Steed joined our company in December 1975.
All our executive officers are elected annually by and serve at the discretion of either the board of directors or the chairman of the board. Mr. Steed is elected annually and serves at the discretion of the managing board of RTS.
10 PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The market price information under the heading "Shareholder Information -- Price Range of Class A Common Stock" on page 53, the shareholder information under the heading "Shareholder Information -- Common Stock" on page 53 and the dividend information under the heading "Five-Year Selected Financial and Operating Highlights" on page 22 of the Annual Report to Shareholders for the year ended September 30, 2000 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, 1996 through 2000 on page 22 of the Annual Report to Shareholders for the year ended September 30, 2000 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information under the heading "Management Discussion and Analysis of Results of Operations and Financial Condition" on pages 23 through 33 of the Annual Report to Shareholders for the year ended September 30, 2000 is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the heading "Market Risk Sensitive Instruments and Positions" on pages 29 through 30 of the Annual Report to Shareholders for the year ended September 30, 2000 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of our company and our subsidiaries included in the Annual Report to Shareholders for the year ended September 30, 2000 are incorporated herein by reference:
Consolidated Statements of Operations for the years ended September 30, 2000, 1999 and 1998.
Consolidated Balance Sheets as of September 30, 2000 and 1999.
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
The information in Note 12, "Financial Results by Quarter (Unaudited)" for the years ended September 30, 2000, 1999 and 1998 on page 49 of the Annual Report to Shareholders for the year ended September 30, 2000 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
11 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 2004," "Nominee for Election -- Term Expiring 2002," "Incumbent Directors -- Term Expiring 2003," and "Incumbent Directors -- Term Expiring 2002" in the Proxy Statement for the Annual Meeting of Shareholders to be held January 26, 2001 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 26, 2001 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section under the heading "Election of Directors" entitled "Compensation of Directors" and the sections under the heading "Executive Compensation" entitled "Summary Compensation Table," "Option Grants Table," "Aggregated Options Table," "Pension Plan Table" and "Severance Agreements" in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 26, 2001 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 26, 2001 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Certain Transactions" in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 26, 2001 is incorporated herein by reference.
12 PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS.
The following Consolidated Financial Statements of our company and our consolidated subsidiaries and the Report of the Independent Auditors, included in our Annual Report to Shareholders for the year ended September 30, 2000 are incorporated by reference in Part II, Item 8:
Consolidated Statements of Operations for the years ended September 30, 2000, 1999 and 1998.
Consolidated Balance Sheets as of September 30, 2000 and 1999.
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
No Current Reports on Form 8 -K have been filed in the last quarter of the fiscal year ended September 30, 2000
2. FINANCIAL STATEMENT SCHEDULE OF ROCK-TENN COMPANY.
The following financial statement schedule is included in Part IV of this report:
Schedule II -- Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or not required.
3. EXHIBITS.
EXHIBIT NUMBER ------2.1 -- 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 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. 3.3 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No. 33-73312). 4.1 -- Credit Agreement, dated as of June 30, 2000 among Rock-Tenn Company, The Lenders listed therein, SunTrust Bank, as Agent, Bank of America, N.A., as Syndication Agent and Wachovia Bank, N.A., as Documentation Agent (incorporated by referenced to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 4.2 -- Agreement to Provide Other Debt Instruments. 10.1 -- 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). 10.2 -- 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). 10.3 -- 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).
13 EXHIBIT NUMBER ------10.4 -- Rock-Tenn Company Key Employee Incentive Bonus Plan as amended on October 27, 1994. 10.5 -- Rock-Tenn Company Supplemental Executive Retirement Plan Effective as of October 1, 1994. 10.6 -- 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). 10.7 -- 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). 10.8 -- 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). 10.9 -- Retention Agreement, effective October 1, 1999, by and between Jay Shuster and Rock-Tenn Company (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999). 10.10 -- Severance Agreement, dated August 24, 2000, by and between David C. Nicholson and Rock Tenn Company. 12 -- Statement re: Computation of Ratio of Earnings to Fixed Charges. 13 -- Annual Report to Shareholders submitted herewith but not "filed," except for those portions expressly incorporated by reference herein. 21 -- Subsidiaries of the Registrant. 23 -- Report and Consent of Ernst & Young LLP. 27 -- Financial Data Schedule.(for SEC use only) 99.1 -- Audited Financial Statements for the Rock-Tenn Company 1993 Employee Stock Purchase Plan for the years ended September 30, 2000, 1999 and 1998. 99.2 -- Cautionary Statement relative to Forward-Looking Statements.
(B) REPORTS ON FORM 8-K
Not applicable.
(C) SEE ITEM 14(A)(3) AND SEPARATE EXHIBIT INDEX ATTACHED HERETO.
(D) NOT APPLICABLE.
14 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROCK-TENN COMPANY
Dated: December 20, 2000 By: /s/ JAMES A. RUBRIGHT ------James A. Rubright Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE ------/s/ JAMES A. RUBRIGHT Director, Chairman of the Board December 20, 2000 ------and Chief Executive Officer James A. Rubright (Principal Executive Officer)
/s/ STEVEN C. VOORHEES Executive Vice President and Chief December 20, 2000 ------Financial Officer (Principal Steven C. Voorhees Financial and Accounting Officer)
/s/ STEPHEN G. ANDERSON Director December 20, 2000 ------Stephen G. Anderson
/s/ J. HYATT BROWN Director December 20, 2000 ------J. Hyatt Brown
/s/ ROBERT B. CURREY Director December 20, 2000 ------Robert B. Currey
/s/ A.D. FRAZIER, JR. Director December 20, 2000 ------A.D. Frazier, Jr.
/s/ LAWRENCE L. GELLERSTEDT, III Director December 20, 2000 ------Lawrence L. Gellerstedt, III
/s/ JOHN D. HOPKINS Director December 20, 2000 ------John D. Hopkins
/s/ LOU BROWN JEWELL Director December 20, 2000 ------Lou Brown Jewell
/s/ JAMES W. JOHNSON Director December 20, 2000 ------James W. Johnson
/s/ CHARLES R. SEXTON Director December 20, 2000 ------Charles R. Sexton
15 SIGNATURE TITLE DATE ------/s/ JOHN W. SPIEGEL Director December 20, 2000 ------John W. Spiegel
/s/ BRADLEY CURREY, JR. Director December 20, 2000 ------Bradley Currey, Jr.
16 INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF EXHIBITS PAGE NO. ------2.1 -- 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 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 3.3 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No. 33-73312) 4.1 -- Credit Agreement, dated as of June 30, 2000 among Rock-Tenn Company, The Lender listed therein, SunTrust Bank, as Agent, Bank of America, N.A., as Syndication Agent and Wachovia Bank, N.A., as Documentation Agent (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 4.2 -- Agreement to Provide Other Debt Instruments 10.1 -- 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) 10.2 -- 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) 10.3 -- 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) 10.4 -- Rock-Tenn Company Key Employee Incentive Bonus Plan as amended on October 27, 1994. 10.5 -- Rock-Tenn Company Supplemental Executive Retirement Plan Effective as of October 1, 1994. 10.6 -- 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) 10.7 -- 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) 10.8 -- 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) 10.9 -- Retention Agreement, effective October 1, 1999, by and between Jay Shuster and Rock-Tenn Company (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999)
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF EXHIBITS PAGE NO. ------10.10 -- Severance Agreement, dated August 24, 2000, by and between David C. Nicholson and Rock-Tenn Company. 12 -- Statements re: Computation of Ratio of Earnings to Fixed Charges 13 -- Annual Report to Shareholders submitted herewith but not "filed," except for those portions expressly incorporated by reference herein 21 -- Subsidiaries of the Registrant 23 -- Report and Consent of Ernst & Young LLP 27 -- Financial Data Schedule, (for SEC use only) 99.1 -- Financial Statements for the Rock-Tenn Company 1993 Employee Stock Purchase Plan for the years ended September 30, 2000, 1999, 1998 99.2 -- Cautionary Statement relative to Forward-Looking Statements
SCHEDULE II
ROCK-TENN COMPANY
SEPTEMBER 30, 2000 (IN THOUSANDS)
CHARGED TO BALANCE AT COSTS BALANCE AT BEGINNING AND END OF DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD ------Year ended September 30, 2000: Allowance for Doubtful Accounts, Returns...... $3,610 $14,338 -- $14,216 $3,732 Reserve for Facility Closures and Consolidation...... 2,714 14,785(1) -- 13,719 3,780 Year ended September 30, 1999 Allowance for Doubtful Accounts, Returns...... 3,817 11,417 -- 11,624 3,610 Reserve for Facility Closures and Consolidation...... 3,884 3,050(1) -- 4,220 2,714 Year ended September 30, 1998: Allowance for Doubtful Accounts, Returns...... 3,632 10,088 -- 9,903 3,817 Reserve for Facility Closures and Consolidation...... 5,615 1,903(1) -- 3,634 3,884
(1) This reserve was recorded in connection with plant closings and employee terminations, net of reversals of $649, $300 and $247 in fiscal 2000, 1999 and 1998, respectively. EXHIBIT 3.2
ARTICLES OF AMENDMENT TO RESTATED AND AMENDED ARTICLES OF INCORPORATION
OF
ROCK-TENN COMPANY
I.
The name of the corporation is Rock-Tenn Company (the "Corporation").
II. The amendments to the Restated and Amended Articles of Incorporation of the Corporation are as follows:
(a) Article II, paragraph (b)(4)(ii) of the Restated and Amended Articles of Incorporation of the Corporation is hereby amended to read in its entirety as follows:
"(ii) (A) any trust existing solely for the benefit of such holder of Class B Common provided such holder was a beneficial owner of Voting Stock immediately prior to the Effective Time, (B) any trust existing solely for the benefit of any person who would be a Permitted Transferee of such holder under clause (i) with respect to the shares to be Transferred and (C) to the extent any such trust referred to in clause (ii)(A) or (ii) (B) is terminated or the property thereof is otherwise Transferred for any reason, any settlor or beneficiary of such trust referred to in clause (ii) (A) or (ii)(B) (for purposes of this clause (ii), a trust shall be deemed to exist solely for the benefit of such holder of Class B Common in clause (ii)(A) and/or such person or persons in clause (i) for such period of time as no other person has a current right to receive the income from or the principal of such trust, and, as of the time any other person (other than a holder of Class B Common specified in clause (ii)(A) and/or a person or persons specified in clause (i)) has such right, each share of Class B Common held by such trust shall automatically convert into one share of Class A Common in accordance with paragraph (b)(6));"
(b) Article II, paragraph (b)(4)(iii) of the Restated and Amended Articles of Incorporation of the Corporation is hereby amended to read in its entirety as follows:
"(iii) upon the death of such holder of Class B Common that was a beneficial owner of Voting Stock immediately prior to the Effective Time, such holder's estate or any executor, administrator, conservator or other legal representative of such holder or upon any Transfer by such estate, executor, administrator, conservator or other legal representative of such holder, such holder's Permitted Transferees specified in clause (i);"
(c) Article II, paragraph (b)(4)(iv) of the Restated and Amended Articles of Incorporation of the Corporation is hereby amended by deleting the word "and" at the end of such paragraph;
(d) Article II, paragraph (b)(4)(v) of the Restated and Amended Articles of Incorporation of the Corporation is hereby amended by deleting the period at the end of such paragraph and inserting"; and" in its place; and
(e) Article II, paragraph (b)(4) of the Restated and Amended Articles of Incorporation of the Corporation is hereby amended to include a new paragraph (vi), which shall read in its entirety as follows:
"(vi) to the extent that such holder of Class B Common was a beneficial owner of Voting Stock immediately prior to the Effective Time and was organized as a trust as of such time, any beneficiary of such trust that was a beneficiary of such trust at the Effective Time."
III.
The amendments set forth above were adopted and approved by the Board of Directors of the Corporation on October 27, 1994.
The amendments set forth above were duly approved by the shareholders of the Corporation in accordance with Section 14-2-1003 of the Georgia Business Corporation Code on January 26, 1995.
IN WITNESS WHEREOF, these Articles of Amendment to Restated and Amended Articles of Incorporation have been signed as of this 26th day of January, 1995.
ROCK-TENN COMPANY
By:
Bradley Currey, Jr.
Chairman, President and Chief Executive Officer EXHIBIT 4.2
We are excluded from including in this filing instruments relating to (i) the $3,850,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1998, 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; (xi) the $2,500,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1999, issued by the Development Authority of Richmond County; (xii) the $5,350,000 Industrial Development Revenue Bonds (Rock-Tenn Converting Company Project), Series 1999, issued by the Union County Industrial Facilities and Pollution Control Financing Authority; (xiii) the $100,000,000 Rock-Tenn Company 7.25% Medium- Term Notes due August 1, 2005 issued pursuant to the Trust Indenture dated July 31, 1995; (xiv) the unsecured promissory note dated November 24, 1986 between Rock -Tenn Company and Richard F. Giersch and Marcus F. Snoddy, trustees for the benefit of Virginia M. Snoddy; (xv) the unsecured promissory note dated December 8, 1986 between Rock-Tenn Company and Kathryn C. Morris, Robert B. Wright and Henry L. Conway, trustees for the benefit of Michael N. Morris; (xvi) the unsecured promissory note dated December 8, 1986 between Rock- Tenn Company and Ronald J. Fudge, trustee for the benefit of Arthur N. Morris, Jr.; (xvii) the unsecured promissory note dated December 8, 1986 between Rock-Tenn Company and Kathryn C. Morris, Robert B. Wright and Henry L. Conway, Jr., trustees for the benefit of Kathryn Ann Uguet de Resayre; (xviii) the Equipment Lease Agreement dated December 10, 1998 between Rock-Tenn Converting Company and PACCAR Financial Corp.; (xix) the Equipment Lease Agreement dated December 10, 1998 between Rock-Tenn Company, Mill Division, Inc. and PACCAR Financial Corp.; (xx) the promissory note dated December 1, 1995 between Waldorf Corporation and Martin L. Benskin. We agree to furnish a copy of the agreements relating to these instruments to the Securities and Exchange Commission upon request; and (xxi) the Master Lease Equipment Lease Agreement dated March 21, 2000 between Rock-Tenn Company of Texas, Inc. and
Citicorp Del -Lease, Inc. d/b/a Citicorp Dealer Finance. EXHIBIT 10.4
ROCK-TENN COMPANY
KEY EMPLOYEE INCENTIVE BONUS PLAN
(As Amended by the Board of Directors on 10/27/94)
1. Purposes. The purposes of this Key Employee Incentive Bonus Plan are to provide an incentive for selected key employees of Rock-Tenn Company (the "Company") and any Subsidiary of the Company, who are in a position to make a significant contribution to the successful operations of the Company or any Subsidiary of the Company; to attract and retain in the employ of the Company persons of outstanding ability; and to further the identity of interests of such employees with those of the shareholders of the Company generally.
2. Definitions. For purposes of the Plan, the following terms shall have the following meanings: a. "Administrative Committee" means a committee appointed by the Board of Directors consisting of designated executive officers to administer the Plan as set forth in Section 3. b. "Base Salary" means the basic annual rate of compensation paid by the Company or any Subsidiary to a Participant as of the 30th day of September of a Plan Year, determined without regard to this Plan or any other incentive compensation, profit sharing or pension Plan, directors, fees, medical or health insurance or reimbursement Plans or other similar forms of compensation. c. "Bonus Level" means a percentage of Base Salary associated with a Targeted Income Amount. The Bonus Level for any Targeted Income Amount for any Plan Year shall be as determined from time to time by the Board of Directors or the Compensation Committee. d. "Company" means Rock-Tenn Company, a Georgia corporation. e. "Compensation Committee" means the Compensation Committee of the Board of Directors as constituted from time to time. f. "Eligible Employee" means an employee of the Company or any Subsidiary who is in a position to make a significant contribution to the operations of the Company of any Subsidiary. g. "Participant" means an Eligible Employee who has been selected by the Board of Directors of the Company or the Administrative Committee to receive a bonus award under the Plan. h. "Plan" means this Key Employee Incentive Bonus Plan. i. "Plan Year" means a fiscal year of the Company. j. "Management Committee" means those individuals designated from time to time by the Board of Directors of the Company. k. "Results of Operations Report" means the final report prepared by the Chief Financial Officer of the Company with respect to the results of operations of the Company and its Subsidiaries for each Plan Year. l. "Subsidiary" means with respect to any Plan Year any corporation the income from which is required to be included in the consolidated federal income tax return of the Company for such Plan Year. m. "Targeted Income Amounts" relating to designated Bonus Levels shall be as determined from time to time by the Board of Directors or the Compensation Committee. Bonus awards for any Plan Year will be computed based on the amount of consolidated pre-tax income of the Company and its subsidiaries as set forth in the Results of Operations Report for such Plan Year, which will be measured against the Targeted Income Amounts to determine the applicable Bonus Level.
3. Administration. The Plan shall be administered by the Board of Directors of the Company or by a committee consisting of certain executive officers appointed by the Board of Directors (the "Administrative Committee"). The Board of Directors of the Company shall have the authority to administer all matters pertaining to the operation of the Plan, and the Administrative Committee shall have all such powers of the Board with respect to the Plan except those provided in Section 6 hereunder or otherwise reserved herein to the Board of Directors or the Compensation Committee.
4. Participants. Not later than 30 days after the end of each Plan Year, the Board of Directors of the Company or the Administrative Committee shall designate the Eligible Employees who shall be Participants for such Plan Year. Each Participant for such Plan Year shall be entitled to receive a bonus award determined in accordance with Section 5 hereof only if such Participant was an Eligible Employee for each day of such Plan Year; provided, however, that the Board of Directors of the Company or the Administrative Committee shall have the authority to include Eligible Employees as Participants whose employment begins during a Plan Year or ends during a Plan Year or whose employment during such year is interrupted so long as the Participant is an employee of the Company or a Subsidiary at the end of the Plan Year, but in such case the bonus award to which such Participant shall be entitled in accordance with Section 5 hereof shall be prorated on the basis of the number of days during such year that the Participant was an Eligible Employee.
5. Bonus Awards. a. Subject to Section 6, during each Plan Year, each Participant shall be entitled to receive a bonus award computed and based on the applicable Targeted Income Amount and related Bonus Levels as approved by the Board of Directors or the Compensation Committee for such Plan Year.
- 2 - b. Bonus awards for any Plan Year shall be computed by the Chief Financial Officer of the Company as soon as practicable following the end of the Plan Year and thereafter will be reviewed by the Board of Directors or the Compensation Committee. Bonus awards shall be paid to Participants not later than 60 days after the determination of the bonus awards for such year; provided, however, that the Board of Directors or the Administrative Committee in its discretion shall have the authority to delay payment thereof for an additional 90 days.
6. Amendment and Termination. Although it is the present intention of the Company to grant bonus awards hereunder annually, the Board of Directors reserves the right to amend the Plan from time to time or to repeal the Plan entirely, or to suspend the granting of awards temporarily or permanently; provided, however, that such right to amend or repeal the Plan or suspend or discontinue granting awards under the Plan may be delegated by the Board to the Compensation Committee.
- 3 - AMENDMENT NUMBER ONE TO ROCK-TENN COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Pursuant to the Powers reserved in ss.8 of the Rock-Tenn Company Supplemental Executive Retirement Plan which became effective as of October 1, 1994, Rock-Tenn Company hereby amends ss.2.5 and 2.7 of The Plan to read as follows:
2.5 Rock-Tenn. The term "Rock-Tenn" shall mean Rock-Tenn Company, any successor to Rock-Tenn Company and any entity directly or indirectly controlled by Rock-Tenn Company or its successors.
2.7 Pension Plan. The term "Pension Plan" shall mean The Rock-Tenn Company Pension Plan, as amended from time to time and, if applicable, the RTS Packaging, LLC Pension Plan, as amended from time to time.
This Amendment Number One shall be effective as of this 23rd day of September, 1998.
ROCK-TENN COMPANY
By:
Title:
Date: EXHIBIT 10.5
ROCK-TENN COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EFFECTIVE AS OF OCTOBER 1, 1994 TABLE OF CONTENTS
SECTION PAGE ------1 Purpose...... 1
2 Definitions...... 1
2.1. Code...... 1 2.2. ERISA...... 1 2.3. 1993 Compensation Cap...... 1 2.4. Participant...... 1 2.5. Rock-Tenn...... 1 2.6. SERP...... 1 2.7. Pension Plan...... 1
3 SERP Benefit...... 1
3.1. Amount...... 2 3.2. Payment...... 2
4 Source of Benefit Payments...... 2
5 Not A Contract of Employment...... 2
6 No Alienation or Assignment...... 3
7 ERISA...... 3
8 Administration, Amendment And Termination...... 3
9 Construction...... 3
ROCK-TENN COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EFFECTIVE AS OF OCTOBER 1, 1994
SS. 1
PURPOSE
Rock-Tenn has adopted this SERP effective as of October 1, 1994 to supplement a Participant's benefits under the Pension Plan in light of the reduction in such benefits which will result from certain changes in the Code.
SS. 2
DEFINITIONS
2.1. Code. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.
2.2. ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended.
2.3. 1993 Compensation Cap. The term "1993 Compensation Cap" means $235,840 as adjusted as of October 1, 1994 and each October 1 thereafter for inflation in the same manner as adjustments made in accordance with Code ss. 415(d) for a plan which has a plan year beginning on such date.
2.4. Participant. The term "Participant" shall mean each executive of Rock-Tenn who the Compensation Committee of Rock-Tenn's Board of Directors designates as such.
2.5. Rock-Tenn. The term "Rock-Tenn" shall mean Rock-Tenn Company and any successor to Rock-Tenn Company.
2.6. SERP. The term "SERP" shall mean this Rock-Tenn Company Supplemental Executive Retirement Plan, as amended from time to time.
2.7. Pension Plan. The term "Pension Plan" shall mean the Rock -Tenn Company Pension Plan, as amended from time to time. SS. 3
SERP BENEFIT
3.1. Amount. A benefit shall be payable under this SERP to, or on behalf of, each Participant which shall equal the excess, if any, of (a) over (b) where
(a) equals the benefit which would have been payable to, or on behalf of, the Participant under the Pension Plan if the 1993 Compensation Cap had remained in effect under Code ss. 401(a)(17) (as in effect on December 31, 1993) and if the limitation on benefits payable from a defined benefit plan under Code ss. 415(b) was inapplicable; and
(b) equals the benefit actually payable to, or on behalf of, the Participant under the Pension Plan.
The benefit described in ss. 3.1(a) shall be determined and paid in the same form and at the same time as the benefit described in ss. 3.1(b).
3.2. Payment. The benefit payable to, or on behalf of, a Participant in this ss. 3 shall be paid as of the same date, in the same benefit payment form and to the same person as the Participant's benefit under the Pension Plan.
SS. 4
SOURCE CF BENEFIT PAYMENTS
All benefits payable under this SERP shall be paid by Rock-Tenn from its general assets. No person shall have any right or interest or claim whatsoever to the payment of a benefit under this SERP from any person whomsoever other than Rock-Tenn, and no Participant or beneficiary shall have any right or interest whatsoever to the payment of a benefit under this SERP which is superior in any manner to the right of any other general and unsecured creditor of Rock-Tenn.
SS. 5
NOT A CONTRACT OF EMPLOYMENT
Participation in this SERP shall not grant to any Participant the right to remain an employee of Rock-Tenn for any specific term of employment or in any specific capacity or at any specific rate of compensation.
2 SS. 6
NO ALIENATION OR ASSIGNMENT
A Participant or a beneficiary under this SERP shall have no right or power to alienate, commute, anticipate or otherwise assign at law or equity all or any portion of any benefit otherwise payable under this SERP, and Rock-Tenn shall have the right to suspend temporarily or terminate permanently the payment of benefits to, or on behalf of, any Participant or beneficiary who attempts to do so.
SS. 7
ERISA
Rock-Tenn intends that this SERP come within the various exceptions and exemptions to ERISA for an unfunded deferred compensation plan maintained primarily for a select group of management or highly compensated employees within the meaning of ERISA ss. 201(2), ss. 301(a) (3) and ss. 401(a)(1), and any ambiguities in this SERP shall be construed to effect that intent.
SS. 8
ADMINISTRATION, AMENDMENT AND TERMINATION
The Compensation Committee of Rock-Tenn's Board of Directors shall have all powers necessary to interpret and to administer this SERP in its absolute discretion and, further, shall have the right to amend this SERP from time to time in any respect whatsoever and to terminate this SERP at any time; provided, however, that any such amendment or termination shall not be applied retroactively to deprive a Participant of benefits accrued under this Plan to the date of such amendment or termination.
SS. 9
CONSTRUCTION
This SERP shall be construed in accordance with the laws of the State of Georgia, and the masculine shall include the feminine and the singular the plural whenever appropriate.
ROCK-TENN COMPANY
By:
Title:
3 EXHIBIT 10.10 (LOGO)
ROCK-TENN COMPANY
August 24, 2000
PERSONAL AND CONFIDENTIAL
Mr. David C. Nicholson 568 Haralson Drive Lilburn, Georgia 30047
Re: Severance Agreement
Dear Dave:
On behalf of Rock-Tenn Company ("Rock-Tenn"), this will set forth our agreement regarding the termination of your employment with Rock- Tenn. For purposes of this Agreement, "Rock-Tenn" shall be deemed to include both Rock-Tenn and all of its direct and indirect subsidiaries and divisions. The parties agree as follows:
1. You and Rock-Tenn agree that your employment with Rock-Tenn will terminate effective at the close of business on August 18, 2000.
2. Your employment will continue through August 18, 2000 and you will continue to receive your current salary through such date plus the amount of salary you would have been paid from that date through September 30, 2000, less all applicable federal, state and local taxes and withholdings. You will receive your fiscal year 2000 Rock-Tenn Bonus Plan payment to the extent earned for fiscal 2000. From the date hereof through August 18, 2000, you will report to Mr. Jim Rubright and perform such duties as he determines. You agree that you will maintain a positive attitude and will not make disparaging remarks of any nature whatsoever regarding Rock-Tenn or its employees.
3. As severance, Rock-Tenn agrees to pay you a lump sum amount equal to your current annual salary, $248,000.00, less an amount to cover normal employee contributions for insurance coverage contemplated in Paragraph 4 below. The salary severance payment, which will be paid eight (8) days following your execution of this Agreement, will be made
P.O. Box 4098 . Norcross, GA 30091 . 770 -448 -2193 Mr. David C. Nicholson August 24, 2000
Page 2 less all applicable federal, state and local taxes and withholdings. The payments shall be in full satisfaction of all obligations of any kind or description which Rock-Tenn has, or might have, to you except for the payment of benefits due after termination of your employment under the terms of any employee benefit plan in which you participate and which is subject to the Employee Retirement Income Security Act of 1974, as amended, and the Company's other obligations under this Agreement. Any such benefits shall be payable to you pursuant to the terms of any such plan on the same basis as benefits are payable to any other participant in such plan. This release does not apply to any rights you may have pursuant to COBRA to continue medical coverage at your own expense after September 30, 2001.
4. Rock-Tenn will continue its medical, dental and life insurance plans for you and your eligible dependents through the severance period ending September 30, 2001. In the event that you accept new employment prior to September 30, 2001, your insurance coverage under this Paragraph 4 will end no later than ninety days following the commencement of such employment if such insurance is available through such employment. In the event that your insurance coverage under this Paragraph 4 is ended prior to September 30, 2001, you will be reimbursed for any unused portion of your employee contributions that were deducted pursuant to Paragraph 3 hereof.
5. As of October 1, 2001 or such earlier date as your insurance coverage under Paragraph 4 ends, you will be eligible for COBRA insurance coverage. If you elect to continue coverage under COBRA, you shall be solely responsible for the payment of premiums with respect to such coverage.
6. Rock-Tenn agrees to provide you with outplacement assistance through Drake Beam Morin for executive job search assistance and support. If you prefer and choose to use another outplacement agency, Rock-Tenn agrees to reimburse you up to an amount equal to $14,000 for outplacement assistance.
7. Except for the compensation provided for herein, any vested accrued pension benefits, vested Supplemental Executive Retirement Plan (SERP) benefits, vested 401(k) benefits and your rights under COBRA (and any similar law), you herby Mr. David C. Nicholson August 24, 2000
Page 3 waive and relinquish all benefits and compensation whatsoever, whether accrued or contingent, arising out of or in connection with your employment with Rock-Tenn.
8. In return for the payments and actions of Rock-Tenn set out in this Agreement which, as you know, are in excess of those to which you would otherwise be entitled, you agree that you will release and covenant not to sue Rock-Tenn, its successors, agents, corporate affiliates, officers, directors and other employees from any and all claims, demands, liabilities, damages, costs (including attorneys' fees) and obligations of any kind in your favor (known or unknown) which arise out of your employment with or separation of employment with Rock-Tenn. This includes, but is not limited to, claims under the Age Discrimination in Employment Act of 1967; the Americans With Disabilities Act of 1990; Title VII of the Civil Rights Act of 1964; The Rehabilitation Act of 1973; 42 U.S.C. Section 1981 and 1983; and other federal, state, or local laws including, but not limited to, claims for breach of contract or wrongful discharge under state laws. This release does not apply to claims, if any, for which releases are prohibited by applicable law or which arise after the date you sign this Agreement. Rock-Tenn and its agents expressly deny that they have any liability to you, and this Agreement should not be construed as an admission of any such liability. You are advised to consult with an attorney before signing this Agreement.
9. You acknowledge that during the term of your employment by Rock-Tenn, you may have acquired knowledge of confidential and proprietary information regarding, among other things, Rock-Tenn's present and future operations, its customers and suppliers, pricing and bidding strategies, and the methods used by Rock-Tenn and its employees. You hereby agree that you will hold in a fiduciary capacity for the benefit of Rock-Tenn, and shall not directly or indirectly use or disclose any Trade Secret, as defined hereinafter, that you may have acquired during the term of your employment by Rock-Tenn for so long as such information remains a Trade Secret. The term "Trade Secret" as used in this Agreement shall mean information including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product Mr. David C. Nicholson August 24, 2000
Page 4 plans, or a list of actual or potential customers or suppliers which: i. derives economic value, actual or potential from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and ii. is the subject of reasonable efforts by Rock-Tenn to maintain its secrecy.
In addition to the foregoing and not in limitation thereof, you agree that for a period of two (2) years after the separation of your employment by Rock-Tenn, you will hold in a fiduciary capacity for the benefit of Rock-Tenn and shall not directly or indirectly use or disclose, any Confidential or Proprietary Information, as defined hereinafter, that you may have acquired (whether or not developed or compiled by you and whether or not you were authorized to have access to such Information) during the term of, in the course of, or as a result of your employment by Rock-Tenn. The term "Confidential or Proprietary Information" of Rock-Tenn shall mean proprietary information not otherwise included in the definition of "Trade Secret" above. The term "Confidential and Proprietary Information" does not include information that has become generally available to the public by the act of one who has the right to disclose such information.
10. Except for information that needs to be conveyed to your tax and legal advisors, you and your family members have kept and will continue to keep all terms of this Agreement confidential, including the fact that this Agreement exists. In addition, you agree that neither you nor any of your family members will make any disparaging remarks, comments or allegations regarding Rock -Tenn or any of its employees. In the event that the covenants contained in Paragraphs 9 or this Paragraph 10 are violated, you agree to pay to Rock-Tenn as liquidated damages an amount equal to the severance payments made to you under Paragraph 3 hereof.
11. You agree and acknowledge that, if a violation of any covenant contained in Paragraph 9 occurs or is threatened, such violation or threatened violation will cause irreparable injury to Rock-Tenn, that the remedy at law for any such violation or threatened violation will be inadequate and that Rock -Tenn shall be entitled to Mr. David C. Nicholson August 24, 2000
Page 5 appropriate equitable relief, including, without limitation, an injunction against any breach by you of such provisions. Should it be held at any time by any court that any of the agreements set forth in Paragraphs 9 or 10 of this Agreement are invalid or unenforceable in any respect, you agree that such court may impose, upon the motion of Rock-Tenn, any lesser restrictions that it may consider appropriate to protect the interests of Rock-Tenn, and the remaining terms of this Agreement shall not be affected thereby and shall be enforced to the greatest extent permitted by law.
12. The provisions included in this Agreement constitute the entire agreement between you and Rock-Tenn, and no other agreement shall have any force or effect unless it is reduced to writing and signed by both parties.
13. You hereby acknowledge and represent that you have been offered a period of at least twenty-one (21) days to consider the terms of this Agreement, Rock-Tenn has advised you in writing to consult with an attorney prior to signing this Agreement, and you have received valuable and good consideration to which you are not otherwise entitled in exchange for your signing this Agreement.
14. This Agreement, the rights and obligations of you and Rock-Tenn, and any claims or disputes relating to this Agreement shall be governed by and construed in accordance with the laws of the State of Georgia, not including the choice-of-law rules thereof.
15. In the event that any provision, paragraph, covenant, or clause of this Agreement is held to be unenforceable or invalid for any reason by a court of competent jurisdiction or otherwise, the validity of the remaining provisions, paragraphs, covenants, or clauses of this Agreement shall not be affected and the invalid or unenforceable provision, paragraph, covenant, or clauses shall be deemed not to be a part of this Agreement.
Sincerely,
/s/ JAMES A. RUBRIGHT ------James A. Rubright Chief Executive Officer
Mr. David C. Nicholson August 24, 2000
Page 6
I knowingly and voluntarily accept the terms of this Agreement set forth above. I understand that I have the right to revoke this Agreement during the seven (7) days following the date that I have signed this Agreement (set forth below) and that this Agreement (including my rights to receive payments under this Agreement) will not go into effect or be enforceable until the seven (7) day period expires. I further understand that any amounts due to be paid to me under this Agreement will not become payable to me until the seven day period expires and this Agreement becomes effective.
Signature: /s/ DAVID C. NICHOLSON ------David C. Nicholson
Date: 8/24 , 2000
------
EXHIBIT 12
ROCK-TENN COMPANY
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
YEAR ENDED SEPTEMBER 30, ------1996 1997 1998 1999 2000 ------Fixed Charges: Interest expenses...... $10,772 $26,466 $ 34,664 $ 30,813 $34,933 Amortization of debt issuance costs...... 206 320 360 365 642 Interest capitalized during period...... -- 1,214 888 931 1,097 Portion of rent expenses representative of interest...... 2,316 2,584 3,034 3,169 3,539 ------Fixed charges...... $13,294 $30,584 $ 38,946 $ 35,278 $40,211 ======Earnings: Pretax income (loss) from continuing operations...... $82,469 $37,756 $ 74,613 $ 70,253 $(4,346) Fixed charges...... 13,294 30,584 38,946 35,278 40,211 ------Earnings...... $95,763 $68,340 $113,560 $105,531 $35,865 ======Ratio of earnings to fixed charges...... 7.20 2.23 2.92 2.99 0.89 ======
EXHIBIT 13
[ROCK-TENN COMPANY LOGO]
Rock-Tenn Company 504 Thrasher Street Norcross, GA 30071 770-448-2193 www.rocktenn.com
Rock-Tenn Company 2000 Annual Report
above and beyond COMPANY OPERATIONS
[MAP]
FOLDING PLASTIC COATED LAMINATED CORRUGATED CARTON PACKAGING PAPERBOARD PAPERBOARD PACKAGING GROUP DIVISION DIVISION PRODUCTS DIVISION DIVISION Augusta, GA Conyers, GA Battle Creek, MI Dothan, AL Baltimore, MD Franklin Park, IL Dallas, TX Aurora, IL(1) Gallatin, TN Chicago, IL(2) Delaware Water Gap, PA Columbus, IN Greenville, SC Chicopee, MA Sheldon Springs, VT Dallas, TX Norcross, GA(1) Clinton, IA RTS St. Paul, MN(1) Macon, GA Conway, AR PACKAGING, LLC Vineland, NJ Dallas, TX(2) Wright City, MO ALLIANCE DIVISION El Paso, TX Charleroi, PA Eutaw, AL Dallas, TX SPECIALTY Brookfield, CT(2) Greenville, TX Eaton, IN PAPERBOARD RECYCLED DeKalb, IL Harrison, AR Hartwell, GA DIVISION FIBER Glendale, CA(2) Kimball, TN Hillside, IL DIVISION Hershey, PA(2) Knoxville, TN Merced, CA Chattanooga, TN Hunt Valley, MD Lebanon, TN Mexico City, Mexico Cincinnati, OH Atlanta, GA Lincoln Park, NJ(2) Madison, WI Monterrey, Nuevo Eaton, IN Chattanooga, TN Martinsville, VA Marshville, NC Leon, Mexico Lynchburg, VA(1) Lynchburg, VA(1) Mason, OH(2) Milwaukee, WI Orange, CA Otsego, MI Cincinnati, OH Mundelein, IL Norcross, GA(2) Santiago, Chile Cleveland, TN Pennsauken, NJ Springfield, OH Scarborough, ME Dallas, TX Tullahoma, TN Stone Mountain, GA Tukwila, WA Des Moines, IA Winston-Salem, NC(1) St. Paul, MN Fort Worth, TX Warwick, Quebec, Huntsville, AL Canada Indianapolis, IN Waxahachie, TX Knoxville, TN Maple Grove, MN Operations Montreal, Quebec, 1 Two operations Canada 2 Sales & Design Shelbyville, TN Center St. Paul, MN
ROCK-TENN AT-A-GLANCE
Rock-Tenn is one of North America's leading manufacturers of packaging and 100% recycled paperboard. Since its founding in 1936, Rock- Tenn has focused on developing strong niche markets that bring high value to both its customers and to its employees and shareholders.
The Company operates 80 manufacturing facilities throughout the United States, Canada, Mexico and Chile, and employs approximately 8,700 people.
Headquartered in Norcross, Georgia, Rock-Tenn is listed on the New York Stock Exchange. The Company's Class A common stock trades under the symbol RKT.
Rock-Tenn team members as they appear on the cover, from left to right beginning on the back cover: JUN BANTUG Lotus Notes Administrator, MARC DUBOIS Die-making & Die-cutting Supervisor, FRANCIS BEAUDETTE Order Processing Coordinator, MARY SMITH Accounting Clerk, SHEILA FORTUIN Secretary to General Manager, ANNIE BESMARGIAN Customer Service, SUSAN BENOIT Planning & Scheduling Technician, RUSS FRITZ Extra Hand, JOSE CABRAL Extrusion Manager, DERIC C. JACKSON Extrusion Manager, JANINA OLEARCZYK Inventory Control Clerk, SCOTT FU Plant Engineer, JERRY WATTS Cabling Project Analyst, MATT HENRY Lotus Notes Systems Analyst, WENDY FORD EUC Support Analyst, TIM OLDS Customer Service, BRENDA SCHREIBER Division IS Coordinator
Rock-Tenn team members page one, from left to right: ANGEL OJEDA Machine Operator, GRETCHEN VAUGHT Marketing & Communications Representative, JON HERMES Sales Representative
PACKAGING PRODUCTS SEGMENT
[GRAPHIC] [GRAPHIC] [GRAPHIC] FOLDING CARTONS PLASTIC PACKAGING PROTECTIVE PACKAGING ------PRODUCTS AND Folding cartons, multi-pack Custom thermoformed plas- Solid fiber partitions, SERVICES wraps and promotional tic packaging and extruded sheeted and die-cut packaging; mechanical pack- plastic roll stock. specialties; agricultural aging system services. packaging; custom protective packaging. ------MARKETS Manufacturers of consumer Manufacturers of bakery Manufacturers of glass and SERVED and industrial products such items, prepared foods, plastic containers, electronic as food, candy, household processed meats and parts, injection molded products, hardware, software, poultry, hardware, products, automobile com- electronics, automotive com- medical, electronic ponents, lighting products, ponents, pharmaceuticals, and consumer products. textiles, agricultural products, personal care products, and others requiring protec- apparel, textiles, paper goods; tion during shipment. quick-serve restaurants.
------COMPETITIVE Industry-leading manufactur- Modern design and pro- Proprietary manufacturing STRENGTHS ing technology in flexographic, duction technology, rapid technology for high-speed lithographic and rotogravure design, sampling and and industry-leading turn- printing; networked structural prototyping capabilities; around capabilities; multiple and graphic design systems in-house extrusion and plants in North and South throughout North America; lamination of roll stock America; centralized customer two industry-leading product for assured quality and service for design, sampling development and package supply of raw materials. and ordering; integration testing laboratories; integra- with Rock-Tenn and Sonoco tion with Rock-Tenn's recycled paperboard mills. paperboard mills.
PAPERBOARD SEGMENT
[GRAPHIC] [GRAPHIC] [GRAPHIC] PAPERBOARD LAMINATED COMPONENTS RECYCLED FIBER ------PRODUCTS Coated and uncoated Furniture panels; drawer Paper recovery and recy- AND grades of 100% recycled bottoms; mirror backs; cover- cling services; wide array SERVICES paperboard and corru- board for books, notebooks of recovered paper grades. gating medium; specially and binders; automotive designed paperboard components; specialized for custom applications. industrial components includ- ing specialty die-cut items and paperboard drums ------MARKETS Manufacturers of folding Manufacturers of home Industrial plants, printing SERVED cartons, fiber partitions, and office furniture and facilities, office buildings and tubes and cores, retail ready-to-assemble furniture; retailers that generate recy- corrugated boxes and manufacturers of automobile clable paper as a byproduct; interior protective packaging. and truck interior panels; Rock-Tenn paperboard mills, producers of books, note- other paper and paperboard books and binders. mills in the U.S., Canada and Mexico. ------COMPETITIVE Nationwide production opera- Fast production cycles; Network of recovery facilities; STRENGTHS tions; capability to produce in-house poly extrusion and internal marketing and broker- paperboard grades for specific poly lamination, industry age group; integration with customer applications; leading die-cutting tech- Rock-Tenn paperboard mills; integration with recycled nology; innovative industrial strong reputation for reliability fiber plants for consistent products; integration with in all market conditions. supply of high-quality fiber. Rock-Tenn recycled paper- board mills.
SPECIALTY CORRUGATED PACKAGING AND DISPLAY SEGMENT
[GRAPHIC] [GRAPHIC] CORRUGATED PACKAGING P.O.P. DISPLAYS ------PRODUCTS Multi-color flexographic Complete design, manufacture, AND direct print and lithographic assembly, pack-out and distri- SERVICES laminated corrugated retail bution to retail of temporary packaging; specialized indus- and permanent P.O.P. displays; trial shipping containers; contract packing and distri- corrugated sheet stock. bution services; direct-to- consumer promotional mailers and sampling. ------MARKETS Consumer products compa- Consumer products companies SERVED nies and industrial products using high-end P.O.P. displays, manufacturers requiring retail promotions, and direct- short to medium run, high- to-consumer promotions quality shipping containers for merchandising and and retail packaging. brand marketing ------COMPETITIVE Strong structural and graphic Concept-to-Consumer(TM) STRENGTHS design staffs; full ISTA- service for single-source retail and NMFTA-certified testing merchandising solutions; facility; state-of-the-art, multiple design and contract centralized corrugator for packing facilities in geographic fast turnaround and assured proximity to most consumer quality of sheet stock; high products companies and/or level of service and rapid their customers. response times.
[PHOTO]
We're creating a culture of high performance and innovation.
IF YOU WANT TO SEE HOW WE'RE CREATING OUR CULTURE OF HIGH PERFORMANCE AND INNOVATION, THE NEXT FEW PAGES GIVE DETAILS ON FIVE OF OUR HIGH-PERFORMING TEAMS. THEY ARE JUST SOME OF THE PEOPLE AT ROCK- TENN WHO ARE SHOWING ALL OF US HOW TO GO ABOVE AND BEYOND TO ACHIEVE EXTRAORDINARY SUCCESS. above and beyond 1 letter to shareholders 12 index to financials 21
1
2000 ANNUAL REPORT Les Industries Ling, Rock-Tenn's industry-leading folding carton plant in Quebec, is one of the most demanding purchasers of coated recycled paperboard in North America. Having converted a low-volume specialty mill in Vermont into a mill that could produce coated recycled paperboard for folding cartons, Rock-Tenn wanted the mill to become a premier supplier to Ling and an industry leader. Ling's general manager took the only approach he knew would work: consistently demand the highest-quality board that could be used for Ling's blue-chip customers, such as Quaker Oats and Johnson & Johnson. "Having Ling as a customer gave the Missisquoi mill the challenge it needed to make itself over into a quality leader in coated board," says Missisquoi General Manager Chris Ham-Ellis. Now the Vermont mill provides - at a consistently high quality - virtually all of the recycled paperboard that Ling uses. Ling continues to be more successful each year, and Missisquoi is now one of the highest-performing mills in the industry.
[GRAPHIC]
We met the needs of a demanding customer: us.
2
ROCK-TENN COMPANY [PHOTO]
Chris Ham-Ellis General Manager - Missisquoi Mill
Andre Boissy Plant Manager - Ling
Raymond Beaulieu General Manager - Ling
"We are very demanding with our in-house mill at Missisquoi, because we supply folding cartons to blue-chip customers who demand the best quality," says Raymond Beaulieu, general manager of Rock-Tenn's Les Industries Ling folding carton plant in Quebec.
3
2000 ANNUAL REPORT [PHOTO]
Jim Einstein Executive Vice President and General Manager
Wayman Monroe Shipping and Receiving
Marcia Viloria Designer
"We give our customers exceptional quality and precision execution time after time. That's how we grew our business 36% in 2000, and how we'll continue growing in the years to come," says Jim Einstein, head of Rock-Tenn's Alliance Division.
4
ROCK -TENN COMPANY point-of-purchase displays >>
Launching new consumer products requires precise execution and cannot tolerate the slightest delay. A key launch component is point-of- purchase display promotions. Rock-Tenn's Alliance Division is North America's fastest-growing provider of retail displays. The key to its success is its Concept-to-Consumer(TM) service, enabling brand managers to source design, manufacturing, display packing and distribution - all at Alliance. Alliance operates nine technologically advanced design offices and six contract packing facilities throughout the nation that are adjacent to many of the major consumer products companies. Alliance's combination of excellence in design and manufacturing, coupled with its precision execution in pack-out and distribution services, is why pharmaceutical, food, tobacco and cosmetics companies turn to Alliance for their point-of-purchase displays and national consumer product rollouts. Alliance provides:
* Complete Concept-to-Consumer service to increase brand managers' speed-to-market.
* The latest technology in design and manufacturing to assure system efficiencies and the highest-quality point-of-purchase displays.
* Experienced team members to assure smooth rollouts for all products.
When you want one merchandising source with speed, creativity, high quality and reliability, get with Alliance. We work at the speed of marketing.
[GRAPHIC]
We deliver complete Concept-to-Consumer(TM) merchandising services.
5
2000 ANNUAL REPORT [PHOTO]
Butch Campbell Manager, Product and Engineering Group
Chuck Bryan National Sales Manager, Specialty Products
"We've found a way to innovate in the protective packaging industry by printing on partitions and creating a retail advertising product with colorful graphics right in the box," says Butch Campbell of RTS Packaging.
6
ROCK -TENN COMPANY [GRAPHIC]
We're making ordinary package partitions into instant advertising.
How does a winery transform a plain shipping box into colorful instant advertising on the shelf? By turning its box into a billboard. Rock- Tenn's RTS Packaging unit's Billboard(TM) partition provides instant merchandising by using high-quality, colorful graphics printed on the box's interior protective partition. All the retailer does is pull out a single printed partition strip and - voila - instant advertising! Suppliers and retailers benefits because:
- Partitions that are already needed to protect the product are used for in-store advertising, thereby eliminating extra merchandising materials.
- Billboard partitions are extremely easy to use, so retailers don't worry about complicated assembly.
- Eye-catching graphics attract customers' attention to help sell the product.
- Merchandising gets where it needs to be - on the selling floor, not in the wastebasket.
When you want unexpected value in your packaging, call Rock-Tenn. We get your message out.
7
2000 ANNUAL REPORT [GRAPHIC]
We're helping to revolutionize case-ready meat packaging.
How does a packaging and paperboard company help revolutionize the meat-processing industry? It develops a new kind of plastic packaging that resists breaking and helps keep meat fresh longer. That's what happened when the meat-processing industry learned that Wal-Mart wanted to eliminate its traditional in-store butcher operations and provide only case-ready meat in its grocery stores. To meet this rapidly developing retail need, Rock-Tenn's Plastic Packaging Division developed the innovative new DuraFresh(TM) case-ready tray. What does DuraFresh do?
- It helps enhance the shelf life of packaged meat.
- DuraFresh resists cracking and reduces waste at retail.
- The design of DuraFresh trays creates more room to display more meat in the retail case.
- DuraFresh packaging appeals to consumers because of its clean appearance and resistance to breakage.
When you need a revolutionary idea, look to Rock-Tenn. We deliver.
8
ROCK-TENN COMPANY plastic packaging
"We're literally changing the face of the meat case," says Bob Esser, product sales manager for modified atmosphere packaging (MAP) in Rock-Tenn's Plastic Packaging Division. "Our new packaging resists cracking and leaking and looks better to the consumer. It simply performs better."
[PHOTO]
Bill Geary General Manager
Eddie Mika Plant Manager
Bob Esser Product Sales Manager - MAP
9
2000 ANNUAL REPORT Read a good book lately? The paperboard used to make the covers may have been supplied by Rock-Tenn's Otsego, Michigan, mill. Three years ago, a European manufacturer introduced to the U.S. a new grade of light -weight, high-performance book coverboard. But by partnering with Rock-Tenn's Laminated Paperboard Products Division, the Specialty Paperboard Division engineered an even better grade of paperboard that meets book manufacturers' needs. Rock-Tenn completely rebuilt its Otsego paperboard machine to produce this paperboard and better serve the coverboard market. The result: many of the major book manufacturers are now using Cirrus(TM), a laminated paperboard cover product made from Otsego's new paperboard.
When you want an ordinary product to be extraordinary, partner with Rock-Tenn. We can help you get where you want to be.
[GRAPHIC]
We're making it lighter, stronger and less expensive.
10
ROCK -TENN COMPANY [PHOTO]
Tom Doss Production Manager
Garth Fuess Tour Foreman
William Henagan Customer Service Representative
Phil Farmer General Manager
"We have new tools that give us more control over the papermaking process," said Phil Farmer, general manager of the Otsego, Michigan, Specialty Paperboard Mill. "What we're now doing is using these tools to develop paperboard in partnership with our customers to give them the products they require to meet their specific market needs. We're creating value-added products and value-added relationships."
11
2000 ANNUAL REPORT Our strategy is a straightforward, threefold one: invest in ourselves for competitive advantage and future growth; execute consistently with a relentless pursuit of improvement; and create a culture of high performance and innovation to maximize our return on assets and create market leaders.
James A. Rubright Chairman and Chief Executive Officer
"Rock-Tenn is creating a culture of innovation and high performance to ensure that our company is the first choice of our customers, our employees and our shareholders."
12
ROCK -TENN COMPANY letter to shareholders
Dear Customers, Fellow Rock-Tenn Employees and Shareholders:
I joined Rock-Tenn Company a year ago because I was confident that the core of this great company that I'd worked with over the years was strong and would be a challenge and a thrill in which to work. Over the last year I've traveled broadly among our operations, from Les Industries Ling in Warwick, Quebec, through our mill and folding carton networks in the Midwest, the Atlantic States and the Southeast, to our RTS plants in Merced and Orange, California. I've met with thousands of our employees and have confirmed that within our company there are many men and women who, in our very competitive businesses, are achieving extraordinary results. These are people who are delivering truly above- and-beyond performance by any measure.
These high performers and the culture they embody are capable of creating value year in and year out because they are driven to do it. We are making them our role models. Their accomplishments are a testament to what our company can do- and what everyone at Rock-Tenn must do if we are to take advantage of our size and financial strength to generate significant and sustainable growth in our sales and profits.
Those leaders need and deserve to be part of a company that supports and builds on their achievements. That is the strategy we've set about in the last year.
ACHIEVING SUSTAINABLE HIGH PERFORMANCE
So, how do we achieve the kind of performance that wins customers, attracts superior employees and creates shareholder value? Our strategy is a straightforward, threefold one: invest in ourselves for competitive advantage and future growth; execute consistently with a relentless pursuit of improvement; and - something I've mentioned earlier - create a culture of high performance and innovation to maximize our return on assets and create market leaders.
INVEST IN OURSELVES
As we'll discuss in more detail, we've invested heavily in some core activities where we have opportunities to reassert market leadership. We've focused much greater attention and investment on our businesses that enjoy above-average growth prospects, with much more than above- average results, and we've restructured assets where we could not be successful without unacceptable levels of investment. We are coupling these strategic commitments with the recognition that performance is what matters and that superior people drive performance. In short, we're rebuilding Rock-Tenn Company in its own former image: a company of choice for customers and employees with a strong economic future for our shareholders.
13
2000 ANNUAL REPORT Let there be no misunderstanding of one basic fact: Rock-Tenn's employees and directors are committed to Rock-Tenn's financial performance. Steve Voorhees, our new CFO, and I are the two newest members of Rock-Tenn's senior management. We both made substantial investments in Rock-Tenn stock. I'm not just talking about option grants. We bought the stock. I believe that we should be, and we will benefit from being, on the line. Our other key managers all have significant investments in Rock-Tenn stock. Our Board members all own significant amounts of our stock, approximately 25 percent of it, in fact. Our aim is to make that investment grow. We will suffer greatly if it fails to do so.
[CHART] [CHART]
Let's look at some defining steps we took in fiscal 2000, after a period of reassessment:
- We committed $13.9 million to build a new gypsum facing paper machine over the foundation of an old uncoated paper machine in Lynchburg, Virginia, that will operate in a joint venture with Lafarge Corporation, a leading international gypsum wallboard manufacturer. We also committed $8.0 million to complete the rebuilding of a large uncoated machine in Otsego, Michigan, that will now be capable of making a world-class book board (please also see the description on page 10).
- We invested $10.4 million in our Alliance display business and $10.9 million in our plastics business because the rapid growth in those businesses was outstripping our planned capital investments (for more information on those developments, please see pages 5 and 8).
- We closed three unprofitable folding carton plants, two of which we acquired in the mid-90s, where the continued investment required to be competitive was not justified. As part of the restructuring, we absorbed a significant charge against this year's earnings. We invested $10.1 million in two of our largest folding carton plants to increase the returns from the plant closures and to take advantage of excellent growth opportunities, and in a third to complete the transformation of a technologically advanced niche-market plant.
14
ROCK-TENN COMPANY letter to shareholders
These capital expenditures exemplify our commitment to own market-leading assets and to invest heavily in growth opportunities.
We're also investing in Rock-Tenn in another important way: by repurchasing our own stock. In fiscal 2000, Rock-Tenn bought back 2.1 million shares of stock at an average price of $10.47 per share. Our Board acted in November, 2000, to authorize the repurchase of another 2.0 million shares, which we will do if current share prices continue.
EXECUTE CONSISTENTLY
We are fully aware of how inconsistent performance affects value. While the results posted by most of our operations in fiscal 2000 are inspiring, Rock-Tenn needs consistently high performance across the board in all lines of business. While fiscal 2000 showed areas of strong improvement and new growth, we clearly had areas where we under-performed, and we recognize hat more solid execution on our part is necessary. We posted a net loss of 46 cents per diluted share at year-end, compared to earnings per share of $1.13 in fiscal 1999. Contributing to the loss were asset write-downs and plant closing expenses that totaled $51.3 million after-tax, or $1.48 per share. Excluding the effects of one-time charges, fiscal
[GRAPHIC]
[GRAPHIC]
15
2000 ANNUAL REPORT [CHART] [CHART]
[GRAPHIC]
The Paperboard segment has taken steps to grow its business in strong niche markets by investing in technology that allows the mills to deliver high value-added products that meet the specific market needs of their customers. year 2000 results were $1.02 per share, compared to $1.25 per share a year ago. Higher fiber, energy and freight costs accounted for much of the decline. Underperformance in some of our assets, only partly attributable to the three plants we closed during the year, more than offset the good performance of most of our assets. (We discuss our financial performance in more detail below and in our Management's Discussion and Analysis.)
Among customers in all of Rock-Tenn's businesses, including its growth businesses, executing consistently is measured through outstanding products and customer service. In our more mature businesses, consistent execution also depends on driving out costs to improve margins on price-competitive commodity products, as well as using innovative thinking and technology to develop products that provide greater value.
Our plan to deliver consistent execution includes a commitment to decentralize our operations. We have flattened our management structure to create leaner, more agile operations. We increased the responsibility and authority of our managers and empowered them with the capital resources, tools and authority they need to take charge of their businesses. We are excited about the new ideas and opportunities that they are creating as a result of these changes.
16
ROCK -TENN COMPANY letter to shareholders
CULTIVATE HIGH PERFORMANCE AND INNOVATION
In addition to recognizing our growth and market leadership opportunities, we worked on our culture of high performance and innovation. Our management has recognized that the leaders must lead, and get the job done, and that the pace of change must be fast now and ever faster each day. This means that we need our highest performers in positions where they can have the greatest impact. Thus, in the last year we promoted over 20 aggressive, talented leaders as general managers of manufacturing locations and we placed the sales organizations in three of our operating divisions under new leaders.
We also acted in midyear to radically change our management compensation system to tie incentive compensation of managers to results that are within each manager's scope of authority. We're all on the line for our performance.
We will invest in ourselves to grow new businesses, reduce costs, enable product innovation and empower people in a decentralized environment. We will execute consistently in order to build customer relationships and to strengthen investor confidence. It's a simple roadmap and an unwavering commitment.
OPERATIONS FOR FISCAL 2000 - IN BRIEF REVIEW PACKAGING BUSINESS: INVEST IN NEW GROWTH AND COMPETITIVENESS
A look at the results of our three business segments reveals our strategy, our successes and some disappointments. Our Packaging business was reorganized to include our Plastic Packaging Division, RTS Packaging and our Folding Carton Group. Our Folding Carton Group is our largest line of business with approximately $600 million in sales.
Aside from the three folding carton plant closures we announced, our Folding Carton Group performed very well this year and is positioned to do even better in fiscal 2001 due to the benefits of consolidating business from the closings and the additional investments we made. We're an industry leader in a number of niche folding carton markets, and we have a number of plants that are leaders in performance.
Our Plastic Packaging Division continues to grow at an exceptional rate - 31% in sales in fiscal 2000. We invested over $10.9 million in new extrusion and thermoforming capacity to meet the sales growth in our new DuraFresh(TM) line of modified atmosphere packaging and our high-end custom packaging. We believe that the Plastic Packaging Division should again grow very well fiscal 2001.
17
2000 ANNUAL REPORT letter to shareholders market is both stable and extremely competitive. The ready-to-assemble furniture market, where we are by far the largest supplier, is also highly competitive, but it's growing at about 7% per year. We've gone through a series of consolidations to rationalize our operations in this business and have taken some charges to earnings as a result, but now believe we are in a much better position to pursue new customers and win back those we lost in the course of repositioning our assets.
SPECIALTY CORRUGATED PACKAGING AND DISPLAY BUSINESS: CONTINUING GROWTH
In our Specialty Corrugated Packaging and Display business, we invested over $10.4 million to expand our manufacturing capacity at Alliance and to open a new contract packing facility to serve two new major consumer products customers. The result was a 36% increase in sales to $152.7 million and a 25% increase in profits at Alliance.
How are we doing so well? Certainly the market has been strong. The point-of-purchase display business is a $9 billion industry and has grown 5% annually since 1996. We focus on the high value and service temporary promotional sector of this business where we believe superior performance is rewarded. Alliance has formed strong customer relationships with some of the largest
The Specialty Corrugated Packaging and Display segment continued its exceptional growth in 2000. Customer service is the hallmark of the Corrugated Packaging Division where it operates in the growing southeastern U.S. market. The Alliance Division's Concept-to-Consumer(TM) approach to promotional merchandising continues to attract business of major consumer products companies.
[GRAPHIC]
[GRAPHIC]
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2000 ANNUAL REPORT [CHART] consumer products companies in the country thanks to its Concept-to-Consumer(TM) approach. We think this is a very good business and one we believe has great potential.
The Corrugated Packaging Division continues to grow and provide superior returns. Sales increased 25% and profits increased 26% as we were able to take advantage of our excellent markets in the southeastern United States and focus on high service requirement customers.
MORE TO DO
Fiscal 2000 was a transition year for Rock-Tenn Company. While we have accomplished a great deal, our markets have been tough and we did not achieve our financial goals. Still, the evidence we see of strong, sustainable results encourages us.
The examples of how Rock-Tenn is creating new opportunities and exceeding customer expectations speak for themselves. I hope you'll take the time to review them in more detail and, like me, share in the excitement of building a high-performing company.
Sincerely,
/s/ James A. Rubright
James A. Rubright Chairman and Chief Executive Officer
20
ROCK-TENN COMPANY ROCK-TENN COMPANY FINANCIAL REVIEW
Five-Year Selected Financial and Operating Highlights 22 Management's Discussion and Analysis of Results of Operations and Financial Condition 23 Consolidated Statements of Operations 34 Consolidated Balance Sheets 35 Consolidated Statements of Shareholders' Equity 36 Consolidated Statements of Cash Flows 37 Notes to Consolidated Financial Statements 38 Report of Independent Auditors 50 Management's Statement of Responsibility for Financial Information 51 Officers and Directors 52 Shareholder Information 53
21
2000 ANNUAL REPORT FIVE-YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
YEAR ENDED SEPTEMBER 30, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998 1997(c),(d) 1996 ------Net sales $ 1,463,288 $1,313,371 $1,297,360 $1,113,883 $ 879,571 Plant closing and other costs 65,630 6,932 1,997 16,251 3,580 (Loss) income before income taxes (4,346) 70,253 74,613 37,756 82,469 Net (loss) income (15,916) 39,698 42,020 16,101 51,125 ------Diluted (loss) earnings per common share(a) (0.46) 1.13 1.20 .47 1.50 Diluted earnings per common share before plant closing and other costs(a) 1.02 1.25 1.23 .90 1.57 Dividends paid per common share(a) 0.30 0.30 .30 .30 .27 Book value per common share(a) 11.57 12.36 11.49 10.80 10.54 ------Total assets 1,158,963 1,161,470 1,111,481 1,113,686 581,688 Long-term debt, including current maturities 534,820 498,845 508,338 533,622 146,604 Shareholders' equity 386,303 432,164 397,415 371,212 349,155 ------Cash provided by operating activities 102,444 112,416 125,688 106,377 123,530 Goodwill amortization(b) 9,069 9,410 9,429 7,070 2,723 Capital expenditures 94,640 92,333 81,666 87,016 72,151 Cash paid for purchases of businesses ------301,287 ------
Notes:
(a) Gives effect to a 10% stock dividend paid on November 15, 1996.
(b) Amount not deductible for income tax purposes was $6,550,000, $6,900,000, $6,928,000, $4,760,000 and $0 in fiscal 2000, 1999, 1998, 1997 and 1996, respectively.
(c) 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.
(d) Reflects (i) the results of operations of Waldorf Corporation, Rite Paper Products Inc. and The Davey Company beginning from the respective dates of acquisition and (ii) the results of operations of RTS Packaging, LLC from the date of formation.
22
ROCK -TENN COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Segment and Market Information
We report our results in three industry segments: (1) packaging products, (2) paperboard and (3) specialty corrugated packaging and display. These segments reflect the results of an evaluation of our businesses undertaken at the end of fiscal year 2000. As a result, all previously reported segment information has been restated to reflect the new composition of each segment. During fiscal 2000, no customer accounted for more than 5% of our consolidated net sales.
The packaging products segment consists of facilities that produce folding cartons, solid fiber partitions and thermoformed plastic products. We compete with a significant number of national, regional and local packaging suppliers. During fiscal 2000, we sold packaging products to approximately 3,200 customers. We sell packaging products to several large national customers, however, the majority of our packaging products sales are to smaller national and regional customers. The packaging business is highly competitive. As a result, we regularly bid for sales opportunities to customers for new business or for renewal of existing business. The loss of business or the award of new business from our larger customers may have a significant impact on our results of operations.
The paperboard segment consists of facilities that collect recovered paper and that manufacture 100% recycled clay-coated and specialty paperboard, which we refer to as boxboard; corrugating medium, which we refer to as medium; and laminated paperboard products. In our clay-coated and specialty paperboard divisions, we compete with integrated and non-integrated national, regional and local companies manufacturing various grades of paperboard. In our laminated paperboard products division, we compete with a small number of national, regional and local companies offering highly specialized products. We also compete with foreign companies in the book cover market. Our recycled fiber division competes with national, regional and local companies. During fiscal 2000, we sold boxboard, corrugating medium, laminated paperboard products and recovered paper to approximately 1,800 customers. A significant percentage of our sales of boxboard is made to our packaging products and specialty corrugated packaging and display segments and to our laminated paperboard products division. Our paperboard segment's sales volumes may therefore be directly impacted by changes in demand for our packaging and laminated paperboard products.
The specialty corrugated packaging and display segment consists of facilities that produce corrugated containers and displays. We compete with a number of national, regional and local suppliers of those goods in this segment. During fiscal 2000, we sold corrugated containers and display products to approximately 1,100 customers. Due to the highly competitive nature of the specialty packaging and display business, we regularly bid for sales opportunities to customers for new business or for renewal of existing business. The loss of business or the award of new business from our larger customers may have a significant impact on our results of operations.
Income and expenses that are not reflected in the information used by management to make operating decisions and assess performance are reported as non-allocated expenses. These include adjustments to record inventory on the last-in, first-out, or "LIFO," method, elimination of intersegment profit and certain corporate expenses.
YEAR ENDED SEPTEMBER 30, (IN MILLIONS) 2000 1999 1998 ------Net sales (aggregate): Packaging Products $ 797.4 $ 749.9 $ 774.4 Paperboard 588.5 529.0 555.4 Specialty Corrugated Packaging and Display 238.8 180.9 138.0 ------Total $ 1,624.7 $ 1,459.8 $ 1,467.8 ------Net sales (intersegment): Packaging Products $ 5.3 $ 3.5 $ 1.2 Paperboard 150.8 138.6 164.4 Specialty Corrugated Packaging and Display 5.3 4.3 4.8 ------Total $ 161.4 $ 146.4 $ 170.4 ======Net sales (unaffiliated customers): Packaging Products $ 792.1 $ 746.4 $ 773.2 Paperboard 437.7 390.4 391.0 Specialty Corrugated Packaging and Display 233.5 176.6 133.2 ------Total $ 1,463.3 $ 1,313.4 $ 1,297.4 ======Segment income: Packaging Products $ 34.8 $ 40.5 $ 32.5 Paperboard 47.6 55.6 72.4 Specialty Corrugated Packaging and Display 28.4 23.8 15.6 ------110.8 119.9 120.5 Plant closing and other costs (65.6) (6.9) (2.0) Non-allocated expenses (9.4) (5.9) (4.6) ------Income from operations 35.8 107.1 113.9 Interest expense (35.5) (31.2) (35.0) Interest and other income 0.4 0.4 1.0 Minority interest in income of consolidated subsidiary (5.0) (6.0) (5.3) ------(Loss) income before income taxes $ (4.3) $ 70.3 $ 74.6
23
2000 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
We provide quarterly information in the following tables to assist in evaluating trends in our results of operations. For additional discussion of quarterly information, see our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission.
Net Sales (Unaffiliated Customers)
Net sales for fiscal 2000 increased 11.4% to $1,463.3 million from $1,313.4 million for fiscal 1999. Net sales increased primarily as a result of increased volumes and price increases in promotional displays, specialty corrugated packaging and plastic packaging.
Net sales for fiscal 1999 increased 1.2% to $1,313.4 million from $1,297.4 million for fiscal 1998. Net sales increased primarily as a result of increased volumes of promotional displays and price increases implemented during the fourth quarter of fiscal 1999.
Net Sales (Aggregate) - Packaging Products Segment
FIRST SECOND THIRD FOURTH FISCAL (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR ------1998 $ 194.0 $ 194.6 $ 192.6 $ 193.2 $ 774.4 1999 185.7 180.7 186.9 196.6 749.9 2000 192.9 195.1 202.8 206.6 797.4 ------
Net sales of the packaging products segment before intersegment eliminations for fiscal 2000 increased 6.3% to $797.4 million from $749.9 million for fiscal 1999.
Net sales of the packaging products segment before intersegment eliminations for fiscal 1999 decreased 3.2% to $749.9 million from $774.4 million for fiscal 1998.
Net Sales (Aggregate) by Division - Packaging Products Segment
FOLDING RTS PLASTIC (IN MILLIONS) CARTON PACKAGING PACKAGING ------1998 $ 588.6 $ 140.1 $ 45.7 1999 565.3 136.0 48.6 2000 597.4 136.4 63.6
The increase in net sales of the packaging products segment before intersegment eliminations for fiscal 2000 as compared to fiscal 1999 was primarily the result of increased volumes in our plastic packaging division and increased prices and volumes in our folding carton group.
The decrease in net sales of the packaging products segment before intersegment eliminations for fiscal 1999 as compared to fiscal 1998 primarily resulted from volume decreases in folding cartons. In order to better utilize capacity, we aggressively pursued additional long-term folding carton volume during fiscal 1999, which resulted in lower average selling prices for the folding carton division. The volume decreases were partially attributable to lower sales to two national customers.
Net Sales (Aggregate) - Paperboard Segment
FIRST SECOND THIRD FOURTH FISCAL (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR ------1998 $ 142.2 $ 144.9 $ 135.2 $ 133.1 $ 555.4 1999 122.5 127.0 134.5 145.0 529.0 2000 144.3 154.7 148.9 140.6 588.5 ------
Net sales of the paperboard segment before intersegment eliminations for fiscal 2000 increased 11.2% to $588.5 million from $529.0 million for fiscal 1999.
Net sales of the paperboard segment before intersegment eliminations for fiscal 1999 decreased 4.8% to $529.0 million from $555.4 million for fiscal 1998.
Net Sales (Aggregate) by Division - Paperboard Segment LAMINATED COATED SPECIALTY RECYCLED PAPERBOARD (IN MILLIONS) PAPERBOARD PAPERBOARD FIBER PRODUCTS ------1998 $ 289.0 $ 76.6 $ 26.6 $ 163.2 1999 268.5 85.6 28.0 146.9 2000 304.0 100.3 48.4 135.8 ------
The increase in net sales of the paperboard segment before intersegment eliminations for fiscal 2000 as compared to fiscal 1999 was the result of increased volumes and prices in the recycled fiber and coated and specialty paperboard divisions. See Operating Income -- Paperboard Segment.
The decrease in net sales of the paperboard segment before intersegment eliminations for fiscal 1999 as compared to fiscal 1998 was the result of price decreases reflecting weakness in the markets for boxboard. In order to better utilize our capacity, we aggressively pursued additional long-term paperboard volume during fiscal 1999, which resulted in lower average selling prices for the paperboard segment. See Operating Income -- Paperboard Segment.
24
ROCK -TENN COMPANY management's discussion and analysis
Net Sales (Aggregate) - Specialty Corrugated Packaging and Display Segment
FIRST SECOND THIRD FOURTH FISCAL (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR ------1998 $ 29.4 $ 32.9 $ 34.4 $ 41.3 $ 138.0 1999 37.8 41.4 45.0 56.7 180.9 2000 52.3 59.2 59.1 68.2 238.8 ------
Net sales within this segment before intersegment eliminations for fiscal 2000 increased 32.0% to $238.8 million from $180.9 million for fiscal 1999.
Net sales within this segment before intersegment eliminations for fiscal 1999 increased 31.1% to $180.9 million from $138.0 million for fiscal 1998.
Net Sales (Aggregate) by Division - Specialty Corrugated Packaging and Display Segment
CORRUGATED (IN MILLIONS) PACKAGING ALLIANCE ------1998 65.9 72.1 1999 68.9 112.0 2000 86.1 152.7
The increase in net sales of the specialty corrugated packaging and display segment before intersegment eliminations for fiscal 2000 as compared to fiscal 1999 was the result of increased volumes and increases in pricing of promotional displays and specialty corrugated packaging.
The increase in net sales of the specialty corrugated packaging and display segment before intersegment eliminations for fiscal 1999 as compared to fiscal 1998 was the result of increased volumes of promotional displays.
Cost of Goods Sold
Cost of goods sold for fiscal 2000 increased 15.3% to $1,174.8 million from $1,019.2 million for fiscal 1999. Cost of goods sold as a percentage of net sales for fiscal 2000 increased to 80.3% from 77.6% for fiscal 1999. The increase in cost of goods sold as a percentage of net sales resulted from higher average recovered paper costs and higher operating costs at several plants, some of which were related to the start-up of certain new equipment and higher energy and freight costs.
Cost of goods sold for fiscal 1999 increased 1.1% to $1,019.2 million from $1,008.6 million for fiscal 1998. Cost of goods sold as a percentage of net sales for fiscal 1999 decreased to 77.6% from 77.7% for fiscal 1998. The decrease in cost of goods sold as a percentage of net sales resulted from lower average recovered paper costs, energy and workers' compensation expenses and increased manufacturing efficiencies, which were offset somewhat by increases in health insurance costs.
Substantially all of our U.S. inventories are valued at the lower of cost or market with cost determined on the LIFO inventory valuation method, which we believe generally results in a better matching of current costs and revenues than under the first-in, first-out, or "FIFO," inventory valuation method. In periods of increasing costs, the LIFO method generally results in higher cost of goods sold than under the FIFO method. In periods of decreasing costs, the results are generally the opposite.
The following table illustrates the comparative effect of LIFO and FIFO accounting on our results of operations. These supplemental FIFO earnings reflect the after-tax effect of eliminating the LIFO adjustment each year.
2000 1999 1998 ------(IN MILLIONS) LIFO FIFO LIFO FIFO LIFO FIFO ------Cost of goods sold $1,174.8 $1,169.5 $ 1,019.2 $ 1,019.0 $1,008.6 $1,007.4 Net (loss) income (15.9) (12.6) 39.7 39.8 42.0 42.7
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2000 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS
Gross Profit
(% OF FIRST SECOND THIRD FOURTH FISCAL NET SALES) QUARTER QUARTER QUARTER QUARTER YEAR ------1998 21.2% 21.4% 23.5% 23.0% 22.3% 1999 23.0 22.1 22.3 22.3 22.4 2000 20.8 19.9 18.8 19.4 19.7 ------
Gross profit for fiscal 2000 decreased 1.9% to $288.5 million from $294.2 million for fiscal 1999. Gross profit as a percentage of net sales decreased to 19.7% for fiscal 2000 from 22.4% for fiscal 1999. See Cost of Goods Sold.
Gross profit for fiscal 1999 increased 1.9% to $294.2 million from $288.8 million for fiscal 1998. Gross profit as a percentage of net sales increased to 22.4% for fiscal 1999 from 22.3% for fiscal 1998. See Cost of Goods Sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2000 increased 4.2% to $178.0 million from $170.8 million for fiscal 1999. Selling, general and administrative expenses as a percentage of net sales for fiscal 2000 decreased to 12.2% from 13.0% for fiscal 1999. The decrease in selling, general and administrative expenses as a percentage of net sales for fiscal 2000 resulted primarily from decreased compensation expenses in relation to net sales.
Selling, general and administrative expenses for fiscal 1999 increased 4.5% to $170.8 million from $163.4 million for fiscal 1998. Selling, general and administrative expenses as a percentage of net sales for fiscal 1999 increased to 13.0% from 12.6% for fiscal 1998. The increase in selling, general and administrative expenses as a percentage of net sales for fiscal 1999 resulted primarily from increased compensation expenses.
Plant Closings and Other Costs
During fiscal 2000, we incurred plant closing and other costs related to announced facility closings. We generally accrue the cost of employee terminations at the time of notification to the employees. Certain other costs, such as moving and relocation costs, are expensed as incurred. These plant closing costs include the closing of a laminated paperboard products plant in Lynchburg, Virginia and folding carton plants in Chicago, Illinois, Norcross, Georgia and Madison, Wisconsin. The closures resulted in the termination of approximately 550 employees. In connection with these and certain other plant closings, we incurred charges of $61.1 million during fiscal 2000, which consisted mainly of asset impairment, severance, equipment relocation, lease write-downs and other related expenses, including business interruption and other inefficiencies. Of the $61.1 million, $46.0 million was asset impairment charges related to the determination that material diminution in the value of assets had occurred at our two folding carton plants that use web offset technology and at the other closed facilities. This includes $25.4 million of goodwill which is not deductible for tax purposes. As a result of the asset impairment and goodwill charges, depreciation and amortization expense in fiscal year 2001 will be lower by $3.9 million and $0.6 million, respectively. Payments of $12.6 million were made in fiscal 2000, leaving a remaining liability of $2.5 million at September 30, 2000. Plant closing and other costs are not allocated to the respective segments for financial reporting purposes. Had these costs been allocated, $50.2 million would have been charged to the packaging products segment, $9.3 million would have been charged to the paperboard segment and $1.6 million would have been non-allocated. We have consolidated the operations of these closed plants into other existing facilities.
During fiscal 2000, we decided to remove certain equipment from service primarily in our laminated paperboard products division. As a result of this decision, we incurred asset impairment charges of $4.6 million related to this equipment.
26
ROCK -TENN COMPANY management's discussion and analysis
During fiscal 1999, we closed a folding carton plant in Taylorsville, North Carolina, a laminated paperboard products operation in Otsego, Michigan and an uncoated papermill serving our coverboard converting operations in Jersey City, New Jersey. The closures resulted in the termination of approximately 280 employees. In connection with these closings, we incurred charges of $6.3 million during fiscal 1999, which consisted mainly of severance, equipment relocation, expected losses on the disposition of the facility and related expenses. We made payments of $0.3 million and $4.1 million in fiscal 2000 and 1999, respectively, incurred losses of $0.2 million and $0.8 million in connection with the disposal of inventory and other assets during fiscal 2000 and 1999, respectively, made an adjustment of $0.1 million to reduce the liability during fiscal 2000 and reduced the carrying value of the Jersey City facility by $1.0 million during fiscal 1999, leaving a nominal remaining liability at September 30, 2000. Plant closing and other costs are not allocated to the respective segments for financial reporting purposes. Had these costs been allocated, $3.9 million would have been charged to the paperboard segment in fiscal 1999 and $2.4 million of expense would have been charged to the packaging products segment in fiscal 1999. We have consolidated the operations of these closed plants into other existing facilities.
During fiscal 1998, we began implementing certain cost reduction initiatives designed to reduce overhead and production costs and improve operating efficiency. In connection with these cost reduction initiatives, we terminated approximately 40 employees and recorded $0.6 million and $2.0 million of costs related to these terminations during fiscal 1999 and 1998, respectively. We made payments of approximately $0.5 million, $1.2 million and a nominal amount during fiscal 2000, 1999 and 1998, respectively, related to these terminations and made an adjustment to reduce the liability by $0.3 million during fiscal 2000. The remaining liability at September 30, 2000 is approximately $0.5 million, which is expected to be paid during fiscal 2001.
Segment Operating Income
Operating Income - Packaging Products Segment
(IN MILLIONS, NET SALES OPERATING RETURN EXCEPT PERCENTAGES) (AGGREGATE) INCOME ON SALES ------First Quarter $ 194.0 $ 6.6 3.4% Second Quarter 194.6 6.5 3.3 Third Quarter 192.6 8.4 4.4 Fourth Quarter 193.2 11.0 5.7 ------Fiscal 1998 $ 774.4 $ 32.5 4.2% ======First Quarter $ 185.7 $ 10.8 5.8% Second Quarter 180.7 9.0 5.0 Third Quarter 186.9 9.4 5.0 Fourth Quarter 196.6 11.3 5.7 ------Fiscal 1999 $ 749.9 $ 40.5 5.4% ======First Quarter $ 192.9 $ 6.3 3.3% Second Quarter 195.1 7.7 3.9 Third Quarter 202.8 10.7 5.3 Fourth Quarter 206.6 10.1 4.9 ------Fiscal 2000 $ 797.4 $ 34.8 4.4% ======
Operating income attributable to the packaging products segment for fiscal 2000 decreased 14.1% to $34.8 million from $40.5 million for fiscal 1999. Operating margin for fiscal 2000 was 4.4% compared to 5.4% for fiscal 1999. The decrease in operating margin resulted from higher raw material costs, significant losses in our web offset folding carton operations and operational inefficiencies attributable in part to the start-up of new equipment.
Operating income attributable to the packaging products segment for fiscal 1999 increased 24.6% to $40.5 million from $32.5 million for fiscal 1998. Operating margin for fiscal 1999 was 5.4% compared to 4.2% for fiscal 1998. The increase in operating margin was the result of increased manufacturing efficiencies from improved operating rates and higher sales in the second half of fiscal 1999. This increase was offset somewhat by lower average selling prices for certain business in the folding carton division.
27
2000 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Income - Paperboard Segment
WEIGHTED BOXBOARD AVERAGE MEDIUM AVERAGE AVERAGE NET SALES OPERATING TONS BOXBOARD TONS MEDIUM RECOVERED (AGGREGATE) INCOME RETURN SHIPPED PRICE SHIPPED PRICE PAPER COST (IN MILLIONS) (IN MILLIONS) ON SALES (IN THOUSANDS) (PER TON) (IN THOUSANDS) (PER TON) (PER TON) ------First Quarter $ 142.2 $ 17.0 12.0% 252.6 $ 420 45.0 $ 330 $ 70 Second Quarter 144.9 19.9 13.7 246.8 420 45.6 347 68 Third Quarter 135.2 19.7 14.6 235.1 417 40.8 338 59 Fourth Quarter 133.1 15.8 11.9 231.0 414 43.9 318 58 ------Fiscal 1998 $ 555.4 $ 72.4 13.0% 965.5 $ 418 175.3 $ 332 $ 64 ======First Quarter $ 122.5 $ 13.0 10.6% 230.7 $ 403 45.2 $ 288 $ 53 Second Quarter 127.0 11.5 9.1 229.0 399 43.5 328 52 Third Quarter 134.5 16.2 12.0 249.4 398 45.3 340 58 Fourth Quarter 145.0 14.9 10.3 249.8 406 44.7 380 76 ------Fiscal 1999 $ 529.0 $ 55.6 10.5% 958.9 $ 401 178.7 $ 336 $ 60 ======First Quarter $ 144.3 $ 15.5 10.7% 250.4 $ 420 42.4 $ 386 $ 83 Second Quarter 154.7 14.7 9.5 257.1 426 44.7 403 91 Third Quarter 148.9 8.4 5.6 242.0 445 40.9 419 108 Fourth Quarter 140.6 9.0 6.4 228.7 449 42.2 407 88 ------Fiscal 2000 $ 588.5 $ 47.6 8.1% 978.2 $ 435 170.2 $ 403 $ 92 ======
Operating income attributable to the paperboard segment for fiscal 2000 decreased 14.4% to $47.6 million from $55.6 million for fiscal 1999. Operating margin for fiscal 2000 decreased to 8.1% from 10.5% in fiscal 1999. The decrease in operating margin was primarily the result of raw material, energy and freight cost increases that were not fully passed on to customers, costs associated with the start-up of new equipment and operational inefficiencies at certain papermills.
Operating income attributable to the paperboard segment for fiscal 1999 decreased 23.2% to $55.6 million from $72.4 million for fiscal 1998. Operating margin for fiscal 1999 decreased to 10.5% from 13.0% in fiscal 1998. The decrease in operating margin primarily resulted from lower average selling prices and volumes of boxboard, which were partially offset by lower average recovered paper costs. Beginning in the latter part of fiscal 1999, recovered paper costs increased and we began implementing price increases to recover these costs.
Operating Income - Specialty Corrugated Packaging and Display Segment
(IN MILLIONS, NET SALES OPERATING RETURN EXCEPT PERCENTAGES) (AGGREGATE) INCOME ON SALES ------First Quarter $ 29.4 $ 2.8 9.5% Second Quarter 32.9 3.3 10.0 Third Quarter 34.4 3.4 9.9 Fourth Quarter 41.3 6.1 14.8 ------Fiscal 1998 $ 138.0 $ 15.6 11.3% ======
First Quarter $ 37.8 $ 3.9 10.3% Second Quarter 41.4 5.7 13.8 Third Quarter 45.0 5.1 11.3 Fourth Quarter 56.7 9.1 16.0 ------Fiscal 1999 $ 180.9 $ 23.8 13.2% ======
First Quarter $ 52.3 $ 6.2 11.9% Second Quarter 59.2 7.8 13.2 Third Quarter 59.1 7.2 12.2 Fourth Quarter 68.2 7.2 10.6 ------Fiscal 2000 $ 238.8 $ 28.4 11.9% ======
28
ROCK -TENN COMPANY management's discussion and analysis
Operating income attributable to this segment for fiscal 2000 increased 19.3% to $28.4 million from $23.8 million for fiscal 1999. Operating margin for fiscal 2000 decreased to 11.9% from 13.2% in fiscal 1999. The decrease in operating margin was primarily the result of higher raw material costs.
Operating income attributable to this segment for fiscal 1999 increased 52.6% to $23.8 million from $15.6 million for fiscal 1998. Operating margin for fiscal 1999 increased to 13.2% from 11.3% in fiscal 1998. The increase in operating margin was primarily the result of lower raw material costs.
Interest Expense
Interest expense for fiscal 2000 increased to $35.5 million from $31.2 million for fiscal 1999 and decreased to $31.2 million for fiscal 1999 from $35.0 million for fiscal 1998. The increase for fiscal 2000 primarily resulted from an increase in the average outstanding borrowings and higher interest rates. The decrease in fiscal 1999 primarily resulted from a decrease in average outstanding borrowings and lower interest rates.
Provision for Income Taxes
Provision for income taxes for fiscal 2000 decreased to $11.6 million from $30.6 million for fiscal 1999. Provision for income taxes for fiscal 1999 decreased to $30.6 million from $32.6 million for fiscal 1998. Excluding the effect of the $25.4 million non-cash write-off during fiscal 2000 of the goodwill associated with the impairment of assets at two facilities acquired in the Waldorf acquisition, which is non-deductible for tax purposes, the Company's effective tax rate increased to 54.9% for fiscal 2000 compared to 43.5% for fiscal 1999 and decreased to 43.5% for fiscal 1999 compared to 43.7% for fiscal 1998. The increase in the effective tax rate in fiscal 2000 was primarily due to higher non-tax deductible goodwill amortization as a percentage of pre-tax net income. The decrease in the effective tax rate in fiscal 1999 primarily resulted from a decrease in our effective state tax rate.
Net (Loss) Income and Diluted (Loss) Earnings Per Common Share
Net loss for fiscal 2000 was $15.9 million compared to net income of $39.7 million for fiscal 1999. Net loss as a percentage of net sales was 1.1% for fiscal 2000 compared to net income as a percentage of net sales of 3.0% for fiscal 1999. Diluted loss per share for fiscal 2000 was $0.46 compared to diluted earnings per share of $1.13 for fiscal 1999.
Net income for fiscal 1999 decreased 5.5% to $39.7 million from $42.0 million for fiscal 1998. Net income as a percentage of net sales decreased to 3.0% for fiscal 1999 from 3.2% for fiscal 1998. Diluted earnings per share for fiscal 1999 decreased to $1.13 from $1.20 for fiscal 1998.
Market Risk-Sensitive Instruments and Positions
We are exposed to market risk from changes in interest rates, foreign exchange rates and commodity prices. To mitigate these risks, we enter into various hedging transactions. The sensitivity analyses presented below do not consider the effect of possible adverse changes in the economy generally, nor do they consider additional actions management may take to mitigate its exposure to such changes.
Derivative Instruments
We enter into a variety of derivative transactions. Generally, we designate at inception that derivatives hedge risks associated with specific assets, liabilities or future commitments and monitor each derivative to determine if it remains an effective hedge. The effectiveness of the derivative as a hedge is based on a high correlation between changes in its value and changes in value of the underlying hedged item. We include in operations amounts received or paid when the underlying transaction settles. We do not enter into or hold derivatives for trading or speculative purposes.
We use interest rate cap agreements and interest rate swap agreements to manage synthetically the interest rate characteristics of a portion of our outstanding debt and to limit our exposure to rising interest rates. Amounts to be received or paid as a result of interest rate cap agreements and interest rate swap agreements are accrued and recognized as an adjustment to interest expense related to the designated debt. The cost of purchasing interest rate caps is amortized to interest expense ratably during the life of the agreement. Gains or losses on terminations of interest rate swap agreements are deferred and amortized as an adjustment to interest expense of the related debt instrument over the remaining term of the original contract life of terminated swap agreements. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income at the time of the extinguishment.
We use forward contracts to limit our exposure to fluctuations in Canadian foreign currency rates with respect to our receivables denominated in Canadian dollars. The forward contracts are settled monthly and resulting gains or losses are recognized at the time of settlement.
We use commodity swap agreements to limit our exposure to falling selling prices and rising raw material costs for a portion of our recycled corrugating medium and recycled fiber businesses. Amounts to be received or paid as a result of these swap agreements are recognized in the period in which the related sale is made.
Interest Rate
We are exposed to changes in interest rates, primarily as a result of our short-term and long-term debt with both fixed and floating interest rates. We use interest rate agreements to effectively cap the LIBOR rate on
29
2000 ANNUAL REPORT Management's Discussion and Analysis portions of the amount outstanding under our revolving credit facility. If market interest rates averaged 1.0% more than actual rates in 2000, our interest expense after considering the effects of interest rate swap and cap agreements would have increased, and income before taxes would have decreased, by approximately $4.7 million. Comparatively, if market interest rates averaged 1.0% more than actual rates in fiscal 1999, our interest expense, after considering the effects of interest rate swap and cap agreements, would have increased, and income before taxes would have decreased by approximately $3.0 million. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing costs and interest rate swap and cap agreements. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. As of September 30, 2000, we had one cap agreement, expiring October 7, 2000, and no swap agreements in place.
Foreign Currency
We are exposed to changes in foreign currency rates with respect to our foreign currency-denominated operating revenues and expenses. We use forward contracts to limit exposure to fluctuations in Canadian foreign currency rates, our largest exposure to foreign currency rates. For fiscal 2000, a uniform 10.0% strengthening in the value of the dollar relative to the currency in which our sales are denominated would have resulted in an increase in gross profit of $0.6 million for fiscal 2000. Comparatively, for fiscal 1999, a uniform 10.0% strengthening in the value of the dollar relative to the currency in which our sales are denominated would have resulted in an increase in gross profit of $0.4 million for fiscal 1999. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.
In addition to the direct effect of changes in exchange rates on the dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.
Commodities
We sell recycled medium to various customers. The principal raw material used in the production of medium is old corrugated containers, or "OCC. Medium prices and OCC costs fluctuate widely due to changing market forces. As a result, we use swap agreements to limit our exposure to falling selling prices and rising raw material costs of a portion of our recycled medium and recycled fiber businesses. We estimate market risk as a hypothetical 10.0% decrease in selling prices or a 10% increase in raw material costs. Based on 2000 medium sales prices, such a decrease would have resulted in lower sales of $2.9 million during fiscal 2000 including the effect of our swaps on medium prices. Based on 2000 OCC costs, such an increase would have resulted in higher costs of purchases of $0.9 million during fiscal 2000.
In 1999, we estimated market risk as a hypothetical 10% increase in selling prices or a 10% decrease in raw material costs. Based on 1999 medium sales prices, such an increase would have resulted in lower sales of $1.7 million during fiscal 1999 because of our swaps on medium prices. Based on 1999 OCC costs, such a decrease would have resulted in higher costs of purchases of $0.7 million during fiscal 1999 because of our swaps on OCC costs.
We purchase and sell a variety of commodities that are not subject to derivative commodity instruments, including OCC, paperboard and recovered paper. Fluctuations in market prices of these commodities could have a material effect on our results of operations. Such fluctuations are not reflected in the results above.
Liquidity and Capital Resources
Working Capital and Capital Expenditures
We have funded our working capital requirements and capital expenditures from net cash provided by operating activities, borrowings under term notes and bank credit facilities and proceeds received in connection with the issuance of industrial revenue bonds and debt and equity securities. During fiscal 2000, we replaced our revolving credit agreement with a new five-year agreement that terminates in fiscal 2005, under which we have aggregate borrowing availability of $450.0 million. At September 30, 2000, we had $393.0 million outstanding under our revolving credit facility. Cash and cash equivalents, $5.4 million at September 30, 2000, increased from $4.5 million at September 30, 1999.
30
ROCK -TENN COMPANY management's discussion and analysis
Net cash provided by operating activities for fiscal 2000 was $102.4 million compared to $112.4 million for fiscal 1999. This decrease was primarily the result of decreased earnings before depreciation and amortization and a larger change in operating assets and liabilities during fiscal 2000 than fiscal 1999. Net cash used for financing activities aggregated $0.1 million for fiscal 2000 and consisted primarily of purchases of common stock and quarterly dividend payments, offset by additional borrowings under our revolving credit facility. Net cash used for financing activities aggregated $22.8 million for fiscal 1999 and consisted primarily of repayments of debt and quarterly dividend payments. Net cash used for investing activities was $101.3 million for fiscal 2000 compared to $91.2 million for fiscal 1999 and consisted primarily of capital expenditures in both years.
Net cash provided by operating activities for fiscal 1999 was $112.4 million compared to $125.7 million for fiscal 1998. This decrease primarily resulted from a larger change in operating assets and liabilities during fiscal 1999 than fiscal 1998. Net cash used for financing activities aggregated $22.8 million for fiscal 1999 and consisted primarily of repayments of debt and quarterly dividend payments. Net cash used for financing activities aggregated $44.7 million for fiscal 1998 and consisted primarily of repayments of debt and quarterly dividend payments. Net cash used for investing activities was $91.2 million for fiscal 1999 compared to $78.4 million for fiscal 1998 and consisted primarily of capital expenditures in both years.
Our capital expenditures aggregated $94.6 million for fiscal 2000. We expanded our operations through an ongoing capital improvements program and management's efforts to optimize the productive output of our manufacturing facilities. In addition, we also redeployed capital by closing certain manufacturing facilities and, in some cases, moving manufacturing equipment to other locations. Our capital improvements program during fiscal 2000 included investments in the following: a new gypsum facing paper machine in Lynchburg, Virginia; rebuilding of a large uncoated machine by adding a new wet end to the mill in Otsego, Michigan; adding extrusion and thermoforming capacity to our Plastics division; and building additional capacity and opening a new contract packing facility in our Alliance division.
We currently estimate that our capital expenditures will aggregate approximately $90.0 million in fiscal 2001, including our investment in our Seven Hills joint venture. We intend to use these expenditures for the purchase and upgrading of machinery and equipment and for building expansions and improvements. We anticipate that we will be able to fund our capital expenditures, interest payments, stock repurchases, dividends and working capital needs for the foreseeable future from cash generated from operations, borrowings under our revolving credit facility, proceeds from the issuance of debt or equity securities or other additional long-term debt financing.
Joint Venture
On February 18, 2000, we formed a joint venture with Lafarge Corporation to produce gypsum paperboard liner for Lafarge's U.S. drywall manufacturing plants. The joint venture, Seven Hills Paperboard, LLC, owns and will operate a paperboard machine located at our Lynchburg, Virginia manufacturing site. We have contributed a portion of our existing Lynchburg assets to the venture, which will manufacture gypsum paperboard liner using Lafarge's state-of-the-art proprietary processes. As of September 30, 2000, we have contributed cash of $7.1 million for purposes of rebuilding the paperboard machine, and we anticipate contributing an additional $6.8 million to the venture over the next several quarters. Lafarge owns 51% and we own 49% of the joint venture.
Stock Repurchase Program
During fiscal 2000, the Board of Directors amended our stock repurchase plan to allow for the repurchase from time to time prior to July 31, 2003 of up to 2.0 million shares of Class A common stock in open market transactions on the New York Stock Exchange or in private transactions. In addition, the Board authorized the repurchase from time to time of shares of Class B common stock in private transactions, including repurchases pursuant to certain first-offer rights contained in our Restated and Amended Articles of Incorporation, provided that the aggregate number of shares of Class A and Class B common stock purchased after approval of this amended plan may not exceed 2.0 million shares. During fiscal 2000, we repurchased 1.6 million shares of Class A common stock and no Class B common stock under our amended plan. Under previously authorized plans, we repurchased 0.5 million, zero and 0.3 million shares of Class A common stock during fiscal 2000, 1999 and 1998, respectively.
31
2000 ANNUAL REPORT Management's Discussion and Analysis
Year 2000
During 1999, we completed all readiness work towards the Year 2000 issue. We have not experienced any material problems resulting from Year 2000 issues, either with our internal computer systems or the products or services supplied by third parties.
Expenditures for Environmental Compliance
We are subject to various federal, state, local and foreign environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances. These laws and regulations include, among others, the Comprehensive Environmental Response, Compensation and Liability Act, which we refer to as CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the U.S. Environmental Protection Agency. In addition, some states in which we operate have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies.
We do not believe that future compliance with these environmental laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. However, environmental laws and regulations are becoming increasingly stringent. Consequently, our compliance and remediation costs could increase materially. In addition, we cannot currently assess with certainty the impact that the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act will have on our operations or capital expenditure requirements. However, we believe that any such impact or capital expenditures will not have a material adverse effect on our results of operations, financial condition or cash flows.
We estimate that we will spend $1.0 to $2.0 million for capital expenditures during fiscal year 2001 in connection with matters relating to environmental compliance.
In addition, we may choose to modify or replace the coal-fired boilers at two of our facilities in order to operate cost effectively while complying with emissions regulations under the Clean Air Act. We estimate these improvements will cost approximately $9.0 million.
We have been identified as a potentially responsible party, which we refer to as a PRP, at eight active "superfund" sites pursuant to CERCLA or comparable state statutes. No remediation costs or allocations have been determined with respect to such sites other than costs that were not material to us. Based upon currently available information and the opinions of our environmental compliance managers and general counsel, although there can be no assurance, we believe that any liability we may have at any site will not have a material adverse effect on our results of operations, financial condition or cash flows.
On February 9, 1999, we received a letter from the Michigan Department of Environmental Quality, which we refer to as MDEQ, in which the MDEQ alleges that we are in violation of the Michigan Natural Resources and Environmental Protection Act, as well as the facility's wastewater discharge permit at one of our Michigan facilities. The letter alleges that we exceeded several numerical limitations for chemical parameters outlined in the wastewater permit and violated other wastewater discharge criteria. The MDEQ further alleges that we are liable for contamination contained on the facility property as well as for contributing contamination to the Kalamazoo River site. The letter requests that we commit, in the form of a binding agreement, to undertake the necessary and appropriate response activities and response actions to address contamination in both areas. We have agreed to enter into an administrative consent order pursuant to which improvements will be made to the facility's wastewater treatment system and we will pay a $75,000 one for the alleged violations. We have also agreed to pay an additional $30,000 for past and future oversight costs incurred by the State of Michigan. Once the final order has been executed, we expect to pay this additional amount in three equal payments over the next three years. The cost of making upgrades to the process waste system and wastewater treatment systems is estimated to be approximately $1,000,000. Nothing contained in the order will constitute an admission of liability or any factual finding, allegation or legal conclusion on our part. The order is expected to be completed during the first quarter of fiscal 2001.
32
ROCK -TENN COMPANY management's discussion and analysis
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement requires the fair value of derivatives to be recorded as assets or liabilities. Gains or losses resulting from changes in the fair values of derivatives would be accounted for currently in earnings or comprehensive income depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. SFAS 133 is required to be adopted in the first quarter of fiscal 2001. The adoption of SFAS 133 will result in an insignficant charge, net of tax, from a cumulative effect of a change in accounting principle, and a $7.8 million decrease in shareholders' equity in our financial statements for the quarter ending December 31, 2000.
In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition." This bulletin provides guidance on the recognition, presentation and disclosure of revenue in financial statements. This bulletin will be effective in fiscal 2001. We do not anticipate that SAB 101 will have a material impact on our consolidated financial statements.
Forward-Looking Statements
Statements herein regarding, among other things, estimated capital expenditures for fiscal 2001 and expected expenditures for environmental compliance, constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such statements are subject to certain risks and uncertainties that could cause actual amounts to differ materially from those projected. With respect to these forward-looking statements, management has made assumptions regarding, among other things, the amount and timing of expected capital expenditures, the estimated cost of compliance with environmental laws, the expected resolution of various pending environmental matters and competitive conditions in our businesses and general economic conditions. These forward-looking statements are subject to certain risks including, among others, that the amount of capital expenditures has been underestimated and that the impact on our results of those capital expenditures has been overestimated; the cost of compliance with environmental laws has been underestimated; and expected outcomes of various pending environmental matters are inaccurate. In addition, our performance in future periods is subject to other risks including, among others, decreases in demand for our products, increases in raw material costs, fluctuations in selling prices and adverse changes in general market and industry conditions. We believe these estimates are reasonable; however, undue reliance should not be placed on such estimates, which are based on current expectations.
33
2000 ANNUAL REPORT CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, (IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998 ------Net sales $ 1,463,288 $ 1,313,371 $ 1,297,360 Cost of goods sold 1,174,837 1,019,214 1,008,594 ------Gross profit 288,451 294,157 288,766 Selling, general and administrative expenses 177,961 170,779 163,404 Amortization of goodwill 9,069 9,410 9,429 Plant closing and other costs 65,630 6,932 1,997 ------Income from operations 35,791 107,036 113,936 Interest expense (35,575) (31,179) (35,024) Interest and other income 418 391 974 Minority interest in income of consolidated subsidiary (4,980) (5,995) (5,273) ------(Loss) income before income taxes (4,346) 70,253 74,613 Provision for income taxes (Note 7) 11,570 30,555 32,593 ------Net (loss) income $ (15,916) $ 39,698 $ 42,020 ======Basic (loss) earnings per share (Note 1) $ (0.46) $ 1.14 $ 1.21 ======Diluted (loss) earnings per share (Note 1) $ (0.46) $ 1.13 $ 1.20 ======
See accompanying notes.
34
ROCK-TENN COMPANY statements >>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2000 1999 ------Assets Current assets: Cash and cash equivalents $ 5,449 $ 4,538 Accounts receivable (net of allowances of $3,732 and $3,610) 156,155 139,034 Inventories (Note 1) 99,589 94,501 Other current assets 8,050 5,308 ------Total current assets 269,243 243,381 Property, plant and equipment, at cost (Note 1): Land and buildings 200,444 194,903 Machinery and equipment 855,714 805,537 Transportation equipment 13,222 14,738 Leasehold improvements 8,561 7,242 ------1,077,941 1,022,420 Less accumulated depreciation and amortization (485,403) (429,681) ------Net property, plant and equipment 592,538 592,739
Goodwill, net 268,526 308,283 Other assets 28,656 17,067 ------$ 1,158,963 $ 1,161,470 ======Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 77,852 $ 66,271 Accrued compensation and benefits 35,403 36,977 Current maturities of long-term debt (Note 4) 20,328 41,435 Other current liabilities 26,792 24,227 ------Total current liabilities 160,375 168,910 Long-term debt due after one year (Note 4) 514,492 457,410 Deferred income taxes (Note 7) 81,384 85,631 Other long-term items 16,409 17,355 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, 2000 and 1999 -- -- Class A common stock, $.01 par value; 175,000,000 shares authorized; 22,031,024 outstanding at September 30, 2000 and 23,411,395 outstanding at September 30, 1999. Class B common stock, $.01 par value; 60,000,000 shares authorized; 11,352,739 outstanding at September 30, 2000 and 11,546,187 outstanding at September 30, 1999 334 350 Capital in excess of par value 127,682 132,048 Retained earnings 262,872 303,287 Accumulated other comprehensive loss (4,585) (3,521) ------Total shareholders' equity 386,303 432,164 ------$ 1,158,963 $ 1,161,470 ======
See accompanying notes.
35
2000 ANNUAL REPORT CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS A AND CLASS B ACCUMULATED COMMON STOCK CAPITAL IN OTHER EXCESS OF RETAINED COMPREHENSIVE (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) SHARES AMOUNT PAR VALUE EARNINGS (LOSS) INCOME TOTAL ------Balance at October 1, 1997 34,374,326 $ 344 $ 126,363 $ 245,592 $(1,087) $ 371,212 Comprehensive income: Net income ------42,020 -- 42,020 Foreign currency translation adjustments ------(4,787) (4,787) ------Comprehensive income 37,233 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) ------Balance at September 30, 1998 34,576,810 346 128,904 274,039 (5,874) 397,415 Comprehensive income: Net income ------39,698 -- 39,698 Foreign currency translation adjustments ------2,353 2,353 ------Comprehensive income 42,051 Cash dividends - $.30 per share ------(10,450) -- (10,450) Sales of common stock 380,772 4 3,144 -- -- 3,148 ------Balance at September 30, 1999 34,957,582 350 132,048 303,287 (3,521) 432,164 Comprehensive loss: Net loss ------(15,916) -- (15,916) Foreign currency translation adjustments ------(1,064) (1,064) ------Comprehensive loss (16,980) Cash dividends - $.30 per share ------(10,384) -- (10,384) Sales of common stock 551,449 5 3,743 -- -- 3,748 Purchases of Class A common stock (2,125,268) (21) (8,109) (14,115) -- (22,245) ------Balance at September 30, 2000 33,383,763 $ 334 $ 127,682 $ 262,872 $(4,585) $ 386,303 ======
See accompanying notes.
36
ROCK -TENN COMPANY statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, (IN THOUSANDS) 2000 1999 1998 ------Operating activities: Net (loss) income $ (15,916) $ 39,698 $ 42,020 Items in (loss) income not affecting cash: Depreciation and amortization 77,061 72,475 70,827 Deferred income taxes 316 3,383 3,974 (Gain) loss on disposal of plant and equipment and other, net (517) 746 604 Minority interest in income of consolidated subsidiary 4,980 5,995 5,273 Impairment loss and other non-cash charges 49,700 -- -- Change in operating assets and liabilities: Accounts receivable (17,374) (20,469) (3,866) Inventories (5,362) (6,102) 5,223 Other assets (2,151) (2,883) 1,219 Accounts payable 11,690 20,180 (8,224) Accrued liabilities 17 (607) 8,638 ------Cash provided by operating activities 102,444 112,416 125,688
Financing activities: Net additions (repayments) to revolving credit facilities 32,147 (7,000) (17,000) Additions to long-term debt 5,454 3,034 -- Repayments of long-term debt (1,626) (5,527) (8,285) Debt issuance costs (1,811) (80) -- Sales of common stock 3,748 3,148 3,776 Purchases of common stock (22,245) -- (4,418) Cash dividends paid to shareholders (10,384) (10,450) (10,388) Distribution to minority interest (5,425) (5,950) (8,400) ------Cash used for financing activities (142) (22,825) (44,715)
Investing activities: Cash contributed to joint venture (7,133) -- -- Capital expenditures (94,640) (92,333) (81,666) Proceeds from sale of property, plant and equipment 2,209 1,127 2,700 (Increase) decrease in unexpended industrial revenue bond proceeds (1,779) -- 61 ------Cash used for investing activities (101,343) (91,206) (78,356) Effect of exchange rate changes on cash (48) 384 (193) ------Increase (decrease) in cash and cash equivalents 911 (1,231) 2,424 Cash and cash equivalents at beginning of year 4,538 5,769 3,345 ------Cash and cash equivalents at end of year $ 5,449 $ 4,538 $ 5,769 ======Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes, net of refunds $ 16,655 $ 28,899 $ 25,916 Interest, net of amounts capitalized 36,228 31,190 37,258
See accompanying notes.
37
2000 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Description of Business and Summary of Significant Accounting Policies
Description of Business
Rock-Tenn Company ("the Company") manufactures and distributes folding cartons, solid fiber partitions, corrugated containers and displays, laminated paperboard products, plastic packaging, 100% recycled clay-coated and specialty paperboard and recycled corrugating medium primarily to nondurable goods producers. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables generally are due within 30 days. The Company serves a diverse customer base primarily in North America and, therefore, has limited exposure from credit loss to any particular customer or industry segment.
Consolidation
The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
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 generally recognizes revenue at the time of shipment. In limited circumstances, the Company ships goods on a consignment basis and recognizes revenue when title to the goods passes to the buyer.
Derivatives
The Company enters into a variety of derivative transactions. Generally, the Company designates at inception that derivatives hedge risks associated with specific assets, liabilities or future commitments and monitors each derivative to determine if it remains an effective hedge. The effectiveness of the derivative as a hedge is based on a high correlation between changes in its value and changes in the value of the underlying hedged item. The Company includes in operations amounts received or paid when the underlying transaction settles. The Company does not enter into or hold derivatives for trading or speculative purposes.
From time to time, the Company uses interest rate cap agreements and interest rate swap agreements to manage synthetically the interest rate characteristics of a portion of its outstanding debt and to limit the Company's exposure to rising interest rates. Amounts to be received or paid as a result of interest rate cap agreements and interest rate swap agreements are accrued and recognized as an adjustment to interest expense related to the designated debt. The cost of purchasing interest rate caps are amortized to interest expense ratably during the life of the agreement. Gains or losses terminations of interest rate swap agreements are deferred and amortized as an adjustment to interest expense related to the debt instrument over the remaining term of the original contract life of terminated swap agreements. In the event of the early extinguishments of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income at the time of the extinguishment. As of September 30, 2000, the Company had one cap agreement, expiring October 7, 2000, and no swap agreements in place.
The Company uses forward contracts to limit exposure to fluctuations in Canadian foreign currency rates with respect to its receivables denominated in Canadian dollars. The forward contracts are settled monthly and resulting gains or losses are recognized at the time of settlement.
The Company uses commodity swap agreements to limit the Company's exposure to falling sales prices and rising raw material costs for a portion of its recycled corrugating medium and recycled fiber businesses. Amounts to be received or paid as a result of these swap agreements are recognized in the period in which the related sale is made.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate fair market values.
Inventories
Substantially all U.S. inventories are valued at the lower of cost or market, with cost determined on the last -in, first -out (LIFO) basis. All other inventories are valued at lower of cost or market, with cost determined using methods which approximate cost computed on a first-in, first-out (FIFO) basis. These other inventories represent approximately 13.6% and 12.6% of FIFO cost at September 30, 2000 and 1999, respectively.
Inventories at September 30, 2000 and 1999 are as follows:
SEPTEMBER 30, (IN THOUSANDS) 2000 1999 ------Finished goods and work in process $ 74,422 $ 67,934 Raw materials 40,353 37,029 Supplies 12,159 11,608 ------Inventories at FIFO cost 126,934 116,571 LIFO reserve (27,345) (22,070) ------Net inventories $ 99,589 $ 94,501 ======
38
ROCK-TENN COMPANY notes
It is impracticable to segregate the LIFO reserve between raw materials, finished goods and work in process.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Cost includes major expenditures for improvements and replacements which extend useful lives or increase capacity and interest costs associated with significant capital additions. During fiscal 2000, 1999 and 1998, the Company capitalized interest of approximately $1,097,000, $931,000 and $888,000, respectively. For financial reporting purposes, depreciation and amortization are provided on both the declining balance and straight-line methods over the estimated useful lives of the assets as follows:
------Buildings and building improvements 15-40 years Machinery and equipment 3-20 years Transportation equipment 3-8 years Leasehold improvements Term of lease ------
Depreciation expense for fiscal 2000, 1999 and 1998 was approximately $66,267,000, $61,435,000 and $59,525,000, respectively.
Basic and Diluted (Loss) Earnings Per Share
The following table sets forth the computation of basic and diluted (loss) earnings per share:
YEAR ENDED SEPTEMBER 30, 2000 1999 1998 ------Numerator: Net (loss) income $ (15,916,000) $ 39,698,000 $ 42,020,000 Denominator: Denominator for basic (loss) earnings per share - weighted average shares 34,523,827 34,801,541 34,595,662 Effect of dilutive stock options -- 405,929 547,880 Denominator for diluted (loss) earnings per share - weighted average shares and assumed conversions 34,523,827 35,207,470 35,143,542 ======Basic (loss) earnings per share $ (0.46) $ 1.14 $ 1.21 ======Diluted (loss) earnings per share $ (0.46) $ 1.13 $ 1.20 ======
Common stock equivalents were antidilutive in fiscal 2000 and, therefore, excluded from the computation of weighted average shares used in computing diluted loss per share.
Goodwill and Other Intangible Assets
The Company has classified as goodwill the excess of the acquisition cost over the fair values of the net assets of businesses acquired. Goodwill is amortized on a straight-line basis over periods ranging from 20 to 40 years. Net goodwill as a percentage of total assets was 23.2% and 26.5% at September 30, 2000 and 1999, respectively. Net goodwill as a percentage of shareholders' equity was 69.5% and 71.3% at September 30, 2000 and 1999, respectively. Accumulated amortization relating to goodwill at September 30, 2000 and 1999 was $36,057,000 and $29,259,000, 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 $6,483,000 and $5,660,000 at September 30, 2000 and 1999, 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 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. See Note 2 for further discussion of fiscal 2000 impairment charges.
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 June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement requires the fair value of derivatives to be recorded as assets or liabilities. Gains or losses resulting from changes in the fair values of derivatives would be accounted for currently in earnings or comprehensive income depending on the purpose of the derivatives and
39
2000 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS whether they qualify for hedge accounting treatment. SFAS 133 is required to be adopted in the first quarter of fiscal 2001. The adoption of SFAS 133 will result in an insignificant charge, net of tax, from a cumulative effect of a change in accounting principle, and a $7,814,000 decrease in shareholders' equity in the Company's financial statements for the quarter ending December 31, 2000.
In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition." This bulletin provides guidance on the recognition, presentation and disclosure of revenue in financial statements. This bulletin will be effective in fiscal 2001. The Company does not anticipate that SAB 101 will have a material impact on the Company's consolidated financial statements.
In July 2000, the FASB issued Emerging Issues Task Force Issue 00-10 ("EITF 00-10"), "Accounting for Shipping and Handling Costs." This issue provides guidance regarding how shipping and handling costs incurred by the seller and billed to a customer should be treated. EITF 00- 10 concludes that all amounts billed to a customer in a sales transaction related to shipping and handling should be classified as revenue, and the costs incurred by the seller for shipping and handling should be classified as cost of goods sold. Prior year financial statements have been reclassified to conform to the requirements of EITF 00-10.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
NOTE 2 Joint Venture and Other Matters
On February 18, 2000, the Company formed a joint venture with Lafarge Corporation to produce gypsum paperboard liner for Lafarge's U.S. drywall manufacturing plants. The joint venture, Seven Hills Paperboard, LLC, owns and will operate a paperboard machine located at the Company's Lynchburg, Virginia manufacturing site. The Company has contributed a portion of its existing Lynchburg assets to the venture, which will manufacture gypsum paperboard liner using Lafarge's state-of-the-art proprietary processes. As of September 30, 2000 the Company has contributed cash of $7,133,000 for purposes of rebuilding the paperboard machine and anticipates contributing an additional $6,767,000 million to the venture over the next several quarters. Lafarge owns 51 percent and the Company owns 49 percent of the joint venture.
During fiscal 2000, the Company incurred plant closing and other costs related to announced facility closings. The cost of employee terminations is generally accrued at the time of notification to the employees. Certain other costs, such as moving and relocation costs, are expensed as incurred. Included in these plant closing costs are the closing of a laminated paperboard products plant in Lynchburg, Virginia and folding carton plants in Chicago, Illinois, Norcross, Georgia and Madison, Wisconsin. The closures resulted in the termination of approximately 550 employees. In connection with these and certain other plant closings, the Company incurred charges of $61,130,000 during fiscal 2000, which consisted mainly of asset impairment, severance, equipment relocation, lease write-downs and other related expenses, including business interruption and other inefficiencies. Of the $61,130,000, $46,037,000 was asset impairment charges related to the determination that material diminution in the value of assets had occurred at the Company's two folding carton plants that use web offset technology and at the other closed facilities. This includes $25.4 million of goodwill which is not deductible for tax purposes. As a result of the asset impairment and goodwill charges, depreciation and amortization expense in fiscal year 2001 will be lower by $3,941,000 and $636,000, respectively. Payments of $12,593,000 were made in fiscal 2000, leaving a remaining liability of $2,500,000 at September 30, 2000. Facilities closed during fiscal 2000 had combined revenues and operating losses of $72,037,000 and $5,587,000, respectively, in fiscal 2000, $98,314,000 and $5,814,000, respectively, in fiscal 1999 and $119,746,000 and $4,801,000, respectively, in fiscal 1998. The Company has consolidated the operations of these closed plants into other existing facilities.
During fiscal 2000, the Company decided to remove certain equipment from service primarily in its laminated paperboard products division. As a result of this decision, the Company incurred impairment charges of $4,622,000 related to this equipment.
During fiscal 1999, the Company closed a folding carton plant in Taylorsville, North Carolina, a laminated paperboard products operation in Otsego, Michigan and an uncoated papermill serving its coverboard converting operations in Jersey City, New Jersey. The closures resulted in the termination of approximately 280 employees. In connection with these closings, the Company incurred charges of $6,357,000 during fiscal 1999, which consisted mainly of severance, equipment relocation, expected losses on the disposition of the facility and related expenses. The Company made payments of $310,000 and $4,134,000 in fiscal 2000 and 1999, respectively, incurred losses of $186,000 and $764,000 in connection with the disposal of inventory and other assets during fiscal 2000 and 1999, respectively, made an adjustment of $122,000 to reduce the liability during fiscal 2000 and reduced the carrying value of the Jersey City facility by $1,000,000 during fiscal 1999, leaving a nominal remaining liability at September 30, 2000. Facilities closed during fiscal 1999 had combined revenues and operating losses of $16,585,000 and $1,501,000, respectively, in fiscal 1999 and $63,323,000 and $745,000, respectively, in fiscal 1998.
During 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
40 ROCK -TENN COMPANY initiatives, the Company terminated approximately 40 employees and recorded no amount, $575,000 and $1,997,000 of costs related to these terminations during fiscal 2000, 1999 and 1998, respectively. The Company made payments of approximately $514,000, $1,246,000 and $23,000 during fiscal 2000, 1999 and 1998, respectively, related to these terminations and made an adjustment to reduce the liability by $302,000 during fiscal 2000. The remaining liability at September 30, 2000 is $487,000, which is expected to be paid during fiscal 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements."
NOTE 3 Shareholders' Equity
Capitalization
The Company's capital stock consists of Class A common stock ("Class A Common") and Class B common stock ("Class B Common"). Holders of Class A Common have one vote per share and holders of Class B Common have 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 2000, 1999 and 1998, respectively, approximately 285,000, 213,000 and 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 3,700,000 shares of Class A Common. Options which have been granted under this plan vest in increments over a period of up to three years and have 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 fair values for the options granted subsequent to September 30, 1995 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 2000, 1999 and 1998, respectively: risk-free interest rate of 5.9%, 4.8% and 4.8%, a dividend yield of 2.0% for all three years, volatility factor of the expected market price of the Company's common stock of 41.4%, 40.0% and 32.0%, and an expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair values estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair values of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
(IN THOUSANDS EXCEPT FOR EARNINGS PER SHARE INFORMATION) 2000 1999 1998 ------Pro forma net (loss) income $(19,609) $37,339 $40,395 Pro forma (loss) earnings per share: Basic (0.57) 1.07 1.17 Diluted (0.57) 1.06 1.15 ------
41
2000 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the changes in all stock options during the periods indicated:
CLASS B COMMON CLASS A COMMON ------WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE RANGE PRICE SHARES PRICE RANGE PRICE ------Options outstanding at October 1, 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 Exercised or forfeited (36,300) $ 3.27-4.33 $ 3.60 (72,400) $ 3.26-20.31 $ 4.95 Granted ------822,200 $11.44-15.19 $ 14.59 ------Options outstanding at September 30, 1999 165,919 $ 4.33-7.45 $ 5.90 3,000,240 $ 4.32-20.31 $ 14.52 Exercised or forfeited 120,379 $ 4.33-7.45 $ 5.57 486,560 $ 4.32-20.31 $ 9.83 Granted ------1,003,600 $ 8.93-14.25 $ 9.19
Options outstanding at September 30, 2000 45,540 $ 6.09-7.45 $ 6.78 3,517,280 $ 6.06-20.31 $ 13.65 Options exercisable at September 30, 2000 45,540 $ 6.09-7.45 $ 6.78 1,811,180 $ 6.06-20.31 $ 15.72 Options available for future grant at September 30, 2000 ------297,100 -- -- ======
The following table summarizes information concerning options outstanding and exercisable at September 30, 2000:
CLASS B COMMON CLASS A COMMON ------WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE NUMBER AVERAGE AVERAGE AVERAGE REMAINING RANGE OF OUTSTANDING EXERCISE NUMBER EXERCISE NUMBER EXERCISE CONTRACTUAL LIFE EXERCISE PRICES AND EXERCISABLE PRICE OUTSTANDING PRICE EXERCISABLE PRICE (BOTH CLASSES) ------$ 6.06- 7.45 45,540 $ 6.78 133,980 $ 6.77 133,980 $ 6.77 2.0 $ 8.94-10.25 -- -- 858,600 $ 9.01 -- -- 9.6 $ 11.13-11.44 -- -- 477,200 $ 11.16 249,000 $ 11.14 7.0 $ 14.25-17.50 -- -- 1,324,400 $ 15.06 715,400 $ 15.25 6.4 $ 18.30-20.31 -- -- 723,100 $ 19.47 712,800 $ 19.48 5.3 ------45,540 $ 6.78 3,517,280 $ 13.65 1,811,180 $ 15.72 6.8 ======
The estimated weighted average fair value of options granted during fiscal 2000, 1999 and 1998 with option prices equal to the market price on the date of grant was $4.41, $6.72, and $4.46, respectively.
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 2000, 1999 and 1998, approximately 314,000, 284,000 and 207,000 shares respectively, were purchased by employees under this plan.
42
ROCK -TENN COMPANY 4 Long-Term Debt
Long-term debt at September 30, 2000 and 1999 consists of the following:
SEPTEMBER 30, (IN THOUSANDS) 2000 1999 ------Revolving credit facility (a) $393,000 $362,000 7.25% notes, due August 2005, net of unamortized discount of $67 and $81(b) 99,933 99,919 Industrial revenue bonds, bearing interest at variable rates (6.95% at September 30, 2000), due through October 2036(c) 40,000 34,650 Other notes 1,887 2,276 ------534,820 498,845 Less current maturities of long-term debt 20,328 41,435 ------Long-term debt due after one year $514,492 $457,410 ======
(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 2005. Borrowings outstanding under the facility bear interest based upon LIBOR plus an applicable margin This rate was 8.04% and 6.18% at September 30, 2000 and 1999, respectively. Annual facility fees range from .125% to .375% of the aggregate borrowing availability, based on the Company's consolidated funded debt to EBITDA 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 Company is in compliance with such restrictions.
As of September 30, 2000, the Company had an interest rate agreement to effectively cap the LIBOR rate on portions of the amount outstanding under the revolving credit facility. Under the agreement, $75,000,000 is capped at 8.00% annum until its expiration on October 7, 2000. The costs associated with this interest rate agreement are being amortized over the term of the agreement.
In April 1998, the Company entered into an interest rate swap agreement to effectively fix the LIBOR rate on $100,000,000 of variable rate borrowings at 5.79% per annum until April 2005. In May 1999, the Company terminated this swap agreement. The resulting gain of $1,034,000 is being amortized over the original contract life as a reduction of interest expense.
In May 1999, the Company entered into an interest rate swap agreement to effectively fix the LIBOR rate on $100,000,000 of variable rate borrowings at 5.84% per annum until May 2002. In January 2000, the Company terminated this swap agreement. The resulting gain of $2,136,170 is being amortized over the original contract life as a reduction of interest expense.
The Company is exposed to counterparty credit risk for nonperformance and, in the unlikely event of nonperformance, to market risk for changes in interest rates. The Company manages exposure to counterparty credit risk through minimum credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. The Company does not anticipate nonperformance of the counterparties.
(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 to effectively fix the interest rate on the Notes subsequently issued in August 1995. The costs associated with the interest rate adjustment transaction of $1,530,000 are being amortized over the term of the Notes. Giving effect to the amortization of the original issue discount, the debt issuance costs and the costs associated with the interest rate adjustment transaction, the effective interest rate on the Notes is approximately 7.51%.
(c) Payments of principal and interest on these industrial revenue bonds are guaranteed by a letter of credit issued by a bank. Restrictions on the Company similar to those described in (a) above exist under the terms of the agreements. The bonds are remarketed periodically based on the interest rate period selected by the Company. In the event the bonds cannot be remarketed, the bank has agreed to extend long-term financing to the Company in an amount sufficient to retire the bonds.
As of September 30, 2000, $373,000,000 of the $393,000,000 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, 2000, the aggregate maturities of long- term debt for the succeeding five years are as follows:
(IN THOUSANDS) ------2001 $ 20,328 2002 348 2003 358 2004 286 2005 473,204 Thereafter 40,296 ------Total long-term debt $ 534,820 ======
One of the Company's Canadian subsidiaries has a revolving credit facility with a Canadian bank. The facility provides borrowing availability of up to Canadian $2,000,000 and can be renewed on an annual basis. There are no facility fees related to this arrangement. As of September 30, 2000 and 1999, there were no amounts outstanding under this facility.
43
ROCK -TENN COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 Financial Instruments
At September 30, 2000 and 1999, the fair market value of the Notes was approximately $97,550,000 and $96,003,000, respectively, based on quoted market prices. At September 30, 2000, 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, 2000 and 1999, the fair value of interest rate cap agreements was immaterial. There were no carrying amounts associated with these instruments.
The Company has swap agreements to limit its exposure to falling prices and rising costs for a portion of its recycled corrugating medium and recycled fiber businesses. Some agreements hedge the selling prices on a total of 17,700 tons of recycled corrugating medium and the cost of related OCC each quarter and expire during fiscal 2002 and fiscal 2003. Other agreements hedge the selling prices on a total of 15,000 tons of recycled corrugating medium each quarter and expire during fiscal 2003. At September 30, 2000, the fair value of these swap agreements was $10,115,000. There were no carrying amounts 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. Some leases contain escalation clauses and provisions for lease renewal.
As of September 30, 2000, future minimum lease payments, including certain maintenance charges on transportation equipment, under all noncancelable leases, are as follows:
(IN THOUSANDS) ------2001 $ 8,272 2002 6,735 2003 5,893 2004 3,981 2005 1,547 Thereafter 3,839 ------Total future minimum lease payments $ 30,267 ======
Rental expense for the years ended September 30, 2000, 1999 and 1998 was approximately $16,157,000, $13,685,000 and $12,264,000, respectively, including lease payments under cancelable leases.
NOTE 7 INCOME TAXES
The Company accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The recognition of future tax benefits is required to the extent that realization of such benefits is more likely than not.
The provisions for income taxes consist of the following components:
YEAR ENDED SEPTEMBER 30, (IN THOUSANDS) 2000 1999 1998 ------Current income taxes: Federal $ 8,259 $23,824 $25,360 State 1,228 2,383 2,498 Foreign 1,767 965 761 ------Total current 11,254 27,172 28,619 ------Deferred income taxes: Federal 96 2,791 3,359 State 8 239 265 Foreign 212 353 350 ------Total deferred 316 3,383 3,974 ------Provision for income taxes $11,570 $30,555 $32,593 ======
The differences between the statutory federal income tax rate and the Company's effective income tax rate are as follows:
YEAR ENDED SEPTEMBER 30, 2000 1999 1998 ------Statutory federal tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit (1.0) 3.5 3.7 Non-deductible amortization and write-off of goodwill (See Note 2) (283.3) 3.7 3.5 Other, net (primarily non-taxable items) (16.9) 1.3 1.5 ------Effective tax rate (266.2%) 43.5% 43.7% ======
44
ROCK -TENN COMPANY The tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities consist of the following:
SEPTEMBER 30, (IN THOUSANDS) 2000 1999 ------Deferred income tax assets: Accruals and allowances $ 9,996 $ 9,843 Other 1,790 2,829 ------Total 11,786 12,672 ------Deferred income tax liabilities: Property, plant and equipment 80,882 82,586 Deductible intangibles 2,822 2,550 Inventory and other 9,466 13,167 ------Total 93,170 98,303 ------Net deferred income tax liability $81,384 $85,631 ======
The Company has not recorded any valuation allowances for deferred income tax assets.
The components of the (loss) income before income taxes are:
YEAR ENDED SEPTEMBER 30, (IN THOUSANDS) 2000 1999 1998 ------United States $(10,516) $66,173 $71,356 Foreign 6,170 4,080 3,257 ------(Loss) income before income taxes $ (4,346) $70,253 $74,613 ======
8 Retirement Plans
The Company has a number of defined benefit pension plans covering essentially all employees who are not covered by certain collective bargaining agreements. The benefits are based on years of service and, for certain plans, compensation. The Company's practice is to fund amounts deductible for federal income tax purposes.
In addition, under several labor contracts the Company makes payments based on hours worked into multi-employer pension plan trusts established for the benefit of certain collective bargaining employees.
The Company's projected benefit obligation, fair value of assets and net periodic pension cost include the following components:
YEAR ENDED SEPTEMBER 30, (IN THOUSANDS) 2000 1999 ------Projected benefit obligation at beginning of year $ 168,653 $ 166,189 Service cost 6,358 7,592 Interest cost on projected benefit obligations 13,268 12,487 Amendments 163 3,829 Actuarial gain (6,433) (15,266) Benefits paid (6,916) (6,178) ------Projected benefit obligation at end of year $ 175,093 $ 168,653 ======
Fair value of assets at beginning of year $ 209,871 $ 195,062 Actual (loss) return on plan assets (2,332) 20,987 Employer contribution 622 -- Benefits paid (6,916) (6,178) ------Fair value of assets at end of year $ 201,245 $ 209,871 ======
Funded status $ 26,152 $ 41,218 Net unrecognized asset (201) (531) Net unrecognized gain (25,921) (42,282) Unrecognized prior service income (834) (1,095) ------Net accrued pension cost included in consolidated balance sheets $ (804) $ (2,690) ======
45
2000 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts required to be recognized in the consolidated statements of operations are as follows:
YEAR ENDED SEPTEMBER 30, (IN THOUSANDS) 2000 1999 1998 ------Service cost $ 6,358 $ 7,592 $ 7,460 Interest cost on projected benefit obligations 13,268 12,487 11,008 Expected return on plan assets (18,595) (17,169) (14,870) Net amortization of the initial asset (330) (378) (385) Net amortization of gain (1,867) (222) (110) Net amortization of prior service income (97) (105) (436) ------Total Company defined benefit plan (income) expense (1,263) 2,205 2,667 Multi-employer plans for collective bargaining employees 254 239 237 ------Net periodic pension (income) cost $ (1,009) $ 2,444 $ 2,904 ======
The discount rate used in determining the actuarial present value of the projected benefit obligations was 8.0%, 7.8% and 7.0% as of September 30, 2000, 1999 and 1998, 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, 2000, 1999 and 1998. The expected long-term rate of return on assets used in determining pension expense was 9.0% for all years presented. There were no underfunded plans as of September 30, 2000 or September 30, 1999.
The Company maintains an employee savings plan which permits participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company matches 50% of contributions up to a maximum of 6% of compensation as defined by the plan. During fiscal 2000, 1999 and 1998, the Company recorded matching expense, net of forfeitures, of $3,357,000, $3,982,000 and $4,001,000, respectively, 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 to partially offset the reduction in amounts that would have been payable from the Company's principal pension plan if it were not for limitations imposed by federal income tax regulations.
Expense relating to the plan of $161,000, $137,000 and $219,000 was recorded for the years ended September 30, 2000, 1999 and 1998, respectively. Amounts accrued as of September 30, 2000 and 1999 related to the plan were $976,000 and $821,000, respectively.
9 Related Party Transactions
A director of the Company is the chairman and a significant shareholder of the insurance agency that brokers a portion of insurance for the Company. The insurance premiums paid by the Company may vary significantly from year to year with the claims arising during such years. For the years ended September 30, 2000, 1999 and 1998, payments were approximately $2,565,000, $4,458,000 and $4,898,000, respectively.
A director of the Company is the former Chairman of the construction company that built a new building for the Company. There were no material payments for the year ended September 30, 2000. For the years ended September 30, 1999 and 1998, payments approximated $118,000 and $2,733,000, 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, 2000 total approximately $11,000,000.
Stock Repurchase Plan
On April 28, 2000, the Board of Directors amended the Company's current stock repurchase plan to allow for the repurchase of a maximum of 2,000,000 shares in aggregate of Class A Common or Class B Common prior to July 31, 2003. During fiscal 2000, the Company repurchased 1,586,668 shares of Class A Common under this amended plan. Under previously authorized plans, the Company repurchased 538,600, zero and 330,100 shares of Class A Common during fiscal 2000, 1999 and 1998, respectively.
Environmental and Other Matters
The Company is subject to various federal, state, local and foreign environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances. These laws and regulations include, among others, the Comprehensive Environmental Response, Compensation and Liability act, which the Company refers to as CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the U.S. Environmental Protection Agency. In addition, some states in which the Company operates have adopted
46
ROCK -TENN COMPANY equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies.
The Company does not believe that future compliance with these environmental laws and regulations will have a material adverse effect on its results of operations, financial condition or cash flows. However, environmental laws and regulations are becoming increasingly stringent. Consequently, the Company's compliance and remediation costs could increase materially. In addition, the Company cannot currently assess with certainty the impact that the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act will have on its operations or capital expenditure requirements. However, the Company believes that any such impact or capital expenditures will not have a material adverse effect on its results of operations, financial condition or cash flows.
The Company has been identified as a potentially responsible party, which we refer to as a PRP, at eight active "superfund" sites pursuant to CERCLA or comparable state statutes. No remediation costs or allocations have been determined with respect to such sites other than costs that were not material to the Company. Based upon currently available information and the opinions of the Company's environmental compliance managers and general counsel, although there can be no assurance, the Company believes that any liability it may have at any site will not have a material adverse effect on the Company's results of operations, financial condition or cash flows.
On February 9, 1999, the Company received a letter from the Michigan Department of Environmental Quality, which the Company refers to as MDEQ, in which the MDEQ alleges that the Company is in violation of the Michigan Natural Resources and Environmental Protection Act, as well as the facility's wastewater discharge permit at one of the Company's Michigan facilities. The letter alleges that the Company exceeded several numerical limitations for chemical parameters outlined in the wastewater permit and violated other wastewater discharge criteria. The MDEQ further alleges that the Company is liable for contamination contained on the facility property as well as for contributing contamination to the Kalamazoo River site. The letter requests that the Company commit, in the form of a binding agreement, to undertake the necessary and appropriate response activities and response actions to address contamination in both areas. The Company has agreed to enter into an administrative consent order pursuant to which improvements will be made to the facility's waste-water treatment system and the Company will pay a $75,000 fine for the alleged violations. The Company has also agreed to pay an additional $30,000 for past and future oversight costs incurred by the State of Michigan. Once the final order has been executed, the Company expects to pay this additional amount in three equal payments over the next three years. The cost of making upgrades to the process waste system and wastewater treatment systems is estimated to be approximately $1,000,000. Nothing contained in the order will constitute an admission of liability or any factual finding, allegation or legal conclusion on the part of the Company. The order is expected to be completed during the first quarter of fiscal 2001.
11 Segment Information
At the end of fiscal 2000, the Company evaluated the composition of its segments. As a result, corresponding segment information has been restated to reflect the new presentation.
The Company reports three business segments. The packaging products segment consists of facilities that produce folding cartons, solid fiber partitions and thermoformed plastic products. The paperboard segment consists of facilities that collect recovered paper and that manufacture 100% recycled clay-coated and specialty paperboard, corrugating medium and laminated paperboard products. The specialty corrugated packaging and display segment consists of facilities that produce corrugated containers and displays. Certain operations included in the packaging products segment are located in foreign countries and had operating income of $7,179,000, $5,620,000 and $4,651,000 for fiscal years ended September 30, 2000, 1999 and 1998, respectively. For fiscal 2000, foreign operations represented approximately 5.1%, 19.7% and 5.9% of total net sales to unaffiliated customers, total income from operations and total identifiable assets, respectively. For fiscal 1999, foreign operations represented approximately 4.6%, 5.1% and 5.5% of total net sales to unaffiliated customers, total income from operations and total identifiable assets, respectively. In fiscal 1998, these 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. As of September 30, 2000, 1999 and 1998, the Company had foreign long-lived assets of $33,756,000, $34,556,000 and $28,545,000, respectively.
The Company evaluates performance and allocates resources based, in part, on profit or loss from operations before income taxes, interest and other items. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies except that the Company accounts for inventory on the FIFO basis at the segment level compared to a LIFO basis at the consolidated level. Intersegment sales are accounted for at prices that approximate market prices. Intercompany profit is eliminated at the consolidated level.
Following is a tabulation of business segment information for each of the past three fiscal years:
47
2000 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a tabulation of business segment information for each of the past three fiscal years:
YEARS ENDED SEPTEMBER 30, (IN THOUSANDS) 2000 1999 1998 ------Net sales (aggregate): Packaging Products $ 797,399 $ 749,850 $ 774,355 Paperboard 588,489 529,014 555,402 Specialty Corrugated Packaging and Display 238,822 180,892 138,046 ------Total $ 1,624,710 $ 1,459,756 $ 1,467,803 ======Less net sales (intersegment): Packaging Products $ 5,294 $ 3,424 $ 1,196 Paperboard 150,794 138,623 164,449 Specialty Corrugated Packaging and Display 5,334 4,338 4,798 ------Total $ 161,422 $ 146,385 $ 170,443 ======Net sales (unaffiliated customers): Packaging Products $ 792,105 $ 746,426 $ 773,159 Paperboard 437,695 390,391 390,953 Specialty Corrugated Packaging and Display 233,488 176,554 133,248 ------Total $ 1,463,288 $ 1,313,371 $ 1,297,360 ======Segment (loss) income: Packaging Products $ 34,767 $ 40,455 $ 32,564 Paperboard 47,585 55,551 72,422 Specialty Corrugated Packaging and Display 28,468 23,805 15,581 ------110,820 119,811 120,567 LIFO and intercompany profit (5,275) (167) (1,213) Plant closing and other costs (65,630) (6,932) (1,997) Other non-allocated expenses (4,124) (5,676) (3,421) ------Income from operations 35,791 107,036 113,936 Minority interest in consolidated subsidiary (4,980) (5,995) (5,273) Interest expense (35,575) (31,179) (35,024) Interest and other income 418 391 974 ------(Loss) income before income taxes $ (4,346) $ 70,253 $ 74,613 ======Identifiable assets: Packaging Products $ 429,422 $ 459,933 $ 436,425 Paperboard 585,985 585,138 569,824 Specialty Corrugated Packaging and Display 130,126 107,267 90,426 Corporate 13,430 9,132 14,806 ------Total $ 1,158,963 $ 1,161,470 $ 1,111,481 ======Depreciation and amortization: Packaging Products $ 31,405 $ 29,719 $ 29,531 Paperboard 33,353 31,612 30,818 Specialty Corrugated Packaging and Display 9,127 7,911 7,187 Corporate 3,176 3,233 3,291 ------Total $ 77,061 $ 72,475 $ 70,827 ======Capital expenditures: Packaging Products $ 48,094 $ 37,059 $ 34,120 Paperboard 29,815 40,473 31,784 Specialty Corrugated Packaging and Display 14,238 11,544 9,161 Corporate 2,493 3,257 6,601 ------Total $ 94,640 $ 92,333 $ 81,666 ======
48 ROCK-TENN COMPANY notes
NOTE 12 Financial Results by Quarter (Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH 2000 QUARTER QUARTER QUARTER QUARTER ------Net sales $346,821 $ 369,940 $370,545 $375,982 Gross profit 72,197 73,637 69,630 72,987 Net income (loss) 8,610 (33,256) 2,605 6,125 Basic earnings (loss) per share 0.25 (0.96) 0.08 0.18 Diluted earnings (loss) per share 0.24 (0.96) 0.07 0.18 ------FIRST SECOND THIRD FOURTH 1999 QUARTER QUARTER QUARTER QUARTER ------Net sales $311,442 $ 312,718 $330,477 $358,734 Gross profit 71,587 68,955 73,788 79,827 Net income 8,758 8,806 9,920 12,214 Basic earnings per share 0.25 0.25 0.28 0.35 Diluted earnings per share 0.25 0.25 0.28 0.35 ------
FIRST SECOND THIRD FOURTH 1998 QUARTER QUARTER QUARTER QUARTER ------Net sales $317,745 $ 328,748 $320,988 $329,879 Gross profit 67,348 70,248 75,317 75,853 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
In accordance with the adoption of Emerging Issues Task Force issue 00-10 ("EITF00-10"), "Accounting for Shipping and Handling Costs," the Company reclassfied its shipping costs, which were previously reported under selling, general, and administrative expenses, to cost of goods sold in the third quarter of fiscal 2000. Additionally, amounts billed to a customer in a sales transaction related to shipping and handling were reclassified to revenue rather than reducing shipping costs. These reclassifications resulted in a net increase in revenue of $1,982,000, $3,003,000 and $3,754,000 for the first two quarters of fiscal 2000 and for fiscal 1999 and 1998, respectively. The reclass of shipping costs to cost of goods sold along with the reclass to revenue of shipping costs billed to customers resulted in a net decrease in gross profit of $37,556,000, $65,356,000 and $59,754,000 for the first two quarters of fiscal 2000 and for fiscal 1999 and 1998, respectively. There was no impact on net (loss) income as a result of the adoption of EITF00-10.
The interim (loss) earnings per common and common equivalent share amounts were computed as if each quarter were a discrete period. As a result, the sum of the basic and diluted (loss) earnings per share by quarter will not necessarily total the annual basic and diluted (loss) earnings per share.
The results of operations for the first, second, third and fourth quarters of fiscal 2000 include expenses of approximately $2,474,000, $52,725,000, $4,876,000 and $5,555,000, respectively, incurred by the Company as a result of the facility closings (see Note 2).
The results of operations for the first, second, third and fourth quarters of fiscal 1999 include expenses of approximately $2,053,000, $1,085,000, $2,763,000 and $1,031,000, respectively, incurred by the Company as a result of the facility closings and related items (see Note 2).
The results of operations for the 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).
49
2000 ANNUAL REPORT REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders Rock-Tenn Company
We have audited the accompanying consolidated balance sheets of Rock-Tenn Company as of September 30, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rock- Tenn Company at September 30, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia October 25, 2000
50
ROCK-TENN COMPANY 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. 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, 2000, the Company's system of internal control is adequate to accomplish the objectives discussed herein.
/s/ Steven C. Voorhees
Steven C. Voorhees Executive Vice President and Chief Financial Officer
51
2000 ANNUAL REPORT OFFICERS AND DIRECTORS
Officers Paul J. England Bradley Currey, Jr. (1) Executive Vice President and Retired Chairman James A. Rubright General Manager Rock-Tenn Company Chairman and Chief Executive Officer Specialty Paperboard Division Atlanta, Georgia
Steven C. Voorhees Stephen P. Flanagan Robert B. Currey Executive Vice President and Executive Vice President and Chief Executive Ofocer Chief Financial Officer General Manager Currey & Company, Inc. Recycled Fiber Division Atlanta, Georgia
Russell M. Currey Senior Vice President James K. Hansen A.D. Frazier, Jr. (2) Marketing & Planning Executive Vice President and President and Chief Executive Officer General Manager Invesco, Inc. Coated Paperboard Division Atlanta, Georgia Robert B. McIntosh Senior Vice President, General Counsel and Secretary L.L. Gellerstedt III (3) Specialty Packaging & Display Group Chairman R. Evan Hardin L.G. III Group Vice President of Finance and Treasurer Edward E. Bowns Atlanta, Georgia Executive Vice President and Bradley P. Newman General Manager John D. Hopkins (1) (3) Vice President of Risk Management Specialty Packaging and Display Group Senior Vice President and General Counsel and Administration Jefferson-Pilot Corporation Greensboro, North Carolina
Vincent J. D'Amelio Larry S. Shutzberg Executive Vice President and Vice President of Information Systems General Manager Lou Brown Jewell (3) Plastic Packaging Division Private Investor Atlanta, Georgia Amanda F. Portnell Controller James L. Einstein Executive Vice President and James W. Johnson (3) General Manager President Alliance Division McCranie Tractor Company Unadilla, Georgia Folding Carton Group
Nicholas G. George John H. Morrison Executive Vice President and Executive Vice President and James A. Rubright (1) General Manager General Manager Chairman and Chief Executive Officer Folding Carton Group Corrugated Packaging Division Rock-Tenn Company Norcross, Georgia
Richard E. Steed Paperboard Group President and Chief Executive Officer Charles R. Sexton RTS Packaging, LLC Principal Sexton-Talbert Products Vero Beach, Florida
David E. Dreibelbis Executive Vice President and General Manager Board of Directors John W. Spiegel (1) (2) Paperboard Group Executive Vice President and Chief Financial Officer SunTrust Banks, Inc. Stephen G. Anderson, M.D.(2) Atlanta, Georgia Terry W. Durham Winston-Salem, North Carolina Executive Vice President and General Manager Laminated Paperboard Products Division J. Hyatt Brown (1) Chairman and Chief Executive Officer Brown & Brown, Inc. Daytona Beach, Florida (1) Executive Committee (2) Audit Committee (3) Compensation and Options Committee
52
ROCK-TENN COMPANY shareholder information
SHAREHOLDER INFORMATION
HOME OFFICE 504 Thrasher Street Norcross, Georgia 30071 770-448-2193
TRANSFER AGENT AND REGISTRAR SunTrust Bank, Atlanta Mail Code 258 P.O. Box 4625 Atlanta, Georgia 30302 800-568-3476
INVESTOR RELATIONS Investor Relations Department Rock-Tenn Company P.O. Box 4098 Norcross, Georgia 30091 770-448-2193 Fax: 770-263-3582
AUDITORS Ernst & Young, LLP 600 Peachtree Street Suite 2800 Atlanta, Georgia 30308
DIRECT DEPOSIT OF DIVIDENDS Rock-Tenn shareholders may have their quarterly cash dividends automatically deposited to checking, savings or money market accounts through the automatic clearinghouse system. If you wish to participate in the program, please contact:
SunTrust Bank, Atlanta Mail Code 258 P.O. Box 4625 Atlanta, Georgia 30302 800-568-3476
ANNUAL MEETING Northeast Atlanta Hilton 5993 Peachtree Industrial Boulevard Norcross, Georgia 30092 Friday, January 26, 2001 9:00 A.M.
COMMON STOCK Rock-Tenn Class A common stock trades on the New York Stock Exchange under the symbol RKT. There is not an established public trading market for the Company's Class B common stock.
As of December 7, 2000, there were approximately 5,299 Class A common shareholders of record and 120 Class B common shareholders of record.
PRICE RANGE OF CLASS A COMMON STOCK
FISCAL 2000 FISCAL 1999 ------HIGH LOW HIGH LOW First Quarter $16.44 $13.56 $17.25 $10.25 Second Quarter 14.94 8.56 19.00 12.38 Third Quarter 10.00 8.38 17.13 12.19 Fourth Quarter 11.44 8.44 18.38 13.69 ------
FORM 10-K REPORT A copy of the Company's annual report on Form 10-K for the year ended September 30, 2000 as filed with the Securities and Exchange Commission is available at no charge to shareholders of record, by writing to:
Investor Relations Department Rock-Tenn Company P.O. Box 4098 Norcross, Georgia 30091
53
2000 ANNUAL REPORT EXHIBIT 21
ROCK-TENN COMPANY
SUBSIDIARIES OF ROCK-TENN COMPANY
JURISDICTION OF NAME INCORPORATION ------1. Rock-Tenn Company, Mill Division, Inc. Tennessee 2. Dominion Paperboard Products, Ltd. Quebec, Canada 3. Rock-Tenn Company of Texas Georgia 4. Rock-Tenn Converting Company Georgia 5. Rock-Tenn Company of Arkansas Georgia 6. Ling Industries, Inc. Quebec, Canada 7. Rock-Tenn Company of California, Inc. Delaware 8. Rock-Tenn Company of Illinois, Inc. Illinois 9. Concord Industries, Inc. Illinois 10. Waldorf Corporation Delaware 11. Wabash Corporation Delaware 12. Wabash Development, Inc. Delaware 13. Waldorf Realty, Inc. Delaware 14. Best Recycling, Inc. Iowa 15. RTS Packaging, LLC Delaware 16. Rock-Tenn Recycling Company Quebec, Canada 17. Rock-Tenn Partition Company Georgia 18. RTS Empaques S. de R.L. de C.V. Mexico 19. Waldorf Corporation of Minnesota Delaware 20. RTS Embalajes de Chile Limitada Santiago, Chile 21. Seven Hills Paperboard, LLC Delaware 22. Rock-Tenn Financial, Inc. Delaware 23. Rock-Tenn Foreign Sales Corporation Barbados
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 25, 2000 included in the 2000 Annual Report to Shareholders of Rock-Tenn Company.
Our audits also include the financial statement schedule of Rock-Tenn Company listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also consent (a) to the incorporation by reference in (i) the Registration Statement (Form S-8 No. 333-77237) which pertains to the Rock- Tenn Company 1993 Employee Stock Option Plan, the Rock-Tenn Company 1993 Stock Purchase Plan, the Rock-Tenn Company 1989 Stock Option Plan and the Rock-Tenn Company 1987 Stock Option Plan, (ii) the Registration Statement (Form S-8 No. 33-83304) which pertains 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 (iii) the Registration Statement (Form S-3 No. 33-93934) of Rock-Tenn Company, of our report dated October 25, 2000, 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, 2000, and our report dated November 10, 2000, 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, 2000.
ERNST & YOUNG LLP
Atlanta, Georgia
December 14, 2000 ARTICLE 5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K. MULTIPLIER: 1,000
PERIOD TYPE YEAR FISCAL YEAR END SEP 30 2000 PERIOD START OCT 01 1999 PERIOD END SEP 30 2000 CASH 5,449 SECURITIES 0 RECEIVABLES 159,887 ALLOWANCES 3,732 INVENTORY 99,589 CURRENT ASSETS 269,243 PP&E 1,077,941 DEPRECIATION 485,403 TOTAL ASSETS 1,158,963 CURRENT LIABILITIES 160,375 BONDS 514,492 PREFERRED MANDATORY 0 PREFERRED 0 COMMON 334 OTHER SE 385,969 TOTAL LIABILITY AND EQUITY 1,158,963 SALES 1,463,288 TOTAL REVENUES 1,463,288 CGS 1,174,837 TOTAL COSTS 1,174,837 OTHER EXPENSES 0 LOSS PROVISION 0 INTEREST EXPENSE 35,575 INCOME PRETAX (4,346) INCOME TAX 11,570 INCOME CONTINUING (15,916) DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET INCOME (15,916) EPS BASIC (0.46) EPS DILUTED (0.46) EXHIBIT 99.1
ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors...... 2 Statements of Financial Condition as of September 30, 2000 and 1999...... 3 Statements of Changes in Plan Equity for the three years ended September 30, 2000...... 4 Notes to Financial Statements...... 5
REPORT OF INDEPENDENT AUDITORS
Compensation and Options Committee of the Board of Directors Rock-Tenn Company
We have audited the accompanying statements of financial condition of the Rock-Tenn Company 1993 Employee Stock Purchase Plan as of September 30, 2000 and 1999 and the related statements of changes in plan equity for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Rock-Tenn Company 1993 Employee Stock Purchase Plan at September 30, 2000 and 1999 and the changes in Plan equity for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Atlanta, Georgia November 10, 2000
2 ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, ------2000 1999 ------Assets: Receivable from Rock-Tenn Company -- Notes 1 and 2...... $287,645 $519,821 ======Liabilities and equity: Obligations to purchase Rock-Tenn Company common stock -- Notes 1 and 2...... 287,645 519,821 Plan equity...... ------Total liabilities and equity...... $287,645 $519,821 ======
See notes to financial statements
3 ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF CHANGES IN PLAN EQUITY
YEARS ENDED SEPTEMBER 30, ------2000 1999 1998 ------Participant contributions...... $ 3,225,378 $ 3,464,190 $ 2,867,976 Purchases of Rock-Tenn Company common stock -- Note 1... (3,096,657) (3,381,882) (2,809,359) Amounts refunded to Plan participants...... (128,721) (82,308) (58,617) ------Plan equity at end of year...... $ -- $ -- $ -- ======
See notes to financial statements
4 ROCK-TENN COMPANY
1993 EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF THE PLAN:
In 1993, the Board of Directors of Rock-Tenn Company (the "Company") adopted the Rock-Tenn Company 1993 Employee Stock Purchase Plan (the "Plan"). The Plan was effective beginning on January 1, 1994. On October 23, 1997, the Company's Board of Directors voted to amend and restate the Plan with an effective date of January 1, 1998, thereby increasing the number of shares reserved for purchase under the Plan to 1,320,000. The amended and restated Rock-Tenn Company 1993 Employee Stock Purchase Plan was approved by Rock-Tenn Company shareholders on January 22, 1998.
The Plan permits eligible employees to make regular, systematic purchases of the Company's Class A common stock directly from the Company through payroll deductions. Substantially all regular, full-time employees of the Company and its subsidiaries are eligible to participate in the Plan upon completion of at least two years of employment as defined by the Plan. Voluntary employee contributions are deducted from participants' compensation each pay period and are held for the participants' accounts. All funds held by the Company under the Plan are included in the general assets of the Company.
On the first day of each of the four purchase periods (November 1, February 1, May 1 and August 1), participants in the Plan are granted an option to purchase shares of the Company's Class A common stock. On the last day of each purchase period (January 31, April 30, July 31 and October 31), the Company uses participant contributions, net of refunds, to purchase shares of the Company's Class A common stock for the participant. Contributions that exceed the plan provisions or the Internal Revenue Code limits are refunded to participants. The purchase price per share to the participant is equal to 85% of the market value, as defined, of the Company's Class A common stock on the first or last day of the purchase period, whichever amount is lower. For the purchase periods ending October 31, 1999, January 31, 2000, April 30, 2000 and July 31, 2000 there was a total of 313,503 shares of the Company's Class A common stock purchased for participants under the Plan. For the purchase periods ending October 31, 1998, January 31, 1999, April 30, 1999 and July 31, 1999, there was a total of 284,080 shares of the Company's Class A common stock purchased for participants under the Plan. 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. Stock certificates for all shares of the Company's Class A Common Stock purchased under the Plan are issued to participants at the end of each purchase period.
Any participant may terminate contributions and withdraw from the Plan at any time. Even though there are no current intentions to do so, the Board of Directors can terminate the Plan at any time. Stock purchase transactions in process at the time of such termination cannot be modified or canceled without the written consent of the participants.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting
The accompanying financial statements have been prepared on the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires Plan management to make estimates and assumptions that affect the reported amounts of Plan assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in Plan equity during the reporting period. Actual results may differ from those estimates and the differences could be material.
5 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 -- SUBSEQUENT EVENT:
Effective November 1, 2000, the Plan was amended to increase the number of Company shares available for purchase under the Plan by 1,000,000. The Plan amendment is subject to shareholder approval at the annual meeting of shareholders on January 26, 2001.
6 EXHIBIT 99.2
We, or our executive officers and directors on our behalf, may from time to time make "forward looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements include statements preceded by, followed by or that include the words "believes," "expects," "anticipates," "plans," "estimates," or similar expressions. These statements may be contained in reports and other documents that we file with the SEC or may be oral statements made by our executive officers and directors to the press, potential investors, securities analysts and others. These forward looking statements could involve, among other things, statements regarding the Company's intent, belief or expectation with respect to:
- our results of operations and financial condition,
- the consummation of acquisitions and financial transactions and their effect on our business, and
- our plans and objectives for future operations and expansion.
Any forward looking statements would be subject to risks and uncertainties that could cause actual results of operations, financial condition, acquisitions, financing transactions, operations, expansion and other events to differ materially from those expressed or implied in such forward looking statements. Any forward looking statements would be subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally and could be affected by changes in management's plans, such as delays or changes in anticipated capital expenditures or changes in our operations. These assumptions would be based on facts and conditions as they exist at the time the forward looking statements are made as well as predictions as to future facts and conditions. These future facts and conditions may be difficult for us to predict accurately and may involve the assessment of events beyond our control. We, or our executive officers and directors, have no duty under the Securities Exchange Act of 1934 to update any forward-looking statement. Further, our business is subject to a number of risks that would affect any such forward looking statements. These risks include, among other things, the following:
- WE MAY FACE INCREASED COSTS AND REDUCED SUPPLY OF RAW MATERIALS
Historically, the cost of recovered paper, virgin paperboard and containerboard, our principal raw materials, have fluctuated significantly due to market and industry conditions. Increasing demand for products packaged in 100% recycled paper and the shift by virgin paperboard manufacturers to the production of paperboard with some recycled paper content may increase demand for recovered paper. The increasing demand may result in cost increases. In recent years, the cost of natural gas, which we use in many of our manufacturing operations, including each of 12 of our paperboard mills, have also fluctuated significantly. There can be no assurance that we will be able to recoup any future increases in the cost of recovered paper or other raw materials or of natural gas or electric power through price increases for our products. Further, a reduction in supply of recovered paper, virgin paperboard and containerboard or other raw materials due to increased demand or other factors could have an adverse effect on our results of operations and financial condition.
- WE MAY EXPERIENCE PRICING VARIABILITY
The paperboard and converted products industries historically have experienced significant fluctuations in selling prices. Our inability to maintain the selling prices of products within these industries during periods of weak economic conditions may have a material adverse effect on our results of operations and financial condition. We are not able to predict with certainty market conditions or the selling prices for our products.
- WE FACE INTENSE COMPETITION
The packaging products and paperboard industries are highly competitive, and no single company dominates either industry. Our competitors include large, vertically integrated packaging products and paperboard companies and numerous smaller companies. In the folding carton and corrugated container markets, we compete with a significant number of national and regional packaging suppliers. In the fiber partitions, corrugated displays, thermoformed plastic products and laminated paperboard products markets, we compete with a smaller number of national, regional and local companies offering highly specialized products. We also compete with foreign companies in the book cover market. In the paperboard segment, we compete with integrated and non-integrated national, regional and local companies manufacturing various grades of paperboard. Our paperboard also competes with virgin paperboard.
The primary competitive factors in the packaging products and paperboard industries are price, design, quality and service, with varying emphasis on these factors depending on the product line and customer preferences. We believe that we compete effectively with respect to each of these factors. However, to the extent any of our competitors becomes more successful with respect to any key competitive factor, our business could be materially adversely affected.
The packaging products and recycled paperboard industries have undergone significant consolidation in recent years. We believe that current trends within these industries will result in further consolidation. Within the packaging products industry, larger corporate customers with an expanded geographic presence have tended in recent years to seek suppliers who can, because of their broad geographic presence, efficiently and economically supply all of the customers' packaging needs. In addition, during recent years, purchasers of recycled paperboard and packaging products have demanded higher quality products meeting stricter quality control requirements. These market trends could adversely affect our results of operations or, alternatively, favor our products depending on our competitive position in specific product lines.
- WE MAY BE UNABLE TO COMPLETE AND FINANCE ACQUISITIONS
We have completed several acquisitions during the past five fiscal years and may seek additional acquisition opportunities. There can be no assurance that we will be able successfully to identify suitable acquisition candidates, complete acquisitions, integrate acquired operations into our existing operations or expand into new markets. There can also be no assurance that future acquisitions will not have an adverse effect upon our operating results. This is particularly true in the fiscal quarters immediately following the completion of such acquisitions while the operations of the acquired business are being integrated into our operations. Once integrated, acquired operations may not achieve levels of revenues, profitability or productivity comparable with those achieved by our existing operations, or otherwise perform as expected. In addition, it is possible that, in connection with acquisitions, our capital expenditures could be higher than we anticipated and that expected benefits of such capital expenditures may not be realized.
- WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL AND GOVERNMENTAL REGULATION
We are subject to various Federal, state, local and foreign environmental laws and regulations, including those relating to the discharge, storage, handling and disposal of a variety of substances. We regularly make capital expenditures to maintain compliance with applicable environmental laws and regulations. However, environmental laws and regulations are becoming increasingly more stringent. Consequently, our compliance and remediation costs could increase materially. In addition, we cannot currently assess with certainty the impact that the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act will have on our operations or capital expenditure requirements. Further, we have been identified as a potentially responsible party at various "superfund" sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act or comparable state statutes. There can be no assurance that any liability we may incur in connection with these superfund sites will not be material to our results of operations, financial condition or cash flows.
- WE HAVE BEEN DEPENDENT ON CERTAIN CUSTOMERS
Each of our divisions has certain key customers, the loss of which could have a material adverse effect on the division's sales and, depending on the significance of the division to our operations, our results of operations, financial condition or cash flows.
- CHANGES IN ACCOUNTING PRACTICES COULD REQUIRE US TO CHANGE PREVIOUSLY REPORTED RESULTS OF OPERATIONS
We understand that the SEC is evaluating existing practice regarding, among other things, accounting for restructuring charges, goodwill write- offs and other pro forma adjustments made in connection with
2 recapitalizations and/or acquisition transactions and is concurrently developing guidance on how registrants should apply existing regulations. We believe that our previously reported financial information has been prepared in a manner that complies with published SEC regulations and is consistent with current practice. However, there can be no assurance that the SEC will not require modification or reformulation of our previously reported financial information. Any such modification or reformulation may be significant.
3
End of Filing
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