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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, and Seven Hills Paperboard, LLC, which we refer
to as Seven Hills. We own 65% of RTS and conduct our interior packaging products business through RTS. We own 49% of Seven
Hills, a manufacturer of gypsum paperboard liner.
General
We are a manufacturer of packaging, merchandising displays and 100% recycled clay-coated and
specialty paperboard and corrugating medium. Our packaging operations manufacture folding cartons, solid
fiber interior packaging, corrugated packaging and corrugated sheet stock, plastic packaging and extruded
plastic roll stock. We also produce laminated paperboard products as well as collect and sell recycled fiber. We
operate 65 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) merchandising
displays and corrugated packaging, and (3) paperboard. For financial information relating to our segments,
please see Item 8, "Financial Statements and Supplementary Data." For financial information related to our
non-U.S. operations, see Note 11, "Segment Information" of the Notes to Consolidated Financial Statements
section of the Financial Statements included herein.
Packaging Products
In our packaging segment, we manufacture three lines of packaging products: folding cartons, solid fiber
interior packaging, and plastic packaging.
Folding Cartons. We believe that we are the fifth largest producer of folding cartons in North America.
Customers use our folding cartons to package frozen, dry and perishable food items, paper goods and
hardware, textile, automotive, apparel and other products. We also manufacture express envelopes for the
overnight courier industry. Folding cartons typically serve the dual function of protecting customers' products
during shipment and distribution and promoting them at retail. 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 assembling, filling and sealing. By employing a broad range
of offset, flexographic and gravure printing technologies, we are able to meet a broad range of folding carton
applications. We support our customers in creating new packaging solutions through our product development,
graphic design and packaging systems service groups. We operate 16 folding carton plants and one distribution
facility. Sales of folding cartons to unaffiliated customers accounted for 41.5%, 41.6% and 40.5% of our net
sales in fiscal 2002, 2001 and 2000, respectively.
Interior Packaging Products. We believe that we are the largest manufacturer of solid fiber partitions in
North America. We market our solid fiber partitions principally to glass container manufacturers and
producers of beer, food, wine, cosmetics and pharmaceuticals. We also manufacture specialty packaging for
specific fruit and vegetable markets and sheeted separation products for various industries. We manufacture
solid fiber interior packaging primarily from 100% recycled specialty paperboard. Our solid fiber interior
packaging is made from varying thicknesses of single ply and laminated paperboard to meet different
structural requirements, including those required for high speed casing, uncasing and filling lines. We focus on
developing high quality, value-added interior packaging products for specific applications to meet customers'
packaging needs. We employ primarily proprietary manufacturing equipment developed by our engineering
services group. This equipment delivers high-speed production which allows for rapid turnaround on large jobs
and specialized capabilities for short-run, custom applications. We operate 11 solid fiber interior packaging
plants. Sales of solid fiber interior packaging products to unaffiliated customers accounted for 8.6%, 8.8% and
9.3% of our net sales in fiscal 2002, 2001 and 2000, respectively.
Plastic Packaging Products. We manufacture custom thermoformed plastic packaging for sale to the
food, food service and consumer products markets and our Durafresh® line of rigid plastic trays for sale to
meat processors for use in the case-ready meat industry. We use radiant heat thermoforming equipment to
manufacture thermoformed products from plastic roll stock in a wide range of thicknesses, enabling us to serve
a range of product applications. We also manufacture extruded plastic roll stock in a variety of resins and in
many colors for internal use and for sale to other thermoformers. 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 support the packaging
needs of our customers through our product design and field technical services groups. We operate two plastic
packaging plants. Sales of plastic packaging products to unaffiliated customers accounted for 4.7%, 5.3% and
4.3% of our net sales in fiscal 2002, 2001 and 2000, respectively.
Merchandising Displays and Corrugated Packaging
In our merchandising displays and corrugated packaging segment, we manufacture three lines of
products: temporary and permanent point-of-purchase displays, corrugated packaging, and corrugated sheet
stock.
Merchandising Displays. We believe we are the largest manufacturer
of temporary promotional point-of-purchase displays in North America. We design, manufacture and, in most cases, pack temporary displays
for sale to consumer products companies. These high impact displays are used as marketing tools to support
new product introductions and specific product promotions in mass merchandising stores, supermarkets,
convenience stores, home improvement stores and other retail locations. We also design, manufacture and, in
some cases, pack permanent displays to the same categories of customers. Temporary displays are constructed
primarily from corrugated paperboard and generally are not restocked with products. Permanent displays are
restocked and, therefore, are constructed primarily from metal, plastic, wood and other durable materials. We
also provide contract packing services such as multi-product promotional packing including "buy one, get one
free" and complementary or free product promotions. In March 2002, we acquired Athena Industries, Inc., a
manufacturer of permanent point-of-purchase displays made primarily from metal wire. We also manufacture
lithographic laminated packaging for sale to our customers that require packaging with high quality graphics
and strength characteristics. We operate two facilities that manufacture displays, one of which also
manufactures lithographic laminated packaging, and one facility that manufactures primarily lithographic
laminated packaging. We also operate twelve contract packing facilities, three of which are co-locations shared
with one of our customers or a third party service provider to one of our customers. We also have ten display
sales and design centers. Sales of our merchandising displays and lithographic laminated packaging to
unaffiliated customers accounted for 15.2%, 12.6% and 10.5% of our net sales in fiscal 2002, 2001 and 2000,
respectively.
Corrugated Packaging. We manufacture corrugated packaging for sale to the industrial products and
consumer products markets and corrugated sheet stock for sale to corrugated box manufacturers. These
products are manufactured in a range of flute configurations and our packaging includes a wide array of
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 also convert corrugated sheets into corrugated products ranging from one-color protective
cartons to graphically brilliant point-of-purchase containers and displays. We assist our customers in
developing solutions through our structural design and engineering services groups. We operate one
corrugator, three sheet plants and one fulfillment center. Sales of our corrugated packaging products to
unaffiliated customers accounted for 4.6%, 5.3% and 5.5% of our net sales in fiscal 2002, 2001 and 2000,
respectively.
Paperboard
In our paperboard segment, we collect recovered paper and produce four paperboard products: 100%
recycled clay-coated paperboard, 100% recycled specialty paperboard, including gypsum paperboard liner,
100% recycled corrugating medium, and laminated paperboard products.
Clay-Coated and Specialty Paperboard, Corrugating Medium and Gypsum Paperboard Liner. We
believe we are the second largest U.S. manufacturer of 100% recycled paperboard (excluding linerboard,
medium and gypsum paperboard liner). We market our recycled clay-coated and specialty paperboard to
manufacturers of folding cartons, solid fiber interior packaging, book cover and laminated paperboard furniture
components, tube and core products, set-up boxes and other paperboard products. We also manufacture
recycled corrugating medium, which we market to corrugated sheet manufacturers. Through our Seven Hills
joint venture, we manufacture gypsum paperboard liner for sale to Lafarge Corporation, our joint venture
partner. We operate 12 paperboard mills. Sales of recycled paperboard (including corrugating medium) to
unaffiliated customers accounted for 15.3%, 16.3% and 17.3% of our net sales in fiscal 2002, 2001 and 2000,
respectively.
Laminated Paperboard Products. We believe we are the largest U.S. producer of laminated paperboard
products for the furniture market and the second largest U.S. manufacturer of laminated paperboard products
for the book cover market. We convert specialty paperboard into laminated paperboard products for use in
book covers and binders, furniture, automotive components, fiber drums and other industrial products. We
operate five laminated paperboard products plants. Sales of laminated paperboard products to unaffiliated
customers accounted for 7.3%, 7.8% and 9.3% of our net sales in fiscal 2002, 2001 and 2000, respectively.
Recycled Fiber. We operate 12 paper recovery facilities that collect paper from a number of sources
including factories, commercial printers, office buildings, retail stores and paper converters as well as from
other wastepaper collectors. After sorting and baling, we transfer collected paper to our paperboard mills for
processing or sell it principally to other U.S. manufacturers that use recycled fiber as their primary raw
material. These customers include, among others, manufacturers of paperboard, tissue, newsprint, roofing
products and insulation. 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 that serves large regional and national accounts. Sales of recovered paper to unaffiliated
customers accounted for 2.8%, 2.3% and 3.3% of our net sales in fiscal 2002, 2001 and 2000, respectively.
Raw Materials
The primary raw material used by our paperboard operations is recycled fiber, including primarily old
corrugated containers, office paper, box clippings, newspaper, and print shop scraps. During fiscal 2002,
recycled fiber prices fluctuated significantly. The average cost of recycled fiber used by our paperboard mills
during fiscal 2002 was $80 per ton, compared to $69 per ton during fiscal 2001. There can be no assurance that
we will be able to recoup any future increases in the cost of recycled fiber through price increases for our
products.
The primary raw material used by our converting operations, other than our plastic packaging operations,
is recycled and virgin paperboard. There are a limited number of suppliers of virgin paperboard and, in the
case of one of the primary grades of virgin paperboard used by our folding carton operations, there are only two
suppliers. While management believes that it would be able to obtain adequate replacement supplies in the
market should any of our current vendors discontinue supplying us virgin paperboard, the failure to obtain
such supplies or the failure to obtain such supplies at market prices could have an adverse effect on our results
of operations. We supply substantially all of our internal needs for recycled paperboard. Because there are
other suppliers that produce the necessary grades of recycled paperboard used in these converting operations,
management believes that it would be able to obtain adequate replacement supplies in the market should we
be unable to meet our requirements for recycled paperboard through internal production. In the event that the
cost of paperboard used in our converting operations increases, there can be no assurance that we will be able
to recoup any such cost increases through price increases of our products.
The primary raw materials used by our plastic packaging operations are virgin and recycled plastic resins,
including high impact polystyrene, high-density polyethylene, polypropylene, polyethylene terephthalate
(PET) and K resin blends. Approximately 75% of the resins we use are purchased pursuant to long-term
contractual arrangements. Because a significant number of reliable suppliers produce the plastic resins used in
our plastic packaging operations, management believes that it would be able to obtain adequate replacement
supplies of these resins in the event that any of our current vendors discontinue supplying us. In the event that
the cost of plastic resins increases, there can be no assurance that we will be able to recoup any such cost
increases through price increases for our products.
Energy
Excluding raw materials and labor, energy is one of our most significant manufacturing costs, particularly
in our paperboard operations. We use energy, including natural gas, electricity, fuel oil and coal, to generate
steam used in the paper making process and to operate our paperboard machines and converting equipment.
We generally purchase energy from local suppliers at market rates. Occasionally, we enter into long-term
agreements to purchase natural gas. We have entered into a long-term supply contract pursuant to which we
purchase steam for our St. Paul mills. Because a significant number of reliable suppliers produce the various
sources of energy used in our operations, management believes that it would be able to obtain adequate
replacement supplies should any of our current vendors discontinue supplying us. In recent years, the cost of
natural gas, which we use in many of our manufacturing operations, including most of our paperboard mills,
has fluctuated significantly. There can be no assurance that we will be able to recoup any future increases in
the cost of natural gas or other energy through price increases for our products.
Sales and Marketing
Our top ten external customers represented approximately 28% of consolidated net sales in fiscal 2002,
none of which accounted for more than 10% of our consolidated net sales. 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 a material 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 good relationships with our key customers. In fiscal 2002, we sold:
- packaging products to approximately 2,900 customers, the top ten of which represented approximately
32% of our external sales of the packaging products segment;
- merchandising display products and corrugated packaging products to approximately 350 and 800
customers, respectively, the top ten of which represented approximately 57% of our external sales of the
merchandising display and corrugated packaging segment; and
- recycled paperboard, corrugating medium, laminated paperboard products and recovered paper to
approximately 2,000 customers, the top ten of which represented approximately 49% of our external
sales of the paperboard segment.
Each of our product lines, other than our gypsum paperboard liner, is marketed through its own sales
force. Each sales force maintains direct sales relationships with our customers. We also market a number of
our product lines, including folding cartons, plastic packaging, interior packaging and book covers, through
independent sales representatives and independent distributors. 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 and
merchandising displays and corrugated packaging sales personnel a base salary plus commissions. We pay our
independent sales representatives on a commission basis. Under the terms of our Seven Hills joint venture
arrangement, Lafarge Corporation is required to purchase all of the gypsum paperboard liner produced by
Seven Hills.
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 packaging
markets, we compete with a significant number of national, regional and local packaging suppliers in North
America. In the solid fiber interior packaging, promotional 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. Our coated paperboard and specialty paperboard operations compete with integrated
and non-integrated national and regional companies manufacturing various grades of recycled and recycled
content paperboard. Our paperboard also competes with virgin paperboard. Our recycled fiber operations
compete with national, regional and local companies.
Due to the highly competitive nature of all of our businesses, 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. Approximately
30% of our paperboard segment sales are to internal customers, predominantly in our packaging products
segment. Our paperboard segment's sales volumes may therefore be directly impacted by changes in demand
for our packaging products.
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 that 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 are likely to 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 or a range 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.
Packaging manufactured from paperboard competes with plastic and corrugated packaging, as well as
packaging manufactured from other materials. Customer shifts away from paperboard packaging to packaging
from such other substrates could adversely affect our results of operations.
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 conducted training of our employees to ensure that no federal, state or local rules or
regulations are violated in the maintenance of our 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.
Excluding costs related to wastewater treatment system improvements at a paperboard mill in Otsego,
Michigan discussed in the next paragraph, we estimate that we will spend up to $1.0 million for capital
expenditures during fiscal year 2003 in connection with matters relating to environmental compliance. We also
may be required to upgrade certain waste water treatment equipment at one of our facilities during the next
twelve months at a cost ranging from approximately $100,000 to $400,000. In addition, we may need 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 could cost from $4.0 million
to $6.0 million. If required, we anticipate those costs to be incurred within the next three years.
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 alleged that we were 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 alleged that we exceeded several numerical limitations for chemical
parameters outlined in the wastewater permit and violated other wastewater discharge criteria. The MDEQ
further alleged that we are liable for contamination contained on the facility property as well as for
contributing contamination to the Kalamazoo River site. The letter requested 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 entered into an administrative consent order pursuant to which
improvements are being made to the facility's wastewater treatment system and we have paid a $75,000
settlement amount. We have also agreed to pay in three equal installments an additional amount of $30,000
for past and future oversight costs incurred by the State of Michigan. The first two installments have been
made, with the last installment to be made during fiscal year 2003. The cost of making upgrades to the
wastewater treatment systems is estimated to be up to $3.1 million, of which we have incurred $1.0 million as
of September 30, 2002. Nothing contained in the order constitutes an admission of liability or any factual
finding, allegation or legal conclusion on our part. The order was completed during the first quarter of fiscal
2002. To date, the MDEQ has not made any other demand regarding our alleged liability for contamination at
the Kalamazoo River site.
We have been identified as a potentially responsible party, which we refer to as a PRP, at ten 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.
Patents and Other Intellectual Property
We hold a substantial number of patents and pending patent applications in the United States and in
certain foreign countries. Our patent portfolio consists primarily of utility and design patents relating to our
various operations, as well as certain process and methods patent applications relating to our paperboard
operations. Certain of our patents and other intellectual property are supported by trademarks such as
Durafresh®, MillMask®, Millennium®, AdvantaEdge®, WineGuard® and ProduSaver™. Our patents and
other intellectual property, particularly our patents relating to our plastic packaging and folding carton
operations, are important to our operations as a whole.
We have filed suit against four parties seeking to enjoin them from infringing our U.S. patent number
6,430,467 relating to our Durafresh® tray technology and to recover damages suffered by us as a result of such
infringements. Another party has filed suit against us seeking to invalidate such patent. We are in the early
stages of these lawsuits and no assurances can be made that we will be able to successfully enforce our patent.
We have additional patents pending with respect to our Durafresh® tray technology.
Employees
At November 25, 2002, we had 8,418 employees. Of these employees, 6,520 were hourly and 1,898 were
salaried. Approximately 2,900 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.
Available Information
Our Internet address is www.rocktenn.com. Please note that our Internet address is included in this
annual report on Form 10-K as an inactive textual reference only. The information contained on our website is
not incorporated by reference into this annual report on Form 10-K and should not be considered part of this
report. We file annual, quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission ("SEC") and we make available free of charge most of our SEC filings
through our Internet website as soon as reasonably practicable after we electronically file these materials with
the SEC. You may access these SEC filings via the hyperlink that we provide on our website to a third-party
SEC filings website.
Forward-looking Information and Risk Factors
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 plastic resins, our principal externally
sourced 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, tissue, newsprint and
corrugated packaging manufacturers to the production of products with some recycled paper content may
increase demand for recovered paper. Furthermore, there has been a substantial increase in demand for U.S.
sourced recovered paper by Asian countries. These increasing demands may result in cost increases. In recent
years, the cost of natural gas, which we use in many of our manufacturing operations, including most of our
paperboard mills, and other energy has 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
other energy through price increases for our products. Further, a reduction in supply of recovered paper, virgin
paperboard and plastic resins, 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.
Our Earnings are Highly Dependent on Volumes
Our operations generally have high fixed operating cost components and therefore our earnings are highly
dependent on volumes, which tend to fluctuate. These fluctuations make it difficult to predict our results with
any degree of certainty.
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 packaging
markets, we compete with a significant number of national, regional and local packaging suppliers in North
America. In the solid fiber interior packaging, promotional 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. Our coated paperboard and specialty paperboard operations compete with integrated
and non-integrated national and regional companies manufacturing various grades of recycled and recycled
content paperboard. Our paperboard also competes with virgin paperboard. Our recycled fiber operations
compete with national, regional and local companies.
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 that 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 or a range 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 successfully be able 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 regulating 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 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.
Non-audit Services by Independent Auditors
During the fourth quarter of fiscal 2002, the audit committee of our board of directors authorized Ernst &
Young LLP, our independent auditors, to perform the following non-audit services, provided that the total cost
of such services does not exceed $50,000 without the prior approval of the audit committee:
- a review of our corporate tax return for the fiscal year ended September 30, 2002, and
- to provide general accounting advice relating to accounting issues.
Item 2. PROPERTIES
The following table shows information about our paperboard mills:
| Location of Mill |
|
Fiscal 2002
Production
Capacity
(in tons) |
|
Paperboard Produced |
|
|
|
|
|
|
| St. Paul, MN |
185,000 |
Recycled corrugating medium |
| St. Paul, MN |
162,000 |
Clay-coated recycled paperboard |
| Battle Creek, MI |
141,000 |
Clay-coated recycled paperboard |
| Sheldon Springs, VT (Missisquoi Mill) |
105,000 |
Clay-coated recycled paperboard |
| Dallas, TX |
94,000 |
Clay-coated recycled paperboard |
| Stroudsburg, PA |
52,000 |
Clay-coated recycled paperboard |
| Chattanooga, TN |
130,000 |
Specialty recycled paperboard |
| Otsego, MI |
95,000 |
Specialty recycled paperboard |
| Lynchburg, VA |
76,500* |
Specialty recycled paperboard |
| Eaton, IN |
59,000 |
Specialty recycled paperboard |
| Cincinnati, OH |
51,000 |
Specialty recycled paperboard |
| Aurora, IL |
32,000 |
Specialty recycled paperboard |
* Reflects the production capacity of one of our two paperboard machines that has been converted to
manufacture gypsum paperboard liner and is owned by Seven Hills Paperboard, LLC, an entity in which we
own 49% of the equity. During fiscal 2002, we permanently shut down a second paperboard machine at our
Lynchburg, Virginia paperboard mill and a specialty paperboard machine at our Dallas, Texas paperboard
mill.
In addition to our paperboard mills set forth above, we also operate 65 converting operations and one
distribution facility that are located in 24 states (mainly in the Southwestern, Southeastern, Midwestern and
Northeastern U.S.), Canada, Mexico and Chile. Of our converting facilities and mills, we own 63 and lease
14. 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.
The following is a list of our significant facilities other than our paperboard mills:
| Type of Facility |
|
Number of
Facilities |
|
Locations |
|
|
|
|
|
|
PACKAGING PRODUCTS
|
| Folding Carton Operations |
| Manufacturing Facilities(1) |
16 |
Eutaw, AL
Conway, AR
Harrison, AR
Warwick, QU (Canada)
Stone Mountain, GA
Clinton, IA
Chicopee, MA
Baltimore, MD
St. Paul, MN
Marshville, NC
Kimball, TN (Sequatchie Valley Plant)
Knoxville, TN
Lebanon, TN
Greenville, TX
Waxahachie, TX
Milwaukee, WI |
| Technical Center |
1 |
St. Paul, MN |
| |
| Interior Packaging Operations |
| Manufacturing Facilities |
11 |
Merced, CA
Orange, CA
San Bernardo, Santiago, Chile
Hartwell, GA
Hillside, IL
Scarborough, ME
Atizapan, Mexico
Villa de Garcia, N.L., Mexico
Charleroi, PA
Dallas, TX
Tukwila, WA |
| Engineering Services |
1 |
Tucker, GA |
| |
| Plastic Packaging Operations |
| Manufacturing Facilities |
2 |
Conyers, GA
Franklin Park, IL (Chicago Plant) |
| |
MERCHANDISING DISPLAYS AND CORRUGATED PACKAGING
|
| Merchandising Displays Operations |
| Manufacturing Facilities |
3 |
Burr Ridge, IL
Winston-Salem, NC
Tullahoma, TN |
| Contract Packing Facilities |
12 |
Dekalb, IL
Woodridge, IL
Mundelein, IL
Hunt Valley, MD
Olive Branch, MS
Morristown, NJ
Pennsauken, NJ
Winston-Salem, NC
West Chester, OH
Mechanicsburg, PA
Memphis, TN
Martinsville, VA |
| Sales and Design Centers |
10 |
Bethel, CT
Long Beach, CA
Hershey, PA
Cincinnati, OH
Hunt Valley, MD
Totowa, NJ
Pennsauken, NJ
Winston-Salem, NC
Burr Ridge, IL
Rogers, AR |
| |
| Corrugated Packaging Operations |
| Sheet Plants |
3 |
Norcross, GA
Greenville, SC
Gallatin, TN |
| Corrugator Facility |
1 |
Norcross, GA |
| Fulfillment Center |
1 |
Lebanon, TN |
| |
PAPERBOARD
|
| Laminated Paperboard Operations |
| Manufacturing Facilities |
5 |
Macon, GA
Aurora, IL
Columbus, IN
Wright City, MO
Dallas, TX |
| |
| Recycled Fiber Operations |
| Recycled Fiber Facilities |
12 |
Huntsville, AL
Tucker, GA (Atlanta)
Indianapolis, IN
St. Paul, MN
Maple Grove, MN
Fairfield, OH (Cincinnati)
Chattanooga, TN
Cleveland, TN
Knoxville, TN
Shelbyville, TN
Dallas, TX
Fort Worth, TX |
| Recycle Marketing and Brokerage |
1 |
Chattanooga, TN |
(1) Our El Paso, TX manufacturing facility closed in December 2002.
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, please see Item 1, "Business —
Governmental Regulation — 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 as of December 5, 2002:
James A. Rubright has served as chairman of the board since January 2000 and chief executive officer
since October 1999. Prior to joining our company, from February 1994 until October 1999, Mr. Rubright
served as an executive officer of Sonat, Inc., an energy concern. From 1995 to 1996 Mr. Rubright was senior
vice president, general counsel and chief accounting officer of Sonat, Inc. In 1996 Mr. Rubright became head
of Sonat's interstate natural gas pipeline group, and in 1998 he became executive vice president of Sonat, Inc.
with responsibility for Sonat's interstate natural gas pipeline group and energy services businesses.
Mr. Rubright is also a director of AGL Resources Inc., an energy company, and Avondale Incorporated, a
textile manufacturing company.
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. Mr. Dreibelbis joined our company in April 1979.
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
general 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.
Nicholas G. George has served as executive vice president and general manager of our folding carton
division since June 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 1999, Mr. Voorhees
served as an executive of Sonat, Inc., an energy company. From 1995 to 1999, 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 wholesale electric power marketing company
and as executive vice president of Sonat Power, a power plant development company.
Robert B. McIntosh has served as senior vice president, general counsel and secretary since August 2000.
From September 1995 until July 2000, Mr. McIntosh served as vice president, general counsel and assistant
secretary.
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.
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