ROCK-TENN COMPANY
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended September 30, 2005
    OR
 
o
  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

(State or Other Jurisdiction of
Incorporation or Organization)
  62-0342590
(I.R.S. Employer
Identification No.)
 
504 Thrasher Street, Norcross, Georgia

(Address of Principal Executive Offices)
  30071

(Zip Code)
Registrant’s Telephone Number, Including Area Code: (770) 448-2193
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Exchange on Which Registered
Class A Common Stock, par value $0.01 per share   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o     No þ
      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o     No þ
      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 þ     No o
      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.     þ
      Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ     No o
      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o     No þ
      The aggregate market value of the common equity held by non-affiliates of the registrant as of March 31, 2005, the last business day of the registrant’s most recently completed second fiscal quarter (based on the last reported closing price of $13.30 per share of Class A Common Stock as reported on the New York Stock Exchange on such date), was approximately $380 million.
      As of December 8, 2005, the registrant had 36,417,342 shares of Class A Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
      Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on January 27, 2006, are incorporated by reference in Parts II and III.
 
 


 

ROCK-TENN COMPANY
INDEX TO FORM 10-K
             
        Page
        Reference
         
 PART I
   Business     3  
   Risk Factors     11  
   Unresolved Staff Comments     13  
   Properties     13  
   Legal Proceedings     14  
   Submission of Matters to a Vote of Security Holders     14  
 
 PART II
   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     15  
   Selected Financial Data     16  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     18  
   Quantitative and Qualitative Disclosures About Market Risk     37  
   Financial Statements and Supplementary Data     40  
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     95  
   Controls and Procedures     95  
   Other Information     96  
 
 PART III
   Directors and Executive Officers of the Registrant     96  
   Executive Compensation     96  
   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     96  
   Certain Relationships and Related Transactions     96  
   Principal Accounting Fees and Services     96  
 
 PART IV
   Exhibits and Financial Statement Schedules     97  
 EX-12 STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
 EX-21 SUBSIDIARIES OF THE REGISTRANT
 EX-23 CONSENT OF ERNST & YOUNG LLP
 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE CEO AND CFO

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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 consolidated subsidiaries, including RTS Packaging, LLC, which we refer to as “RTS” and GSD Packaging, LLC, which we refer to as “GSD.” We own 65% of RTS and conduct our interior packaging business through RTS. We own 60% of GSD and conduct some folding carton operations through GSD. These terms do not include Seven Hills Paperboard, LLC, which we refer to as “Seven Hills.” We own 49% of Seven Hills, a manufacturer of gypsum paperboard liner, which we do not consolidate for purposes of our financial statements. All references in the accompanying financial statements and this Annual Report on Form 10-K to aggregated data regarding sales price per ton and fiber, energy, chemical and freight costs with respect to our recycled paperboard mills excludes that data with respect to our Aurora, Illinois, recycled paperboard mill. We exclude that data because the Aurora operation sells only converted products. All other references herein to operating data with respect to our recycled paperboard mills, including tons data and capacity utilization rates, includes operating data from our Aurora recycled paperboard mill.
General
      We are primarily a manufacturer of packaging, merchandising displays, and paperboard. We operate a total of 93 facilities located in 26 states, Canada, Mexico, Chile and Argentina.
      On June 6, 2005, we acquired from Gulf States Paper Corporation and certain of its related entities (which we refer to collectively as “Gulf States”) substantially all of the assets of Gulf States’ Paperboard and Packaging operations (which we refer to as “GSPP”) and assumed certain of Gulf States’ related liabilities for an aggregate purchase price of $552.2 million, net of cash received of $0.7 million, including expenses. We refer to this acquisition as the “GSPP Acquisition”. Pursuant to the GSPP Acquisition we acquired a bleached paperboard mill in Demopolis, Alabama, which includes a pulp mill and a chip mill (which we refer to collectively as the “bleached paperboard mill”) and 11 folding carton plants.
Products
      We report our results of operations in three segments: (1) the Packaging Products segment, (2) the Merchandising Displays and Corrugated Packaging segment, and (3) the Paperboard segment. For financial information relating to our segments, please see Item 8, “Financial Statements and Supplementary Data.” For financial information related to our non-US operations, see “Note 16. Segment Information” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
Packaging Products Segment
      In our Packaging Products segment, we manufacture folding cartons and solid fiber interior packaging.
      Folding Cartons. We believe that we are the second largest producer of folding cartons in North America. Customers use our folding cartons to package frozen, dry and perishable food items for the retail sale and quick-serve markets; beverages; paper goods; automotive products; hardware; health care and nutritional food supplement products; household goods; healthcare and beauty aids; recreational products; textiles; apparel; and other products. We also manufacture express envelopes for the overnight courier industry. Folding cartons typically protect customers’ products during shipment and distribution and employ graphics to promote them at retail. We manufacture folding cartons from recycled or virgin paperboard, including high strength paperboard, laminated paperboard and various substrates with specialty characteristics such as grease masking and microwaveability. We print, coat, die-cut and glue the paperboard 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, gravure, backside printing, and double coating 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

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service groups. Sales of folding cartons to unaffiliated customers accounted for 49.1%, 48.8%, and 46.5% of our net sales in fiscal 2005, 2004, and 2003, respectively.
      We believe that the GSPP Acquisition gives us increased geographic and technical coverage of the North American markets with a more diversified customer base, and the folding carton converting operations have complementary end markets, paper substrates and customers. The GSPP folding carton plants serve primarily the food and food service markets and the pharmaceutical and health and beauty markets. Three of the GSPP plants are part of a joint venture with Dopaco, Inc., in which we have a 60% interest and which manufactures take-out food pail products.
      Interior Packaging. Our subsidiary, RTS, specializes in the design and manufacture of fiber partitions and die-cut paperboard components. 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 agricultural packaging for specific fruit and vegetable markets and sheeted separation products for various industries. We also manufacture partitioned shipping cases to include stand-alone point-of-purchase display systems. 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, de-casing 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 that allows for rapid turnaround on large jobs and specialized capabilities for short-run, custom applications. RTS operates in North America, Mexico, Chile, and Argentina. Sales of interior packaging products to unaffiliated customers accounted for 8.0%, 8.4%, and 9.1% of our net sales in fiscal 2005, 2004, and 2003, respectively.
Merchandising Displays and Corrugated Packaging Segment
      In our Merchandising Displays and Corrugated Packaging segment, we manufacture temporary and permanent point-of-purchase displays, corrugated packaging, and corrugated sheet stock.
      Merchandising Displays. We believe that we are one of the largest manufacturers 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 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, pre-assemble permanent displays for 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. We also manufacture lithographic laminated packaging for sale to our customers that require packaging with high quality graphics and strength characteristics. Sales of our merchandising displays and lithographic laminated packaging to unaffiliated customers accounted for 13.1%, 15.0%, and 15.4% of our net sales in fiscal 2005, 2004, and 2003, 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 United States. To make corrugated sheet stock, we 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

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through our structural design and engineering services groups. Sales of our corrugated packaging products to unaffiliated customers accounted for 6.0%, 4.8%, and 4.6% of our net sales in fiscal 2005, 2004, and 2003, respectively.
Paperboard Segment
      In our Paperboard segment, we collect recovered paper and produce paperboard products.
      Paperboard. We believe we are one of the largest U.S. manufacturers of 100% recycled paperboard. We market our coated recycled 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 sell to corrugated sheet manufacturers. Through our Seven Hills joint venture with Lafarge North America, Inc. (“Lafarge”), we manufacture gypsum paperboard liner for sale to Lafarge.
      Our bleached paperboard mill manufactures bleached paperboard and southern bleached softwood kraft pulp. Based on a study by Jaakko Pöyry Consulting conducted for us during our due diligence process for the GSPP Acquisition, we believe our bleached paperboard mill is one of the lowest cost solid bleached sulphate paperboard mills in North America because of cost advantages achieved through original design, process flow, replacement of its recovery boiler and hardwood pulp line in the early 1990s and access to hardwood and softwood fiber.
      We also believe we are a leading U.S. producer of laminated paperboard products for the ready-to-assemble furniture market. We convert specialty paperboard into laminated paperboard products for use in furniture, automotive components, storage, and other industrial products. We also convert specialty paperboard into book covers.
      Sales of pulp, paperboard, recycled medium, and laminated paperboard products to unaffiliated customers accounted for 19.7%, 19.0%, and 20.8% of our net sales in fiscal 2005, 2004, and 2003, respectively.
      Recycled Fiber. Our paper recovery facilities collect primarily waste paper from a number of sources including factories, warehouses, commercial printers, office complexes, retail stores, document storage facilities, and paper converters as well as from other wastepaper collectors. We handle a wide variety of grades of recovered paper, including old corrugated containers, office paper, box clippings, newspaper and print shop scraps. After sorting and baling, we transfer collected paper to our paperboard mills for processing, or sell it, principally to other U.S. manufacturers. These customers include, among others, manufacturers of paperboard, tissue, newsprint, roofing products and insulation. We also operate a fiber marketing and brokerage group that serves large regional and national accounts. Sales of recovered paper to unaffiliated customers accounted for 4.1%, 4.0%, and 3.6% of our net sales in fiscal 2005, 2004, and 2003, respectively.
Raw Materials
      The primary raw materials that our paperboard operations use is recycled fiber at our recycled paperboard mills and virgin fibers from hardwoods and softwoods at our bleached paperboard mill. The average cost of recycled fiber that our recycled paperboard mills used during fiscal 2005, fiscal 2004, and fiscal 2003 was $102 per ton, $98 per ton, and $83 per ton, respectively. During fiscal 2005 recycled fiber prices were relatively stable. During fiscal 2004, recycled fiber prices fluctuated significantly. While virgin fiber prices are generally more stable than recycled fiber prices, they are subject to fluctuation, particularly during prolonged periods of heavy rain. As part of the GSPP Acquisition, we entered into a five year chip supply agreement with Gulf States pursuant to which Gulf States has essentially agreed to continue to make available to our bleached paperboard mill the supply of soft wood chips that it made available to the mill before the acquisition, which represents approximately 75% to 80% of the mill’s historical soft wood chip supply requirements.
      There can be no assurance that we will be able to recoup any future increases in the cost of recycled and virgin fiber through price increases for our products, in part due to competitive factors and contractual limitations. See “Business — Competition” below.

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      Recycled and virgin paperboard are the primary raw materials that our paperboard converting operations use. One of the primary grades of virgin paperboard, coated unbleached kraft, used by our folding carton operations, has only two domestic suppliers. While management believes that it would be able to obtain adequate replacement supplies in the market should either of our current vendors discontinue supplying us coated unbleached kraft, the failure to obtain such supplies or the failure to obtain such supplies at reasonable market prices could have an adverse effect on our results of operations. We supply substantially all of our internal needs for recycled paperboard and consume approximately 50% of our bleached paperboard production, although we have the capacity to consume it all. Because there are other suppliers that produce the necessary grades of paperboard used in our 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 or bleached paperboard through internal production. If the cost of paperboard that we use in our converting operations increases, there can be no assurance that we will be able to recoup any such cost increases through price increases for our products.
Energy
      Energy is one of the most significant manufacturing costs of our paperboard operations. We use natural gas, electricity, fuel oil and coal to generate steam used in the paper making process and to operate our recycled paperboard machines and primarily electricity for our converting equipment. Our bleached paperboard mill uses wood by-products for most of its energy. We generally purchase these products from suppliers at market rates. Occasionally, we enter into long-term agreements to purchase natural gas. The average cost of energy used by our recycled paperboard mills during fiscal 2005 was $73 per ton, compared to $67 per ton during fiscal 2004 and $58 per ton in fiscal 2003. Our bleached paperboard mill’s recovery boiler is able to produce substantially all of the mill’s energy needs.
      In recent years, the cost of natural gas, which we use in many of our manufacturing operations, including most of our recycled paperboard mills, has fluctuated significantly, while increasing significantly. The cost of natural gas can also affect the cost of electricity, which we also use in our manufacturing operations. 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, in part due to competitive factors and contractual limitations. See “Business — Competition” below.
      We are a party to a long-term supply contract pursuant to which we purchase steam from a nearby power plant for our St. Paul, Minnesota mills. The supply contract currently expires in June 2007. The steam supplier has advised us that by September 2007 it expects to replace the power plant with a facility that will not have the capability to provide steam to the St. Paul mills. We are currently evaluating replacement energy supply alternatives. We currently anticipate that, subject to necessary regulatory approval, we may incur aggregate capital expenditures of approximately $5 to $15 million during fiscal years 2006 and 2007 to repair and restart an existing on-site power plant, depending upon the scope of the project selected. The power plant could be powered by burning natural gas or fuel oil. We believe that the cost of operating the on-site power plant may be more expensive than the cost of our current steam supply.
Sales and Marketing
      Our top 10 external customers represented approximately 26% of consolidated net sales in fiscal 2005, none of which individually 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 2005, we sold:
  •  packaging products to approximately 3,200 customers, the top 10 of which represented approximately 18% of the external sales of our Packaging Products segment;

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  •  merchandising display products and corrugated packaging products to approximately 1,300 customers, the top 10 of which represented approximately 52% of the external sales of our Merchandising Display and Corrugated Packaging segment; and
 
  •  paperboard products to approximately 1,750 customers, the top 10 of which represented approximately 42% of the external sales of our Paperboard segment.
      During fiscal 2005, we sold approximately 33% of our Paperboard segment sales to internal customers, primarily to our Packaging Products segment. During fiscal 2005, we sold approximately 50% of our recycled paperboard to our converting facilities. During fiscal 2006, we expect to sell approximately one-half of our bleached paperboard to our converting operations. Our Paperboard segment’s sales volumes may therefore be directly impacted by changes in demand for our packaging products. Under the terms of our Seven Hills joint venture arrangement, Lafarge is required to purchase all of the qualifying gypsum paperboard liner produced by Seven Hills.
      We market each of our product lines, other than our gypsum paperboard liner, through separate sales forces. Each sales force maintains direct sales relationships with our customers. We also market a number of our products through either independent sales representatives or independent distributors, or both. We pay our 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.
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, and converted paperboard products markets, we compete with a smaller number of national, regional and local companies offering highly specialized products. Our paperboard operations compete with integrated and non-integrated national and regional companies operating in North America that manufacture various grades of paperboard and, to a limited extent, manufacturers outside of North America.
      Because all of our businesses operate in highly competitive industry segments, 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 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 and we evaluate our performance with annual customer service surveys. 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.
      Our ability to fully pass through cost increases can be limited based on competitive market conditions for various products that we sell and by the actions of our competitors. In addition, we sell a significant portion of our paperboard and paperboard-based converted products pursuant to term contracts that provide that prices are either fixed for specified terms or provide for price adjustments based on negotiated terms, including changes in specified paperboard index prices. The effect of these contractual provisions generally is to either limit the amount of the increase or delay our ability to recover announced price increases for our paperboard and paperboard-based converted products.
      The packaging products and recycled paperboard industries have undergone significant consolidation in recent years. 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

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years, purchasers of 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 products manufactured from paperboard compete 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 (which we refer to as “OSHA”) and related regulations. OSHA, among other things, establishes asbestos and noise standards and regulates the use of hazardous chemicals in the workplace. Although we do not use asbestos in manufacturing our products, some of our facilities contain asbestos. For those facilities where asbestos is present, we believe we have properly contained this asbestos and/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 (which we refer to as “US EPA”). 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 associated with changes to regulations promulgated under 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 approximately $4.0 million for capital expenditures during fiscal 2006 in connection with matters relating to environmental compliance. Additionally, to comply with emissions regulations under the Clean Air Act, we may be required to modify or replace a coal-fired boiler at one of our facilities, the cost of which we estimate would be approximately $2.0 to $3.0 million. If necessary, we anticipate that we will incur those costs before the end of fiscal 2007.
      We have been identified as a potentially responsible party (“PRP”) at 10 active “superfund” sites pursuant to CERCLA or comparable state statutes (“Superfund legislation”). Based upon currently available information and the opinions of our environmental compliance managers and general counsel, although there can be no assurance, we have reached the following conclusions with respect to these ten sites:
  •  With respect to each of two sites, while we have been identified as a PRP, our records reflect no evidence that we are associated with the site. Accordingly, if we are considered to be a PRP, we believe that we should be categorized as an unproven PRP.

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  •  With respect to each of eight sites, we preliminarily determined that, while we may be associated with the site and while it is probable that we may have some liability with respect to the site, one of the following conclusions was applicable:
  •  With respect to each of six sites, we determined that it was appropriate to conclude that, while it is not estimable, the potential liability is reasonably likely to be a de minimus amount and immaterial.
 
  •  With respect to each of two sites, we have preliminarily determined that it is appropriate to conclude that the potential liability is best reflected by a range of reasonably possible liabilities all of which we expect to be de minimus and immaterial.
      Except as stated above, we can make no assessment of any potential for our liability with respect to any such site. Further, there can be no assurance that we will not be required to conduct some remediation in the future at any such site and that such remediation will not have a material adverse effect on our results of operations, financial condition or cash flows. We believe that we can assert claims for indemnification pursuant to existing rights we have under settlement and purchase agreements in connection with certain of these sites. If any party brings an environmental claim or action against us involving any such site, we intend to assert claims for indemnification in connection with such site. There can be no assurance that we will be successful with respect to any claim regarding such indemnification rights or that, if we are successful, that any amounts paid pursuant to such indemnification rights will be sufficient to cover all costs and expenses.
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 patents and patent applications relating to our paperboard operations. Certain of our patents and other intellectual property are supported by trademarks such as MillMask®, Millennium Board®, AdvantaEdge®, BlueCuda®, BillBoard®, CitruSaver®, Duraframe®, DuraFreezetm, ProduSaver®, WineGuard®, MAX PDQtm, and MAXLite PDQtm. Our patents and other intellectual property, particularly our patents relating to our interior packaging, retail displays and folding carton operations, are important to our operations as a whole.
      One of our patents (U.S. Patent Number 6,430,467) and several pending patent applications relate to centralized packaging of case-ready meat. We previously disclosed that there was a legal proceeding pending pursuant to which, among other things, we were seeking to enjoin certain parties from infringing our U.S. Patent Number 6,430,467 and to recover damages suffered by us as a result of the infringement. On March 30, 2005, the Court granted the defendants’ motion for Summary Judgment of patent invalidity with respect to certain claims of U.S. Patent Number 6,430,467. There are currently pending defendants’ counterclaims of patent unenforceability. In addition, one of the other opposing parties has pending claims of alleged patent unenforceability and tortious interference.
      We can make no assurances concerning any pending legal or administrative proceedings with respect to U.S. Patent Number 6,430,467 and pending patent applications related to centralized packaging of case-ready meat or with respect to any of the proceedings thereto. We do not believe that any such proceedings will have a material adverse effect on our results of operations, financial condition or cash flows.
Employees
      At September 30, 2005, we had approximately 9,600 employees. Of these employees, approximately 7,400 were hourly and approximately 2,200 were salaried. Approximately 3,150 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 other than a three-week work stoppage at our Aurora, Illinois, laminated paperboard products manufacturing facility during fiscal 2004. Management believes that our relations with our employees are good.

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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. We also make available on our website the charters of our audit committee, our compensation committee, and our nominating and corporate governance committee, as well as the corporate governance guidelines adopted by our board of directors, our Code of Business Conduct for employees, our Code of Business Conduct and Ethics for directors and our Code of Ethical Conduct for CEO and senior financial officers. We will also provide copies of these documents, without charge, at the written request of any shareholder of record. Requests for copies should be mailed to: Rock-Tenn Company, 504 Thrasher Street, Norcross, Georgia 30071, Attention: Corporate Secretary.
Forward-Looking Information
      We, or our executive officers and directors on our behalf, may from time to time make “forward-looking statements” within the meaning of the federal securities laws. 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 any of the following: our results of operations, financial condition, cash flows, liquidity or capital resources, including expectations regarding sales growth, our production capacities, our ability to achieve operating efficiencies, and our ability to fund our capital expenditures, interest payments, stock repurchases, dividends, working capital needs, and repayments of debt; the consummation of acquisitions and financial transactions, the effect of these transactions on our business and the valuation of assets acquired in these transactions; our competitive position and competitive conditions; our ability to obtain adequate replacement supplies of raw materials or energy; our relationships with our customers; our relationships with our employees; our plans and objectives for future operations and expansion; amounts and timing of capital expenditures and the impact of such capital expenditures on our results of operations, financial condition, or cash flows; our compliance obligations with respect to health and safety laws and environmental laws, the cost of such compliance, the timing of such costs, or the impact of any liability under such laws on our results of operations, financial condition or cash flows, and our right to indemnification with respect to any such cost or liability; the impact of any gain or loss of a customer’s business; the impact of announced price increases; the scope, costs, timing and impact of any restructuring of our operations and corporate and tax structure; the scope and timing of any litigation or other dispute resolutions and the impact of any such litigation or other dispute resolutions on our results of operations, financial condition or cash flows; factors considered in connection with any impairment analysis, the outcome of any such analysis and the anticipated impact of any such analysis on our results of operations, financial condition or cash flows; pension and retirement plan obligations, contribution expenses, the factors used to evaluate and estimate such obligations and expenses, the impact of amendments to our pension and retirement plans, and pension and retirement plan asset investment strategies; the financial condition of our insurers and the impact on our results of operations, financial condition or cash flows in the event of an insurer’s default on their obligations; the impact of any market risks, such as interest rate risk, pension plan risk, foreign currency risk, commodity price risks, energy price risk, rates of return, the risk of investments in derivative instruments, and the risk of counterparty nonperformance, and factors affecting such risks; the amount of contractual obligations based on variable price provisions and variable timing and the effect of contractual obligations on liquidity and cash flow in future periods; the implementation of accounting standards and the impact of such standards once implemented; factors used to calculate the fair value of options, including expected term and stock price volatility; our assumptions and expectations regarding critical accounting policies and estimates; the adequacy of our system of internal

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controls over financial reporting; and the effectiveness of any actions we may take with respect to our system of internal controls over financial reporting.
      Any forward-looking statements are based on our current expectations and beliefs at the time of such statements and 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 these forward-looking statements. With respect to these statements, we make a number of assumptions regarding, among other things, expected economic, competitive and market conditions generally; expected volumes and price levels of purchases by customers; competitive conditions in our businesses; possible adverse actions of our customers, our competitors and suppliers; labor costs; the amount and timing of expected capital expenditures, including installation costs, project development and implementation costs, severance and other shutdown costs; restructuring costs; the expected utilization of real property that is subject to the restructurings due to realizable values from the sale of that property; anticipated earnings that will be available for offset against net operating loss carry-forwards; expected credit availability; raw material and energy costs; replacement energy supply alternatives and related capital expenditures; and expected year-end inventory levels and costs. These assumptions also could be affected by changes in management’s plans, such as delays or changes in anticipated capital expenditures or changes in our operations. We believe that our assumptions are reasonable; however, undue reliance should not be placed on these assumptions, which are based on current expectations. These forward-looking statements are subject to certain risks including, among others, that our assumptions will prove to be inaccurate. There are many factors that impact these forward-looking statements that we cannot predict accurately. Actual results may vary materially from current expectations, in part because we manufacture most of our products against customer orders with short lead times and small backlogs, while our earnings are dependent on volume due to price levels and our generally high fixed operating costs. Forward-looking statements speak only as of the date they are made, and we, and our executive officers and directors, have no duty under the federal securities laws and undertake no obligation to update any such information as future events unfold.
      Further, our business is subject to a number of general risks that would affect any such forward-looking statements, including the risks discussed under “Item 1A. — Risk Factors.”
Item 1A.      RISK FACTORS
• We May Face Increased Costs and Reduced Supply of Raw Materials
      Historically, the cost of recovered paper and virgin paperboard, 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 have and may continue to 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 costs (including energy generated by burning natural gas) have also fluctuated significantly, while increasing significantly. There can be no assurance that we will be able to recoup any past or 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 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. If we are unable to maintain the selling prices of products within these industries, that inability 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.

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• 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
      Our businesses are in industries that are highly competitive, and no single company dominates an 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 and converted paperboard products markets, we compete with a smaller number of national, regional and local companies offering highly specialized products. Our paperboard operations compete with integrated and non-integrated national and regional companies operating in North America manufacturing various grades of paperboard and, to a limited extent, manufacturers outside of North America. Because all of our businesses operate in highly competitive industry segments, 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. Further, competitive conditions have prevented us from fully recovering our increased costs and may continue to inhibit our ability to pass on cost increases to our customers. Our paperboard segment’s sales volumes may be directly impacted by changes in demand for our packaging products and our laminated paperboard products. See “Business — Competition.”
• We May be Unable to Complete and Finance Acquisitions
      We have completed several acquisitions in recent 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 we are integrating the operations of the acquired business into our operations. Once integrated, acquired operations may not achieve levels of revenues, profitability or productivity comparable with those our existing operations achieve, 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 we may not realize the expected benefits of such capital expenditures.
• We are Subject to Extensive Environmental and Other 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 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 CERCLA or comparable state statutes. See “Business — Governmental Regulation — Environmental Regulation.” 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.

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• We Have Been Dependent on Certain Customers
      Each of our segments has certain key customers, the loss of which could have a material adverse effect on the segment’s sales and, depending on the significance of the loss, our results of operations, financial condition or cash flows.
• We May Incur Additional Restructuring Costs
      We have restructured a portion of our operations from time to time in recent years and it is possible that we may engage in additional restructuring opportunities. Because we are not able to predict with certainty market conditions, the loss of key customers, or the selling prices for our products, we also may not able to predict with certainty when it will be appropriate to undertake such restructuring opportunities. It is also possible, in connection with such restructuring efforts, that our costs could be higher than we anticipate and that we may not realize the expected benefits of such restructuring efforts.
Item 1B. UNRESOLVED STAFF COMMENTS
      Not applicable — there are no unresolved staff comments.
Item 2. PROPERTIES
      We operate at a total of 93 locations. These facilities are located in 26 states (mainly in the Eastern and Midwestern U.S.), Canada, Mexico, Chile and Argentina. We own our principal executive offices in Norcross, Georgia. There are 31 owned and 11 leased facilities used by operations in our Packaging Products segment, 6 owned and 19 leased facilities used by operations in our Merchandising Displays and Corrugated Packaging segment, and 24 owned and 1 leased facility used by operations in our Paperboard segment. We believe that our existing production capacity is adequate to serve existing demand for our products. We consider our plants and equipment to be in good condition.
      The following table shows information about our paperboard mills. We own all of our mills.
                 
    Production    
    Capacity    
Location of Mill   (in tons at 9/30/2005)   Paperboard Produced
         
Demopolis, AL
    327,000       Bleached paperboard and  
      91,500       southern bleached softwood kraft pulp  
St. Paul, MN
    180,000       Recycled corrugating medium  
St. Paul, MN
    160,000       Coated recycled paperboard  
Battle Creek, MI
    140,000       Coated recycled paperboard  
Sheldon Springs, VT (Missisquoi Mill)
    108,000       Coated recycled paperboard  
Dallas, TX
    96,000       Coated recycled paperboard  
Stroudsburg, PA
    60,000       Coated recycled paperboard  
Chattanooga, TN
    130,000       Specialty recycled paperboard  
Lynchburg, VA
    88,000 (1)     Specialty recycled paperboard  
Eaton, IN
    60,000       Specialty recycled paperboard  
Cincinnati, OH
    53,000       Specialty recycled paperboard  
Aurora, IL
    32,000       Specialty recycled paperboard  
 
(1)  Reflects the production capacity of a paperboard machine that manufactures gypsum paperboard liner and is owned by our Seven Hills joint venture.

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      The following is a list of our significant facilities other than our paperboard mills:
             
Type of Facility   Locations   Owned or Leased
         
Merchandising Display Operations
  Winston-Salem, NC
(also contract packing and sales and design)
    Owned  
Headquarters
  Norcross, GA     Owned  
Item 3. LEGAL PROCEEDINGS
      We agreed with Lafarge, our partner in the Seven Hills joint venture, to enter into arbitration with respect to the price of gypsum plasterboard liner that Seven Hills is entitled to charge Lafarge from November 2002 going forward, as well as our right to recover amounts for certain services that we rendered to Seven Hills. On December 8, 2005, the arbitrator issued a final ruling. Consistent with our previous disclosure, we expect the arbitrator’s final ruling to reduce our future annual pre-tax income from 2004 levels by approximately $0.8 million. We previously disclosed that we had recorded a charge of $1.5 million at June 30, 2005 in connection with the arbitration.
      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” and “Business — Patents and Other Intellectual Property.”
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
      Not applicable — there were no matters submitted to a vote of security holders in our fourth fiscal quarter.

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PART II
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
      Our Class A common stock, par value $0.01 per share (which we refer to as our “Common Stock”), trades on the New York Stock Exchange under the symbol RKT. As of December 8, 2005, there were approximately 379 shareholders of record of our Common Stock.
Price Range of Common Stock
                                 
    Fiscal 2005   Fiscal 2004
         
    High   Low   High   Low
                 
First Quarter
  $ 16.60     $ 14.68     $ 17.99     $ 14.50  
Second Quarter
  $ 15.40     $ 13.05     $ 17.87     $ 13.35  
Third Quarter
  $ 13.60     $ 9.75     $ 17.00     $ 13.65  
Fourth Quarter
  $ 16.00     $ 12.28     $ 16.98     $ 13.15  
Dividends
      During fiscal 2005, we paid a quarterly dividend on our Common Stock of $0.09 per share ($0.36 per share annually). During fiscal 2004, we paid a quarterly dividend on our Common Stock of $0.085 per share ($0.34 per share annually).
      For additional dividend information, please see “Item 6. Selected Financial Data.”
Securities Authorized for Issuance Under Equity Compensation Plans
      The section under the heading “Executive Compensation” entitled “Equity Compensation Plan Information” in the Proxy Statement for the Annual Meeting of Shareholders to be held on January 27, 2006, is incorporated herein by reference.
      For additional information concerning our capitalization, please see “Note 13. Shareholders’ Equity” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.

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Item 6. SELECTED FINANCIAL DATA
      The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report. We derived the consolidated statements of income and consolidated statements of cash flows data for the years ended September 30, 2005, 2004, and 2003, and the consolidated balance sheet data as of September 30, 2005 and 2004, from the Consolidated Financial Statements included elsewhere in this report. We also derived the consolidated statements of income and consolidated statements of cash flows data for the years ended September 30, 2002 and 2001, and the consolidated balance sheet data as of September 30, 2003, 2002, and 2001, from audited Consolidated Financial Statements not included in this report. We reclassified our plastic packaging operations, which we sold in October 2003, as a discontinued operation on the consolidated statements of income for all periods presented. We have also presented the assets and liabilities of our plastic packaging operations as assets and liabilities held for sale for all periods presented on our consolidated balance sheets. The table that follows is consistent with those presentations.
      On June 6, 2005, we acquired from Gulf States substantially all of the GSPP assets. The acquisition was the primary reason for the fiscal 2005 increases in net sales; income and diluted earnings per common share from continuing operations before the cumulative effect of a change in accounting principle; income and diluted earnings per common share before the cumulative effect of a change in accounting principle; net income and diluted earnings per common share; book value per common share; total assets, total current maturities of debt, total long-term debt, less current maturities, and total debt; shareholders’ equity, net cash provided by operating activities, and cash paid for purchase of businesses, net of cash received. The results of operations shown below may not be indicative of future results.
                                         
    Year Ended September 30,
     
    2005   2004   2003   2002   2001
                     
    (In thousands, except per share amounts)
Net sales
  $ 1,733,481     $ 1,581,261     $ 1,433,346     $ 1,369,050     $ 1,364,759  
Restructuring and other costs
    7,525       32,738       1,494       18,237       16,893  
Goodwill amortization (a)
                            8,569  
Income from continuing operations before the cumulative effect of a change in accounting principle
    17,614       9,651       29,541       29,853       24,623  
Income from discontinued operations, net of tax
          7,997       35       2,617       5,614  
Income before the cumulative effect of a change in accounting principle
    17,614       17,648       29,576       32,470       30,237  
Cumulative effect of a change in accounting principle, net of tax
                      (5,844 )     286  
     
Net income (b)
    17,614       17,648       29,576       26,626       30,523  
Diluted earnings per common share from continuing operations before the cumulative effect of a change in accounting principle
    0.49       0.27       0.85       0.87       0.74  
Diluted earnings per common share before the cumulative effect of a change in accounting principle
    0.49       0.50       0.85       0.94       0.90  
Diluted earnings (loss) per common share from cumulative effect of a change in accounting principle, net of tax
                      (0.17 )     0.01  
Diluted earnings per common share
    0.49       0.50       0.85       0.77       0.91  
Dividends paid per common share
    0.36       0.34       0.32       0.30       0.30  
Book value per common share
    12.57       12.28       12.07       11.80       12.00  
     
Total assets
    1,798,434       1,283,813       1,291,395       1,176,198       1,164,413  
Total current maturities of debt
    62,079       85,760       12,927       62,917       97,152  

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    Year Ended September 30,
     
    2005   2004   2003   2002   2001
                     
    (In thousands, except per share amounts)
Total long-term debt, less current maturities
    853,002       398,301       512,967       410,074       397,090  
Total debt (c)
    915,081       484,061       525,894       472,991       494,242  
Shareholders’ equity
    456,222       437,601       422,036       405,147       402,760  
     
Net cash provided by operating activities (d)
    154,680       91,440       114,795       115,058       146,027  
Capital expenditures
    54,326       60,823       57,402       72,701       60,635  
Cash paid for joint venture investment (e)
    120       158       332       1,720       9,627  
Cash paid for purchase of businesses, net of cash received
    552,291       15,047       81,845       25,351        
     
 
Notes (in thousands):
(a) Amount not deductible for income tax purposes was $6,189 in fiscal 2001.
 
(b) Goodwill amortization, net of tax in fiscal 2001 was $7,802, or $0.23 per diluted share. Pro forma net income after adding back goodwill amortization, net of tax in fiscal 2001 was $38,325, or $1.14 per diluted share.
 
(c) Total debt includes fair value aggregate hedge adjustments resulting from terminated and/or existing interest rate derivatives or swaps of $12,255, $18,461, $23,930, $19,751, and $8,603 during fiscal 2005, 2004, 2003, 2002, and 2001, respectively.
 
(d) Net cash provided by operating activities for the year ended September 30, 2004 was reduced by approximately $9,869 in cash taxes paid from the gain on the sale of discontinued operations.
 
(e) Of the total cash paid for the joint venture investment, contributions for capital expenditures amounted to $120, $158, $332, $383, and $7,667 during fiscal 2005, 2004, 2003, 2002, and 2001, respectively.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
      We have prepared our accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles (which we refer to as “GAAP”), which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting matters that are both important to the portrayal of our financial condition and results and that require some of management’s most subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions that, in management’s judgment, could change in a manner that would materially affect management’s future estimates with respect to such matters and, accordingly, could cause our future reported financial condition and results to differ materially from those that we are currently reporting based on management’s current estimates. For additional information, see “Note 1. Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
Accounts Receivable
      We have an allowance for doubtful accounts that serves to reduce the value of our gross accounts receivable to the amount we estimate we will ultimately collect. The allowance for doubtful account contains uncertainties because the calculation requires management to make assumptions and apply judgment regarding the customer’s credit worthiness. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections from our customers and maintain a provision for estimated credit losses based upon our customers’ financial condition, our collection experience and any other relevant customer specific credit information. Our assessment of this information forms the basis of our allowances. We have not made any material changes in the accounting methodology used to establish the allowance during the past three years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to estimate the allowance. However, while these credit losses have historically been within our expectations and the provisions we established, it is possible that our credit loss rates could be higher or lower in the future depending on changes in business conditions. At September 30, 2005, our allowances were $5.1 million; a 5% change in credit worthiness of our customers would change our reserve by approximately $0.3 million.
Inventory
      We carry our inventories at the lower of cost or market. Cost includes materials, labor and overhead. Market, with respect to all inventories, is replacement cost or net realizable value. Management frequently reviews inventory to determine the necessity to markdown excess, obsolete or unsaleable inventory. Judgment and uncertainty exists with respect to this estimate because it requires management to assess customer and market demand. These estimates may prove to be inaccurate, in which case we may have overstated or understated the markdown required for excess, obsolete or unsaleable inventory. We have not made any material changes in the accounting methodology used to markdown inventory during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate inventory markdowns. While these markdowns have historically been within our expectations and the markdowns we established, it is possible that our reserves could be higher or lower in the future if our estimates are inaccurate. At September 30, 2005, our inventory reserves were $1.4 million; a 5% change in credit worthiness of our customers would change our reserve by approximately $0.1 million.
Impairment of Long-Lived Assets and Goodwill
      We account for our goodwill under the goodwill impairment model set forth in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). We review the

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recorded value of our goodwill annually during the fourth quarter of each fiscal year, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. We determine recoverability by comparing the estimated fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit. Estimating the fair value of the reporting unit involves uncertainties because it requires management to develop numerous assumptions about the reporting unit including assumptions about the future growth in revenue and costs, capital expenditures, industry economic factors and future business strategy.
      The variability of the factors that management uses to perform the goodwill impairment test depends on a number of conditions, including uncertainty about future events and cash flows. All such factors are interdependent and, therefore, do not change in isolation. Accordingly, our accounting estimates may change from period to period due to changing market factors. If we had used other assumptions and estimates or if different conditions occurred in future periods, future operating results could be materially impacted. For example, based on available information as of our most recent review during the fourth quarter of fiscal 2005, if our pre-tax earnings were to have decreased by 10% with respect to the pre-tax earnings we used in our forecasts, the enterprise value of each of our divisions would have continued to exceed their respective net book values. Also, based on the same information, if we had concluded that it was appropriate to increase by 100 basis points the discount rate we used to estimate the fair value of each reporting unit, the fair value for each of our reporting units would have continued to exceed its carrying value, except for the paperboard division. Under circumstances where the fair value of a reporting unit was less than its carrying value, we would have completed the second step of the impairment analysis for that reporting unit. We do not believe that such a change in the discount rate was appropriate at the beginning of the fourth quarter of fiscal 2005 and no facts have come to our attention that would require us to perform an interim impairment analysis under SFAS 142. We completed the annual test of the goodwill associated with each of our reporting units during the fourth quarter of fiscal 2005 and we identified no indicators of impairment.
      We follow Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), in determining whether the carrying value of any of our long-lived assets is impaired. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance. Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating the impairment also requires us to estimate future operating results and cash flows, which also require judgment by management. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. We believe no impairment indicators currently exist.
      Other intangible assets are amortized based on the pattern in which the economic benefits are consumed over their estimated useful lives ranging from 1 to 40 years. We identify the weighted average lives of our intangible assets by category in “Note 7. Other Intangible Assets” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
      We have not made any material changes to our impairment loss assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in future assumptions or estimates we use to calculate impairment losses. However, if actual results are not consistent with our assumptions and estimates, we may be exposed to additional impairment losses that could be material.
Self-Insurance
      We are self-insured for the majority of our group health insurance costs, subject to specific retention levels. Our self-insurance liabilities contain uncertainties because the calculation requires management to make assumptions regarding and apply judgment to estimate the ultimate cost to settle reported claims and claims incurred buy not reported as of the balance sheet date. We utilize historical claims lag data provided by our claims administrators to compute the required estimated reserve rate per carrier. We calculate our average monthly claims paid utilizing the actual monthly payments during the trailing 12-month period. At that time, we also calculate our required reserve utilizing the reserve rates discussed above. During fiscal 2005, the

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average monthly claims paid fluctuated between $2.7 million and $2.9 million and our average claims lag fluctuated between 1.5 and 1.7 times the average monthly claims paid. Our accrual at September 30, 2005, represents approximately 1.7 times the average monthly claims paid. Health insurance costs have risen in recent years, but our reserves have historically been within our expectations. We have not made any material changes in the accounting methodology used to establish our self-insured liabilities during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future assumptions or estimates we use to calculate our self-insured liabilities. However, if actual results are not consistent with our assumptions, we may be exposed to losses or gains that could be material. A 5% change in the average claims lag would change our reserve by approximately $0.2 million.
Workers’ Compensation
      We purchase large risk deductible workers’ compensation policies for the majority of our workers’ compensation liabilities that are subject to various deductibles. We calculate our workers’ compensation reserves based on estimated actuarially calculated development factors which are applied to total reserves as provided by the insurance companies we do business with. Our workers’ compensation liabilities contain uncertainties because the calculation requires management to make assumptions regarding the injury. We rely on expertise and advice from our third party administrator, and development factors to form the basis of our reserve. We have not made any material changes in the accounting methodology used to establish our workers’ compensation liabilities during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future assumptions or estimates we use to calculate our workers’ compensation liabilities. However, if actual results are not consistent with our assumptions, we may be exposed to losses or gains that could be material. Although the cost of individual claims may vary over the life of the claim, the population taken as a whole has not changed significantly from our expectations A 5% change in our development factors at September 30, 2005 would have resulted in an additional $0.3 million of expense for the year.
Accounting for Income Taxes
      As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We estimate our actual current tax exposure and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Certain judgments, assumptions and estimates may affect the carrying value of the valuation allowances and deferred income tax expense in our Consolidated Financial Statements. We periodically review our estimates and assumptions of our estimated tax obligations using historical experience in the jurisdictions we do business in, and informed judgments. A 1% increase in our effective tax rate would increase tax expense from continuing operations by approximately $0.2 million for fiscal 2005. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our income tax exposure.
Pension
      We have five defined benefit pension plans (“U.S. Qualified Plans”) with approximately 60% of our employees in the United States currently accruing benefits. In addition, under several labor contracts, we make payments based on hours worked into multi-employer pension plan trusts established for the benefit of certain collective bargaining employees in facilities both inside and outside the United States. The determination of our obligation and expense for pension is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. We describe these assumptions in “Note 11. Retirement Plans” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein, which include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation levels. Although there is authoritative guidance on how to select most of these assumptions, management must exercise some degree of judgment when selecting these assumptions.

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      The amounts necessary to fund future payouts under these plans are subject to numerous assumptions and variables. Certain significant variables require us to make assumptions that are within our control such as an anticipated discount rate, expected rate of return on plan assets and future compensation levels. We evaluate these assumptions with our actuarial advisors on an annual basis and we believe they are within accepted industry ranges, although an increase or decrease in the assumptions or economic events outside our control could have a direct impact on reported net earnings.
      Our discount rate for each plan used for determining future net periodic benefit cost is based on the Moody’s AA Utility Bond Index. We believe the timing and amount of cash flows related to this bond index is expected to match the estimated defined benefit payment streams of our Plans. In determining the appropriateness of utilizing the Moody’s AA Utility Bond Index, we compared the average age and time to retirement for the participants in our plans and the maturity characteristics of the index. For calculating net periodic pension cost for September 30, 2004 and September 30, 2005 we employed a discount rate of 6.0% and 5.5%, respectively. The 50 basis point reduction in our discount rate was the primary reason for the $20 million reduction in funded status compared to the prior year. In determining the long-term rate of return for a plan, we consider the historical rates of return, the nature of the plan’s investments and an expectation for the plan’s investment strategies. For fiscal 2005, we used an expected return on plan assets of 9.0%. The plan assets were divided among various investment managers. As of September 30, 2005, approximately 66% of plan assets were invested with equity managers, approximately 29% of plan assets were invested with fixed income managers, approximately 3% of plan assets were invested with managers of alternative investments and approximately 2% of the plan assets were held in a cash account. The difference between actual and expected returns on plan assets is accumulated and amortized over future periods and, therefore, affects our recorded obligations and recognized expenses in such future periods. For fiscal 2005, our pension plans had actual returns on assets of $21.4 million as compared with expected returns on assets of $19.0 million, which resulted in a net deferred gain of $2.4 million. At September 30, 2005 we had an unrecognized loss of $121.1 million. In fiscal 2006, we expect to charge to net periodic pension cost approximately $8.1 million of this unrecognized loss. The amount of this unrecognized loss charged to pension cost in future years is dependent upon future interest rates and pension investment results. A 25 basis-point change in the discount rate, expected increase in compensation levels, or the expected long-term rate of return on plan assets would have had the following effect on fiscal 2005 pension expense (in millions):
                 
    25 Basis Point   25 Basis Point
    Increase   Decrease
         
Discount rate
  $ (1.2 )   $ 1.4  
             
Expected long-term rate of return on plan assets
  $ (0.5 )   $ 0.5  
             
Expected increase in compensation levels
  $ 0.1     $ (0.1 )
             
      Several factors influence our annual funding requirements. For the U.S. Qualified Plans, our funding policy consists of annual contributions at a rate that provides for future plan benefits and maintains appropriate funded percentages. Such contribution is not less than the minimum required by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and subsequent pension legislation and is not more than the maximum amount deductible for income tax purposes. Amounts necessary to fund future obligations under these plans could vary depending on estimated assumptions. The effect on operating results in the future of pension plan funding will depend in part on investment performance, funding decisions and employee demographics.
      For fiscal 2005 and 2004, there was no minimum contribution to the U.S. Qualified Plans required by ERISA. However, at management’s discretion, we made cash contributions to the U.S. Qualified Plans of $7.3 million and $19.6 million during fiscal 2005 and 2004, respectively. During fiscal 2006, we do not have a minimum contribution to make to the U.S. Qualified Plans. Based on current expectations, we anticipate contributing approximately $35 million to the U.S. Qualified Plans over the next two years.

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Segment and Market Information
      We report our results in three segments: (1) the Packaging Products segment, (2) the Merchandising Displays and Corrugated Packaging segment, and (3) the Paperboard segment.
      The following table shows certain operating data for our three segments. We do not allocate certain of our income and expenses to our segments and, thus, the information that management uses to make operating decisions and assess performance does not reflect such amounts. We report these items as non-allocated expenses. These items include restructuring and other costs and certain corporate expenses.
                           
    Year Ended September 30,
     
    2005   2004   2003
             
    (In millions)
Net sales (aggregate):
                       
 
Packaging Products
  $ 994.0     $ 908.1     $ 801.4  
 
Merchandising Displays and Corrugated Packaging
    333.8       318.3       291.2  
 
Paperboard
    615.4       539.9       509.9  
                   
Total
  $ 1,943.2     $ 1,766.3     $ 1,602.5  
                   
Net sales (intersegment):
                       
 
Packaging Products
  $ 3.4     $ 3.5     $ 4.6  
 
Merchandising Displays and Corrugated Packaging
    4.0       4.7       5.0  
 
Paperboard
    202.3       176.8       159.6  
                   
Total
  $ 209.7     $ 185.0     $ 169.2  
                   
Net sales (unaffiliated customers):
                       
 
Packaging Products
  $ 990.6     $ 904.6     $ 796.8  
 
Merchandising Displays and Corrugated Packaging
    329.8       313.6       286.2  
 
Paperboard
    413.1       363.1       350.3  
                   
Total
  $ 1,733.5     $ 1,581.3     $ 1,433.3  
                   
Segment income:
                       
 
Packaging Products
  $ 33.4     $ 38.0     $ 38.5  
 
Merchandising Displays and Corrugated Packaging
    21.1       29.1       28.6  
 
Paperboard
    31.6       15.7       21.8  
                   
      86.1       82.8       88.9  
Restructuring and other costs
    (7.5 )     (32.7 )     (1.5 )
Non-allocated expenses
    (17.7 )     (12.4 )     (9.7 )
Interest expense
    (36.6 )     (23.6 )     (26.9 )
Interest and other income (expense)
    0.4       (0.2 )     0.1  
Minority interest in income of consolidated subsidiary
    (4.8 )     (3.4 )     (3.2 )
                   
Income from continuing operations before income taxes
  $ 19.9     $ 10.5     $ 47.7  
                   
Overview
      Fiscal 2005 was a watershed year for Rock-Tenn as a result of the acquisition on June 6, 2005 of the GSPP folding carton and bleached paperboard operations. Through the acquisition, we greatly improved our business mix with the very low cost bleached paperboard mill and the 11 GSPP folding carton plants. The supply/demand characteristics of the bleached paperboard markets, and hence margins for bleached paperboard, have been superior to recycled paperboard over at least the last business cycle. Also, the addition of bleached paperboard, which is made from virgin fiber and requires less purchased fossil fuels for energy, reduces the percentage of our paperboard operations dependent on those inputs, both of which are characterized by highly volatile prices and have seen significant increases in prevailing prices in the last few

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years. In addition, the GSPP folding carton plants broaden our already very broad customer base, increasing our geographic and technological capabilities and provide significant opportunities to reduce our unit costs through administrative and operational synergies. The GSPP assets added $176.2 million of net sales in the four months in fiscal 2005 we owned them, on $519.6 million of pro forma annual net sales, and significantly increased our operating income and earnings per share. Our year-end fiscal 2005 net debt, as defined (see “Non-GAAP Measures” below), increased by $467.3 million from September 30, 2004, although we paid $552.2 in cash to fund the acquisition and related expenses. This implied reduction of net debt resulted from increased cash flow from operations, which was $154.7 million in fiscal 2005 and $91.4 million in fiscal 2004. We believe we achieved an annualized run rate of acquisition synergies of $18 million in the fourth fiscal quarter of 2005 and we expect to realize at least $25 million in annualized synergies from the acquisition. For additional information regarding the acquisition see “Note 6. Acquisitions, Restructuring and Other Matters” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
      Our legacy operations posted mixed results during fiscal 2005. Packaging Products segment operating margins declined from 4.2% of sales to 3.4% as the contribution of the GSPP folding carton plants was offset primarily by delays in board cost pass throughs, higher freight and other costs and the losses incurred in plants in the process of closure. During the year we took steps to address margin issues in two of our poorest performing folding carton plants, closing one and raising prices and cutting costs in the other. We expect that these actions, further recovery of board cost increases, and the contribution of the GSPP assets including synergies will cause packaging segment margins to improve in fiscal 2006.
      Sales of merchandising displays and corrugated packaging increased in fiscal 2005 as a result of the corrugator we acquired in August 2004, however, segment operating margins declined to 6.3% of sales from 9.1%, as we were unable to fully recover higher costs through price increases or volume.
      Paperboard segment operating income increased to $31.6 million in fiscal 2005 from $15.7 million in fiscal 2004 due to the operating income generated from the bleached paperboard mill and higher pricing for recycled paperboard partly recovering much higher energy, chemical and freight costs increases in the past two fiscal years. Our specialty paperboard mills performed very well and benefited from high operating rates due in part to our closure in fiscal 2004 of a specialty paperboard mill. Our coated recycled tons sold decreased in fiscal 2005 as demand weakened early in fiscal 2005. We expect to realize higher prices in fiscal 2006 for recycled paperboard, including corrugated medium. However, much higher winter 2005/2006 energy pricing will adversely affect operating results.
      During fiscal 2005, management engaged in an ongoing process of evaluating and improving the effectiveness of our internal control over financial reporting and to comply with Section 404 of the Sarbanes-Oxley Act (which we refer to as “Sarbanes-Oxley Act”). These efforts required that we commit significant financial and managerial resources. Our third party costs to comply with the Sarbanes-Oxley Act were approximately $3.4 million during fiscal 2005. These costs are included in our non-allocated expenses. In addition, we expect to incur approximately $1 million during the first quarter of fiscal 2006 to complete our first year of compliance with the Sarbanes-Oxley Act. We will incur third party costs during fiscal 2006 to continue our efforts, including our evaluation of the internal control over financial reporting in our GSPP operations; however, we currently expect these costs to be less than the costs we incurred with respect to fiscal 2005.
Results of Operations
      We provide quarterly information in the following tables to reflect trends in our results of operations. For additional discussion of quarterly information, see our quarterly reports on Form 10-Q filed with the SEC.
Net Sales (Unaffiliated Customers)
      Net sales for fiscal 2005 increased 9.6% to $1,733.5 million compared to $1,581.3 million in fiscal 2004 due to net sales increases in each of our segments.
      Net sales for fiscal 2004 increased 10.3% to $1,581.3 million compared to $1,433.3 million in fiscal 2003.

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Net Sales (Aggregate) — Packaging Products Segment
                                         
    First Quarter   Second Quarter   Third Quarter   Fourth Quarter   Fiscal Year
                     
    (In millions)
2003
  $ 173.7     $ 196.3     $ 210.1     $ 221.3     $ 801.4  
2004
    208.9       231.7       231.6       235.9       908.1  
2005
    221.8       218.8       239.2       314.2       994.0  
      The 9.5% increase in Packaging Products segment net sales before intersegment eliminations in fiscal 2005 compared to fiscal 2004 was primarily due to net sales from the acquired GSPP folding carton facilities, which accounted for net sales of $119.6 million. This increase was partially offset by reductions in other folding carton sales, primarily from facilities that we have either closed or are in the process of closing. In the early part of fiscal 2006, we will have the challenge of flowing through board cost increases across our Packaging Products segment. For the most part, we are not limited by contract in our ability to pass through board cost increases, although contracts may impact the timing of our recovery of published board price increases. For much of the rest of our packaging business, market forces will determine the timing and extent of our recovery of board price increases.
      The 13.3% increase in Packaging Products segment net sales before intersegment eliminations in fiscal 2004 compared to fiscal 2003 was primarily due to sales growth in our folding carton division where sales were up 15.5% from the prior year period. Approximately $41.5 million of the $106.7 million increase in segment net sales was attributable to our fiscal 2003 acquisitions and the remainder was primarily due to internal growth. Competitive pricing significantly offset the contribution from increased net sales.
Net Sales (Aggregate) — Merchandising Displays and Corrugated Packaging Segment
                                         
    First Quarter   Second Quarter   Third Quarter   Fourth Quarter   Fiscal Year
                     
    (In millions)
2003
  $ 75.1     $ 66.1     $ 71.7     $ 78.3     $ 291.2  
2004
    73.5       77.5       75.8       91.5       318.3  
2005
    79.5       86.1       83.5       84.7       333.8  
      The 4.9% increase in Merchandising Displays and Corrugated Packaging segment net sales before intersegment eliminations for fiscal 2005 compared to fiscal 2004 resulted primarily from our acquisition of the Athens corrugator in August 2004 (which we refer to as “Athens Acquisition”), which had net sales of $30.5 million in fiscal 2005. Net sales of merchandising displays declined for the year primarily due to lower sales in our fourth fiscal quarter. We continue to seek to broaden our permanent and multi-material display capabilities as well as developing theft deterrent solutions for high theft products that are sold by various classes of retailers. We have made significant progress in the marketplace with our MAX PDQtm display. We expect revenues to grow from our brand management group that joined us in fiscal 2005.
      The 9.3% increase in Merchandising Displays and Corrugated Packaging segment net sales before intersegment eliminations for fiscal 2004 compared to fiscal 2003 resulted primarily from an increase in net sales of merchandising displays due to strong demand and sales to new customers as we expanded our presence in the North American display business. Net sales of corrugated packaging and sheets increased 14.6% or $10.3 million due to increased volume and the Athens Acquisition, which contributed $3.7 million in net sales in the fourth fiscal quarter of 2004.
Net Sales (Aggregate) — Paperboard Segment
                                         
    First Quarter   Second Quarter   Third Quarter   Fourth Quarter   Fiscal Year
                     
    (In millions)
2003
  $ 121.8     $ 128.9     $ 128.8     $ 130.4     $ 509.9  
2004
    128.3       136.1       138.6       136.9       539.9  
2005
    128.7       131.8       155.0       199.9       615.4  

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      The 14.0% increase in Paperboard segment net sales before intersegment eliminations in fiscal 2005 compared to fiscal 2004 was primarily due to the combination of bleached paperboard and southern bleached softwood kraft pulp sales from our GSPP Acquisition and higher selling prices for recycled paperboard. The effect of the higher sales price during the period was more than offset by a decrease in tons shipped by our coated recycled and specialty paperboard mills. We expect to see some further price increases in the early part of fiscal 2006 as a result of price increases we previously announced. However, the impact of announced board price increases will be dictated, in part, by market forces that determine the timing and extent of our recovery of the increases in a market that currently is subject to overcapacity. Our announced price increases were necessary primarily due to significantly increasing energy costs. During fiscal 2005, our recycled mills operated at 93% of capacity compared to 96% in fiscal 2004. Recycled paperboard tons shipped in fiscal 2005 for the segment were 1,019,139 tons compared to 1,130,004 tons shipped in fiscal 2004. As a result of the GSPP Acquisition we sold 110,882 tons of bleached paperboard and 30,037 tons of southern bleached softwood kraft pulp, respectively. Laminated paperboard product net sales declined $21.2 million primarily due to the actions we took in fiscal 2004 to exit certain laminated paperboard operations.
      The 5.9% increase in Paperboard segment net sales before intersegment eliminations in fiscal 2004 compared to fiscal 2003 was primarily due to a 2.6% increase in paperboard tons shipped and an $18 per ton increase in our average selling price for all tons shipped. During fiscal 2004, our recycled mills operated at 96% of capacity compared to 94% in fiscal 2003. Total tons shipped in fiscal 2004 for the segment increased to 1,130,004 tons from 1,100,832 tons shipped in fiscal 2003. Net sales of recycled fiber increased primarily due to increased fiber prices and volume. Sales of laminated paperboard products continued to decline as we continued to experience a decrease in demand for our products by customers in the ready-to-assemble furniture and book and binder industries, which during fiscal 2004 continued to be our primary laminated paperboard products markets, as well as continued competitive pricing. Net sales also decreased due to closures of our laminated plant facilities at the end of fiscal 2003 and second quarter of fiscal 2004.
Cost of Goods Sold
      Cost of goods sold increased to $1,459.2 million (84.2% of net sales) in fiscal 2005 from $1,313.9 million (83.1% of net sales) in fiscal 2004 primarily due to the GSPP Acquisition, and fiber, energy, chemical and freight costs at our recycled paperboard mills increased $4.1 million, $6.6 million, $2.2 million and $8.4 million, respectively on a volume adjusted basis. Excluding amounts attributable to the GSPP Acquisition, group insurance expense increased $1.1 million, and workers’ compensation expense and pension expense decreased $2.3 million and $1.3 million, respectively, during fiscal 2005 compared to fiscal 2004. We have foreign currency transaction risk primarily due to our operations in Canada. See “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency” below. The impact of foreign currency transaction risk in fiscal 2005 compared to fiscal 2004 increased costs of goods sold by $0.8 million.
      Cost of goods sold increased to $1,313.9 million (83.1% of net sales) in fiscal 2004 from $1,171.0 million (81.7% of net sales) in fiscal 2003 primarily due to $28.6 million (1.8% of net sales) of increased fiber, energy, chemical and freight costs at our recycled paperboard mills. Fiber, energy, chemical and freight costs at our recycled paperboard mills increased $16.3 million, $9.2 million, $1.3 million and $1.8 million, respectively, on a volume adjusted basis. In fiscal 2003, we covered most of our winter requirements for natural gas purchases at a NYMEX equivalent price of less than $3.50 per MMBtu (million British thermal units). In fiscal 2004, we covered approximately two-thirds of our winter energy purchases at a NYMEX equivalent price of approximately $5.20 per MMBtu that resulted in a small benefit compared to the winter NYMEX contract close prices. Across our businesses we also experienced increased freight costs of $4.4 million, excluding the $1.8 million of recycled paperboard freight costs referred to above, increased group insurance expense of $3.6 million, increased pension expense of $3.3 million (0.2% of net sales), and increased workers’ compensation expense of $2.0 million during fiscal 2004 compared to fiscal 2003. The increase in freight costs was primarily due to increased volumes associated with our increased net sales and, to a lesser degree, increased fuel surcharges. Partially offsetting these higher costs were lower expenses for maintenance and repairs of $0.6 million. We also partially offset the effect of these increased costs by leveraging certain fixed costs at our higher operating rates. We have foreign currency transaction risk primarily due to our operations

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in Canada. See “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency” below. The impact of foreign currency transaction risk in fiscal 2004 compared to fiscal 2003 reduced costs of goods sold by $0.5 million.
      We value the majority of our U.S. inventories at the lower of cost or market with cost determined on the last-in, first-out, or “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.
                                                 
    Fiscal 2005   Fiscal 2004   Fiscal 2003
             
    LIFO   FIFO   LIFO   FIFO   LIFO   FIFO
                         
            (In millions)        
Cost of goods sold
  $ 1,459.2     $ 1,463.6     $ 1,313.9     $ 1,311.8     $ 1,171.0     $ 1,170.5  
Net income
    17.6       14.9       17.6       19.0       29.6       29.9  
      Net income is higher in fiscal 2005 under the LIFO method than the FIFO method. Generally accepted accounting principles requires that inventory acquired in an acquisition be valued at selling price less costs to sell, dispose and complete. This value is generally higher than the cost to manufacture inventory. For the GSPP Acquisition, the inventory value computed in this manner was $7.3 million higher than the cost to manufacture. During fiscal 2005, this step-up would have been expensed under the FIFO method. Under our LIFO inventory method, this higher cost remains in inventory until the inventory layer represented by this inventory is consumed. To the extent inventory levels acquired in the GSPP Acquisition are lowered in the future, cost of goods sold could be higher than the normal cost to manufacture.
Selling, General and Administrative Expenses
      Selling, general and administrative expenses (“SG&A”) decreased as a percentage of net sales to 11.8% in fiscal 2005 from 12.5% in fiscal 2004 primarily as a result of the synergies we realized following the GSPP Acquisition and our continued focus on cost reductions and efficiency. SG&A expenses were $7.8 million higher than fiscal 2004 primarily as a result of SG&A from the GSPP locations we acquired, the third party costs we incurred to comply with the Sarbanes-Oxley Act, which were approximately $3.4 million, and increased amortization expense of $1.1 million from the GSPP Acquisition. Bad debt expense decreased $2.5 million, and bonus expense and commission expense, excluding the impact of the GSPP Acquisition, decreased $2.9 million and $2.0 million, respectively.
      SG&A expenses decreased as a percentage of net sales to 12.5% in fiscal 2004 from 12.7% in fiscal 2003. SG&A expenses were $14.3 million higher than fiscal 2003 primarily as a result of increases in bad debt expense, pension expense, sales commissions, bonuses and stock compensation expense, and the amortization of certain identifiable intangible assets, which were $3.6 million, $3.5 million, $2.0 million, $1.5 million and $1.2 million, respectively, higher than fiscal 2003. Travel and entertainment expenses were $1.8 million lower than the prior fiscal year. Commission expense increased because of increased sales primarily of folding cartons. Bonuses and stock compensation expense increased due to the attainment of certain performance targets. Amortization of identifiable intangible assets increased primarily due to the fiscal 2003 acquisitions. Travel and entertainment expenses decreased primarily as a result of our continued focus on controlling costs.
      At September 30, 2005, certain group insurance costs related to the indirect plant personnel were reclassified from SG&A to cost of goods sold. The prior year amounts were reclassified as well. In addition, franchise taxes were reclassified from provision for income taxes to SG&A. For additional information, see “Note 17. Financial Results by Quarter (Unaudited)” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.

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Acquisitions
      On June 6, 2005, we acquired from Gulf States substantially all of the GSPP assets and operations and assumed certain of Gulf States’ related liabilities. We have included the results of GSPP’s operations in our consolidated financial statements since that date. The aggregate purchase price for the GSPP Acquisition was $552.2 million, net of cash received of $0.7 million, including various expenses. We assigned the goodwill to our Paperboard and Packaging Products segments in the amounts of $37.2 million and $13.8 million, respectively. We expect all $51.0 million of the goodwill to be deductible for tax purposes.
      In fiscal 2004, cash paid for purchase of businesses was $15.0 million, which consisted primarily of the $13.7 purchase price for the Athens Acquisition, in August 2004. The purchase price did not exceed the fair value of the assets and liabilities acquired; therefore, we recorded no goodwill. We included the results of operations of the Athens operations in our consolidated statements of income from the date of acquisition. Included in the assets acquired were $2.2 million of intangible assets. We are amortizing the customer relationships over 10 years and the non-compete agreement over five years. The pro forma impact of the Athens Acquisition was not material to our consolidated financial results for fiscal 2004.
      For additional information, see “Note 6. Acquisitions, Restructuring and Other Matters” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
Restructuring and Other Costs
      We recorded pre-tax restructuring and other costs of $7.5 million, $32.7 million, and $1.5 million for fiscal 2005, 2004, and 2003, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with a restructuring can vary. The pre-tax charges recorded in fiscal 2005 were primarily $2.5 million from the announced closure of our Marshville folding carton plant, $2.8 million from our St. Paul folding carton plant and $1.6 million from our Otsego paperboard mill from previously announced closures, and $1.6 million for our folding division restructuring.
      In fiscal 2004, the pre-tax charges consisted primarily of $16.6 million, $7.9 million, and $3.0 million, respectively, from the announced closure of our Otsego paperboard mill, Wright City laminated paperboard products facility, and St. Paul folding carton facility, $4.2 million from the announced the closure of the laminated paperboard products converting lines at our Aurora facility, and $1.1 million incurred to review our corporate structure and reorganized our subsidiaries, reducing the number of corporate entities and the complexity of the organizational structure.
      In fiscal 2003, we incurred pre-tax charges of $1.5 million for various initiatives.
      For additional information, see “Note 6. Acquisitions, Restructuring and Other Matters” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.

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Segment Operating Income
Operating Income — Packaging Products Segment
                         
    Net Sales   Operating   Return
    (Aggregate)   Income   on Sales
             
    (In millions, except percentages)
First Quarter
  $ 173.7     $ 4.9       2.8 %
Second Quarter
    196.3       10.0       5.1  
Third Quarter
    210.1       10.8       5.1  
Fourth Quarter
    221.3       12.8       5.8  
                   
Fiscal 2003
  $ 801.4     $ 38.5       4.8 %
                   
First Quarter
  $ 208.9     $ 7.0       3.4 %
Second Quarter
    231.7       10.2       4.4  
Third Quarter
    231.6       11.8       5.1  
Fourth Quarter
    235.9       9.0       3.8  
                   
Fiscal 2004
  $ 908.1     $ 38.0       4.2 %
                   
First Quarter
  $ 221.8     $ 5.3       2.4 %
Second Quarter
    218.8       5.7       2.6  
Third Quarter
    239.2       10.6       4.5  
Fourth Quarter
    314.2       11.8       3.7  
                   
Fiscal 2005
  $ 994.0     $ 33.4       3.4 %
                   
      Operating income attributable to the Packaging Products segment decreased to $33.4 million in fiscal 2005 from $38.0 million in fiscal 2004. Our operating margin for fiscal 2005 was 3.4% compared to 4.2% in fiscal 2004. The GSPP folding plants were net contributors to folding operating profit, but, the decrease in operating income for the segment was primarily due to lower folding sales in plants owned for the full year, lower volume, higher operating costs, and operating losses of $3.0 million at plants in the process of being closed. Additionally, excluding amounts attributable to the GSPP Acquisition, freight expense increased $1.3 million primarily due to increased fuel surcharges, and group insurance expense increased $0.7 million. Bad debt expense decreased $1.5 million, workers’ compensation expense decreased $1.3 million, and sales commissions decreased $0.9 million due to the mix of commissionable sales.
      Operating income attributable to the Packaging Products segment for fiscal 2004 was $38.0 million, relatively flat compared to $38.5 million in fiscal 2003. Our operating margin for fiscal 2004 was 4.2% compared to 4.8% in fiscal 2003. The decrease in operating income for the segment was primarily due to competitive pressures, a $1.4 million increase in bad debt expense, increased sales commissions of $1.0 million due to increased net sales, increased workers’ compensation expense of $1.2 million, increased group insurance of $2.8 million, increased freight expense of $3.6 million primarily due to increased volumes associated with our increased net sales and, to a lesser degree, increased fuel surcharges, increased pension expense of $2.6 million, increased intangible asset amortization of $0.9 million due to the amortization associated with the fiscal 2003 acquisitions in our folding carton division.

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Operating Income — Merchandising Displays and Corrugated Packaging Segment
                         
    Net Sales   Operating   Return on
    (Aggregate)   Income   Sales
             
    (In millions, except percentages)
First Quarter
  $ 75.1     $ 7.2       9.6 %
Second Quarter
    66.1       5.3       8.0  
Third Quarter
    71.7       6.8       9.6  
Fourth Quarter
    78.3       9.3       11.8  
                   
Fiscal 2003
  $ 291.2     $ 28.6       9.8 %
                   
First Quarter
  $ 73.5     $ 5.9       8.1 %
Second Quarter
    77.5       7.5       9.7  
Third Quarter
    75.8       6.1       8.0  
Fourth Quarter
    91.5       9.6       10.4  
                   
Fiscal 2004
  $ 318.3     $ 29.1       9.1 %
                   
First Quarter
  $ 79.5     $ 2.7       3.4 %
Second Quarter
    86.1       4.8       5.6  
Third Quarter
    83.5       6.4       7.7  
Fourth Quarter
    84.7       7.2       8.5  
                   
Fiscal 2005
  $ 333.8     $ 21.1       6.3 %
                   
      Operating income attributable to the Merchandising Displays and Corrugated Packaging segment in fiscal 2005 decreased to $21.1 million from $29.1 million in fiscal 2004. Our operating margin for fiscal 2005 decreased to 6.3% from 9.1% in fiscal 2004. The decline in the operating margin was the result of higher material costs, a $1.1 million pre-tax loss at our Athens facility, increased sales of corrugated packaging and sheets which have lower margins than merchandising displays, and weaker than expected sales in the first fiscal quarter. Freight expense increased $1.7 million, primarily due to increased fuel surcharges, sales commissions decreased $1.1 million due to the mix of commissionable sales, and bonus expense decreased $1.9 million.
      Operating income attributable to the Merchandising Displays and Corrugated Packaging segment in fiscal 2004 increased 1.8% to $29.1 million compared to $28.6 million in fiscal 2003. Our operating margin for fiscal 2004 decreased to 9.1% from 9.8% in fiscal 2003. The segment’s increase in gross profit from our 9.3% increase in net sales was almost completely offset by increased bad debt expense of $1.0 million due to a change in the credit quality of several customers. Sales commissions increased $1.2 million due to increased net sales, workers’ compensation expense increased $0.3 million, pension expense increased $1.3 million and selling, general and administrative salaries increased $0.8 million to support our increased sales levels. The $1.2 million we invested in developing theft deterrent solutions in fiscal 2004 also reduced segment operating income.

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Operating Income — Paperboard Segment
                                                                 
                Coated and                
                Specialty                
                Recycled       Bleached        
                Paperboard   Corrugated   Paperboard   SBSK    
    Net Sales   Operating       Tons   Medium Tons   Tons   Pulp Tons   Average
    (Aggregate)   Income   Return   Shipped(a)   Shipped   Shipped(b)   Shipped(b)   Price(c)
    (In Millions)   (In Millions)   On Sales   (In Thousands)   (In Thousands)   (In Thousands)   (In Thousands)   (Per Ton)
                                 
First Quarter
  $ 121.8     $ 5.3       4.4 %     217.3       40.8       n/a       n/a     $ 419  
Second Quarter
    128.9       6.4       5.0       241.9       41.5       n/a       n/a       406  
Third Quarter
    128.8       6.0       4.7       239.3       40.4       n/a       n/a       423  
Fourth Quarter
    130.4       4.1       3.1       234.6       45.0       n/a       n/a       421  
                                                 
Fiscal 2003
  $ 509.9     $ 21.8       4.3 %     933.1       167.7       n/a       n/a     $ 417  
                                                 
First Quarter
  $ 128.3     $ 3.1       2.4 %     230.7       43.9       n/a       n/a     $ 422  
Second Quarter
    136.1       2.4       1.7       248.8       42.9       n/a       n/a       424  
Third Quarter
    138.6       2.6       1.9       248.0       44.7       n/a       n/a       439  
Fourth Quarter
    136.9       7.6       5.6       224.9       46.1       n/a       n/a       455  
                                                 
Fiscal 2004
  $ 539.9     $ 15.7       2.9 %     952.4       177.6       n/a       n/a     $ 435  
                                                 
First Quarter
  $ 128.7     $ 4.4       3.4 %     210.6       42.7       n/a       n/a     $ 467  
Second Quarter
    131.8       3.6       2.8       209.7       45.2       n/a       n/a       472  
Third Quarter
    155.0       7.6       4.9       211.6       44.8       26.7       6.9       491  
Fourth Quarter
    199.9       16.0       8.0       209.7       44.8       84.2       23.1       523  
                                                 
Fiscal 2005
  $ 615.4     $ 31.6       5.1 %     841.6       177.5       110.9       30.0     $ 492  
                                                 
 
(a) Recycled Paperboard Tons Shipped and Average Recycled Paperboard Price Per Ton include tons shipped by Seven Hills, our joint venture with Lafarge.
 
(b) Bleached paperboard and southern bleached softwood kraft (SBSK) pulp tons shipped begin in June 2005 as a result of the GSPP Acquisition.
 
(c) Beginning in the third quarter of fiscal 2005, Average Price Per Ton includes coated and specialty recycled paperboard, corrugated medium, bleached paperboard and southern bleached softwood kraft pulp.
      Operating income attributable to the Paperboard segment for fiscal 2005 increased to $31.6 million compared to $15.7 million in fiscal 2004 due to the GSPP Acquisition and higher selling prices for recycled paperboard. Our operating margin for fiscal 2005 increased to 5.1% from 2.9% in fiscal 2004 as a result of higher margin sales from the GSPP Acquisition and increased selling prices. In our recycled mills, sales price increases were significantly offset by the aggregate increase of $21 per ton in fiber, energy, chemical and freight costs compared to the prior fiscal year. Operating income also benefited from the elimination of $3.8 million of fiscal year 2004 losses at a portion of our laminated paperboard products operations and $2.7 million from our Otsego paperboard mill, both of which we closed in fiscal 2004. In our recycled paperboard mills, fiber costs increased $4.1 million, energy costs increased $6.6 million, chemical costs increased $2.2 million, and freight costs increased $8.4 million on a volume adjusted basis. Additionally, adjusted for the GSPP Acquisition, bad debt expense decreased $0.9 million, and bonus expense increased $0.8 million.
      Operating income attributable to the Paperboard segment for fiscal 2004 decreased 27.6% to $15.7 million compared to $21.8 million in fiscal 2003 despite the increase in paperboard tons shipped and average selling price. Our operating margin for fiscal 2004 decreased to 2.9% from 4.3% in fiscal 2003. Operating income in our recycled fiber division increased 143.4% as a result of higher fiber prices and increased volume. The operating loss generated by our laminated paperboard products operations increased $0.7 million due to lower sales, continued pricing pressure, and rising material costs. In our recycled paperboard mills, on a volume adjusted basis, fiber costs increased $16.3 million, energy costs increased $9.2 million, chemical costs

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increased $1.3 million, and freight costs increased $1.8 million, which more than offset the increased sales of $19.6 million attributable to increased average selling prices. The net impact of the increased average selling price and the increased fiber, energy, chemical and freight costs was a reduction in segment income of $8.9 million. Other Paperboard segment freight costs increased $0.3 million. Additionally, group insurance expense increased $0.9 million, pension expense increased $1.9 million, inventory write-downs related to closed plants increased $0.8 million, bad debt expense increased $1.3 million due to the change in credit quality of several customers, and workers’ compensation expense increased $0.5 million.
Interest Expense
      Interest expense for fiscal 2005 increased 55.5%, or $13.1 million, to $36.6 million from $23.6 million for fiscal 2004. The increase was primarily attributable to our increased debt to finance the GSPP Acquisition. The increase in our average outstanding borrowings increased interest expense by approximately $7.6 million. An increase in our effective interest rates, net of swaps, resulted in increased interest expense of approximately $5.5 million.
      Interest expense for fiscal 2004 decreased 12.3%, or $3.3 million, to $23.6 million from $26.9 million for fiscal 2003. The decrease in our effective interest rates, net of swaps, resulted in decreased interest expense of approximately $2.9 million. The decrease in our average outstanding borrowings decreased interest expense by approximately $0.4 million.
Minority Interest
      Minority interest in income of our consolidated subsidiary for fiscal 2005 increased 41.3% to $4.8 million from $3.4 million in 2004. The increase was primarily due our acquisition of our 60% ownership share in GSD as part of the GSPP Acquisition.
      Minority interest in income of our consolidated subsidiary for fiscal 2004 increased 5.3% to $3.4 million from $3.2 million in 2003. The increase was primarily due to higher volumes.
Provision for Income Taxes
      We recorded a provision for income taxes of $2.2 million for fiscal 2005 compared to a provision of $0.9 million for fiscal 2004. Fiscal 2005 included a $4.1 million benefit resulting from the resolution of historical federal and state tax deductions that we had previously reserved. Other adjustments to the statutory federal tax rate are more fully described in Note 10 to the consolidated financial statements. We estimate our marginal effective income tax rate for fiscal 2005 to be approximately 39%.
      In fiscal 2004, we reviewed our corporate structure and reorganized our corporate subsidiaries, reducing the number of corporate entities and the complexity of our organizational structure. The changes we implemented as a result of this review resulted in a one-time income tax benefit of $3.2 million. Approximately $1.2 million of the benefit related to the filing of amended tax returns for fiscal years 2001 and 2002 and comparable adjustments made to the fiscal 2003 tax returns. The changes related to certain income apportionment factors and a correction of an allocation of intercompany charges. The impact of these changes was not material to our net income for any of the fiscal years in question; therefore, we recorded the cumulative impact in the current period. The remaining $2.0 million tax benefit relates to a reduction in the deferred tax valuation allowance for net operating loss carry-forwards (which we refer to as “NOLs”) and credits that we had previously concluded were not realizable. We anticipate that the restructuring will allow us to realize the benefit of these NOLs in future years. Due to these one-time tax benefits, our fiscal 2005 and fiscal 2004 effective income tax rates of 11.3% and 24.4%, respectively are not comparable.
      The American Jobs Creation Act of 2004 creates a temporary incentive for United States corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. We plan to repatriate $30.9 million in extraordinary dividends, as defined in the Jobs Creation Act, during the quarter ending December 31, 2005. Accordingly, we recorded a tax liability of $0.8 million as of September 30, 2005.

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      Provision for income taxes for fiscal 2004 decreased to $0.9 million from $18.1 million for fiscal 2003. The $0.9 million provision for income taxes in fiscal 2004 does not include $4.8 million for taxes related to our discontinued operations in fiscal 2004. Our effective tax rate for fiscal 2004 decreased to 24.4% from 38.1% for fiscal 2003. These rates are not comparable due to the reorganization of our corporate subsidiaries in fiscal 2004, as discussed above.
Discontinued Operations
      Income from discontinued operations, net of tax, was $8.0 million in fiscal 2004 compared to $0.04 million for fiscal 2003.
      In the first quarter of fiscal 2004, we completed the sale of our plastic packaging division and the sale of certain assets and liabilities that we acquired in the January 2003 acquisition of Groupe Cartem Wilco Inc. (which we refer to as “Cartem Wilco”) that were associated with a folding carton plant in Quebec. We received cash proceeds of approximately $59.0 million from the sale of the plastic packaging division and we recorded an after-tax gain of approximately $7.3 million. The sale of certain Cartem Wilco assets and liabilities resulted in no gain or loss and we received cash proceeds of approximately $2.9 million. We have reclassified the results of operations for these components as income from discontinued operations, net of tax, on the consolidated statements of income for all periods presented.
      Income from discontinued operations in fiscal 2003 was $0.04 million due to declining sales prices of case ready meat packaging, higher raw material costs, primarily resin, and a shift toward lower margin extruded roll stock sales.
Net Income
      Net income for fiscal 2005 was $17.6 million and included pre-tax expenses of $7.5 million for restructuring and other costs, and a one-time income tax benefit of $6.7 million. Net income for fiscal 2004 was $17.6 million and included income from discontinued operations of $8.0 million, pre-tax expenses of $32.7 million for restructuring and other costs, and a one-time income tax benefit of $3.2 million. Net income as a percentage of net sales was 1.0% for fiscal 2005 compared to 1.1% for fiscal 2004. Net income for fiscal 2003 was $29.6 million and included income from discontinued operations of $0.04 million and pre-tax expense of $1.5 million for restructuring and other costs. Net income as a percentage of net sales was 2.1% for fiscal 2003.
Liquidity and Capital Resources
Working Capital and Capital Expenditures
      We fund our working capital requirements, capital expenditures and acquisitions from net cash provided by operating activities; borrowings under term notes, our receivables-backed financing facility and bank credit facilities; proceeds from the sale of our discontinued and closed operations, and proceeds received in connection with the issuance of industrial development revenue bonds as well as other debt and equity securities.
      The sum of cash and cash equivalents and investment in marketable securities was $26.8 million at September 30, 2005, compared to $56.9 million at September 30, 2004, an aggregate decrease of $30.1 million. Our debt balance at September 30, 2005, was $915.1 million compared with $484.1 million on September 30, 2004, an increase of $431.0 million, which primarily reflects the debt incurred to finance the GSPP Acquisition. Our debt exposes us to changes in interest rates. We use swap instruments to manage the interest rate characteristics of our outstanding debt. In May 2005, we paid $4.2 million to terminate $200 million of long-term fixed-to-floating interest rate swaps. In June and September 2005, we entered into $350 million notional amount and $75 million notional amount of floating-to-fixed interest rate swaps, respectively, and designated them as cash flow hedges of forecasted interest payments for a like amount of our floating rate debt. The start date of the $75 million is effective September 1, 2006. We financed the GSPP Acquisition of $552.2 million, including related costs, with $420.0 million in financing from a new secured

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credit facility (which we refer to as the “Senior Credit Facility”) that we entered into contemporaneously with the closing of the GSPP Acquisition, $70.1 million in financing from our existing $75.0 million receivables-backed financing facility and cash on hand. We have established a goal to reduce our debt by $180 million by September 2007. For this goal, we assumed our debt would equal our March 31, 2005, net debt (as defined) of $396.3 million plus the purchase price of $552.2 million and that we would reduce our net debt to $768.5 million by September 2007. Our actual net debt at the end of September 30, 2005 was $876.0 million, implying that we reduced pro forma net debt by $72.5 million. We are ahead of our expectations for debt reduction after the GSPP Acquisition. The Senior Credit Facility includes revolving credit, swing, and term loan facilities in the aggregate principal amount of $700.0 million. The Senior Credit Facility is pre-payable at any time and is scheduled to expire on June 6, 2010, and includes certain restrictive covenants. We had $250.0 million outstanding under the term loan facility at September 30, 2005. We have aggregate outstanding letters of credit under this facility of approximately $41 million. At September 30, 2005, due to the covenants in the Senior Credit Facility, maximum available borrowings under this facility were approximately $126 million. We also had a 364-day receivables-backed financing facility under which we had aggregate borrowing capacity of $75.0 million through May 1, 2006. Borrowing availability under this facility is based on the eligible underlying secured assets. At September 30, 2005, this facility was fully drawn. On October 26, 2005, the facility was increased to $100.0 million and is scheduled to expire on October 25, 2006. At September 30, 2005 and September 30, 2004, we had $55.0 million and no borrowings, respectively outstanding under our receivables-backed financing facility. At September 30, 2005, we had $216.0 million outstanding under our revolving credit facility that is part of our Senior Credit Facility. At September 30, 2004, we had no borrowings on the terminated revolving credit facility. On August 1, 2005, we retired the outstanding balance of $74.0 million of our $100.0 million in aggregate principal amount of our 7.25% notes (which we refer to as the “2005 Notes”). We retired the 2005 Notes with $14.0 million cash on hand and $60.0 million of borrowings under our Senior Credit Facility. For additional information regarding our outstanding debt, our credit facilities and their securitization, see “Note 8. Debt” of the Notes to Condensed Consolidated Financial Statements section of the Financial Statements included herein.
      Net cash provided by operating activities for fiscal 2005 was $154.7 million and $91.4 million in fiscal 2004. The increase was primarily due to higher income from continuing operations, increased depreciation and amortization, and net decreases in working capital. The net decreases in working capital were primarily due to a reduction in accounts receivable and inventories. Net cash provided by operating activities for fiscal 2004 was $91.4 million compared to $114.8 million for fiscal 2003. Net cash provided by operating activities for fiscal 2004 was reduced by $9.9 million of cash taxes paid on the sale of our plastic packaging division, which we are required to record as a reduction of net cash provided by operating activities. The remaining decrease is primarily the result of working capital changes to support our increased sales levels and decreased earnings from continuing operations.
      Net cash used for investing activities was $572.4 million in fiscal 2005 compared to $36.3 million in fiscal 2004. Net cash used for investing activities consisted primarily of the $552.2 million purchase price of the GSPP Acquisition, $54.3 million of capital expenditures that were partially offset by net sales of $28.2 million of marketable securities, and proceeds from the sale of property, plant and equipment of $6.1 million, primarily from previously idled facilities and equipment. Fiscal 2004 consisted primarily of capital expenditures of $60.8 million, and net purchases of $28.2 million of marketable securities, and our Athens Acquisition for which the purchase price was $13.7 million, and were largely offset by the $59.0 million that we received from the sale of the plastic packaging division and $2.9 million that we received from the sale of certain Cartem Wilco assets and liabilities. Net cash used for investing activities for fiscal 2003 was $156.7 million, consisting primarily of capital expenditures of $57.4 million, $65.3 million paid for the January 2003 purchase of Cartem Wilco, $15.4 million paid for the August 2003 purchase of Pacific Coast Packaging, and the buyout of our synthetic lease for $21.9 million. Partially offsetting these cash outflows were $6.8 million of proceeds from the sale of property, plant and equipment, primarily from closed facilities, and $1.5 million that we received for the sale of our Montreal, Quebec, recycled fiber collection facility.
      Net cash provided by financing activities was $415.1 million in fiscal 2005 and net cash used for financing activities was $41.1 million in fiscal 2004. In fiscal 2005, net cash provided consisted primarily of net additions

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to debt to finance the GSPP Acquisition and the issuance of Common Stock, which were partially offset by cash dividends paid to shareholders, distributions to minority interest partners, payment on termination of swap contracts, and debt issuance costs. Fiscal 2004 consisted primarily of net repayments of debt, cash dividend payments to shareholders, and distributions to the minority interest partner in our RTS joint venture that were partially offset by proceeds from monetizing swap contracts and the issuance of Common Stock. Net cash provided by financing activities aggregated $50.4 million for fiscal 2003 and consisted primarily of proceeds from the issuance of $100.0 million in aggregate principal amount of our 5.625% notes due March 15, 2013 which we used to pay down the balances on our revolving credit facility, our receivables-backed financing facility and the debt that we incurred as part of the acquisition of Cartem Wilco; additions to debt; the issuance of Common Stock; and proceeds from monetizing swap contracts. Partially offsetting these sources of cash were repayments of debt, cash dividends paid to shareholders, and distributions to the minority interest partner in our RTS joint venture, debt issuance costs, and the repurchase of Common Stock.
      Our capital expenditures aggregated $54.3 million in fiscal 2005. We used these expenditures primarily for the purchase and upgrading of machinery and equipment. We estimate that our capital expenditures will aggregate approximately $70 million in fiscal 2006 and we are obligated to purchase $14.4 million of fixed assets at September 30, 2005. We intend to use these expenditures for the purchase and upgrading of machinery and equipment, including growth and efficiency capital focused on our folding carton business, and maintenance capital. We believe that our financial position would support higher levels of capital expenditures, if justified by opportunities to increase revenues or reduce costs, and we continuously review new investment opportunities. Accordingly, it is possible that our capital expenditures in fiscal 2006 could be higher than currently anticipated.
      As a result of the step up in basis related to the acquisition of the Gulf States fixed assets and the future tax depreciation from these assets, we do not anticipate paying any Federal income taxes over the next two fiscal years.
      We anticipate that we will be able to fund our capital expenditures, interest payments, stock repurchases, dividends, pension payments, working capital needs, and repayments of current portion of long term debt for the foreseeable future from cash generated from operations, borrowings under our Senior Credit Facility and receivables-backed financing facility, proceeds from the issuance of debt or equity securities or other additional long-term debt financing.
      In November 2005, our board of directors approved a resolution to pay our quarterly dividend of $0.09 per share, indicating an annualized dividend of $0.36 per year, on our Common Stock.

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Contractual Obligations
      We summarize in the following table our enforceable and legally binding contractual obligations at September 30, 2005, and the effect such obligations are expected to have on our liquidity and cash flow in future periods. We based some of the amounts in this table on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are subjective, the enforceable and legally binding obligations we actually pay in future periods may vary from those we have summarized in the table.
                                         
    Payments Due by Period
     
        Fiscal   Fiscal   Fiscal    
Contractual Obligations   Total   2006   2007 & 2008   2009 & 2010   Thereafter
                     
    (In millions)
Long-term debt, including current portion (a)(e)
  $ 903.4     $ 62.1     $ 63.6     $ 403.6     $ 374.1  
Operating lease obligations (b)
    38.1       10.2       15.4       7.5       5.0  
Purchase obligations (c)(d)
    276.0       137.0       120.9       17.9       0.2  
                               
Total
  $ 1,217.5     $ 209.3     $ 199.9     $ 429.0     $ 379.3  
                               
 
(a) We have included in the long-term debt line item above amounts owed on our note agreements, industrial development revenue bonds, and credit agreements. For purposes of this table, we assume that all of our long- term debt will be held to maturity. We have not included in these amounts interest payable on our long-term debt. We have excluded aggregate hedge adjustments resulting from terminated interest rate derivatives or swaps of $12.3 million and excluded unamortized bond discounts of $0.6 million from the table to arrive at actual debt obligations. For information on the interest rates applicable to our various debt instruments see “Note 8. Debt.” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
 
(b) For more information, see “Note 9. Leases and Other Agreements” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
 
(c) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provision; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.
 
(d) Under the terms of the joint venture agreement, Lafarge has the option to terminate the joint venture and require us to purchase its interest in Seven Hills on March 29, 2008, and annually thereafter at a formula price that would result in a purchase price of less than 40% of Lafarge’s net equity investment. We have included an estimate of this contingent obligation in the table. We have included approximately $8.0 million in the table under the column “Fiscal 2007 & 2008”.
 
(e) We have not included in the table above an item labeled “other long-term liabilities reflected on our consolidated balance sheet” because none of our other long-term liabilities have a definite pay-out scheme. As discussed in “Note 11. Retirement Plans” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein, we have long-term liabilities for deferred employee compensation, including pension, supplemental retirement plans, and deferred compensation. We have not included in the table the payments related to the supplemental retirement plans and deferred compensation because these amounts are dependent upon, among other things, when the employee retires or leaves our company, and whether the employee elects lump-sum or annuity payments. In addition, we have not included in the table minimum pension funding requirements because such amounts are not available for all periods presented. We estimate we will contribute approximately $35 million to our pension and supplemental retirement plans in the next two fiscal years. During fiscal 2005, we contributed approximately $7.3 million to our five defined benefit pension plans.
      In addition to the enforceable and legally binding obligations quantified in the table above, we have other obligations for goods and services and raw materials entered into in the normal course of business. These contracts, however, either are not enforceable or legally binding or are subject to change based on our business decisions.

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      For information concerning certain related party transactions, please see “Note 14. Related Party Transactions” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
Unconsolidated Joint Venture
      We own 49% of the Seven Hills joint venture with Lafarge, and account for it under the equity method. During fiscal 2005 and 2003 our share of operating losses incurred at Seven Hills amounted to $1.0 million and $0.4 million, respectively. During fiscal 2004, our share of operating income at Seven Hills was $0.1 million. The loss in fiscal 2005 included approximately $1.5 million that we recorded in our third fiscal quarter due to arbitration with Lafarge. Our pre-tax income from the Seven Hills joint venture, including the fees we charge the venture and our share of the joint venture’s net income, was $0.7 million, $2.8 million, and $1.3 million for fiscal 2005, 2004, and 2003, respectively.
      For additional information, see “Note 1. Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
Stock Repurchase Program
      Our board of directors has approved a stock repurchase plan that allows for the repurchase from time to time of shares of Common Stock over an indefinite period of time. As of September 30, 2005, we had 2.0 million shares of Common Stock available for repurchase under the amended repurchase plan. Pursuant to our repurchase plan, during fiscal 2005 and fiscal 2004, we did not repurchase any shares of Common Stock. During fiscal 2003, we repurchased 0.1 million shares of Common Stock.
Expenditures for Environmental Compliance
      For a discussion of our expenditures for environmental compliance, please see Item 1, “Business — Governmental Regulation — Environmental Regulation.”
New Accounting Standards
      See “Note 1. Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on results of operations and financial condition.
Non-GAAP Measures
      We have included in the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” above a financial measure that is not prepared in accordance with GAAP. Any analysis of non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP. Below, we define the non-GAAP financial measure, provide a reconciliation of the non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP, and discuss the reasons that we believe this information is useful to management and may be useful to investors.
Net Debt (as defined)
      We have defined the non-GAAP measure net debt to include the aggregate debt obligations reflected in our balance sheet, less the hedge adjustments resulting from terminated and existing interest rate derivatives or swaps, the balance of our cash and cash equivalents and certain other investments that we consider to be readily available to satisfy such debt obligations.
      Our management uses net debt, along with other factors, to evaluate our financial condition. We believe that net debt is an appropriate supplemental measure of financial condition because it provides a more

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complete understanding of our financial condition before the impact of our decisions regarding the appropriate use of cash and liquid investments. Set forth below is a reconciliation of net debt to the most directly comparable GAAP measures, Total Current Portion of Debt and Total Long-term Debt, Less Current Portion, in thousands:
                         
    September 30,   March 31,   September 30,
    2005   2005   2004
             
Total Current Portion of Debt
  $ 62,079     $ 75,090     $ 85,760  
Total Long-term Debt, Less Current Portion
    853,002       390,691       398,301  
                   
      915,081       465,781       484,061  
Less: Hedge Adjustments Resulting From Terminated Interest Rate Derivatives or Swaps
    (12,255 )     (18,702 )     (21,235 )
Less: Hedge Adjustments Resulting From Existing Interest Rate Derivatives or Swaps
          8,937       2,774  
                   
      902,826       456,016       465,600  
Less: Cash and Cash Equivalents
    (26,839 )     (28,505 )     (28,661 )
Less: Investment in Marketable Securities
          (31,230 )     (28,230 )
                   
Net Debt
  $ 875,987     $ 396,281     $ 408,709  
                   
Item 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      We are exposed to market risk from changes in interest rates, foreign exchange rates and commodity prices. Our objective is to identify and understand these risks and then implement strategies to manage them. When evaluating these strategies, we evaluate the fundamentals of each market, our sensitivity to movement in commodity pricing, and underlying accounting and business implications. To implement these strategies, we periodically enter into various hedging transactions. The sensitivity analyses we present below do not consider the effect of possible adverse changes in the general economy, nor do they consider additional actions we may take to mitigate our exposure to such changes. There can be no assurance that we will manage or continue to manage any such risks in the future or that any such efforts will be successful.
Derivative Instruments
      We enter into a variety of derivative transactions. We use interest rate swap agreements to manage the interest rate characteristics on a portion of our outstanding debt. We evaluate market conditions and our leverage ratio in order to determine our tolerance for potential increases in interest expense that could result from floating interest rates. We use forward contracts to limit our exposure to fluctuations in non-functional foreign currency rates with respect to our operating units’ receivables. We also use commodity swap agreements to limit our exposure to falling sales prices and rising raw material costs.
      We account for derivative instruments and transactions based on whether the derivative instrument is designated as a fair value hedge or a cash flow hedge as more fully described in “Note 1. Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.
      In fiscal 2005, we paid $4.2 million to terminate $200 million notional amount of long-term fixed-to-floating interest rate swaps. During fiscal 2004, we realized cash proceeds of $4.4 million by terminating interest rate swaps that were designated as fair value hedges of our fixed rate debt and entering into comparable replacement interest rate swaps at then-current market levels. We do not expect any material impact on net income or change in interest rate risk from these transactions relative to our position before we entered into these transactions.

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Interest Rates
      We are exposed to changes in interest rates, primarily as a result of our short-term and long-term debt. We use swap agreements to manage the interest rate characteristics of a portion of our outstanding debt. Based on the amounts and mix of our fixed and floating rate debt at September 30, 2005 and September 30, 2004, if market interest rates increase an average of 100 basis points, after considering the effects of our swaps, our interest expense would have increased by $2.0 million and $3.1 million, respectively. We determined these amounts by considering the impact of the hypothetical interest rates on our borrowing costs and interest rate swap agreements. These analyses do not consider the effects of changes in the level of overall economic activity that could exist in such an environment.
Market Risks Impacting Pension Plans
      Our pension plans are influenced by trends in the financial markets and the regulatory environment. Adverse general stock market trends and falling interest rates increase plan costs and liabilities. During fiscal 2005 and 2004, the effect of a 0.25% change in the discount rate would have impacted income from continuing operations before income taxes by approximately $1.3 million and $1.2 million, respectively.
Foreign Currency
      We are exposed to changes in foreign currency rates with respect to our foreign currency denominated operating revenues and expenses. Our principal foreign exchange exposure is the Canadian dollar. The Canadian dollar is the functional currency of our Canadian operations.
      We have transaction gains or losses that result from changes in our operating units’ non-functional currency. For example, we have non-functional currency exposure at our Canadian operations because they have purchases and sales denominated in U.S. dollars. We record these gains or losses in foreign exchange gains and losses in the income statement. From time to time, we enter into currency forward or option contracts to mitigate a portion of our foreign currency transaction exposure. We recorded losses of $0.7 million and $0.5 million in fiscal 2005 and fiscal 2003, respectively, and a gain of $0.01 million in fiscal 2004. To mitigate potential foreign currency transaction losses, we may use offsetting internal exposures or forward contracts.
      We also have translation gains or losses that result from translation of the results of operations of an operating unit’s foreign functional currency into U.S. dollars for consolidated financial statement purposes. As a result of the Canadian dollar strengthening in relation to the U.S. dollar, our translated, before tax earnings from our Canadian operations were increased. Translated earnings were also $0.6 million higher in fiscal 2005 than if we translated the same earnings using fiscal 2004 exchange rates. Translated earnings were $0.8 million higher in fiscal 2004 than if we translated the same earnings using fiscal 2003 exchange rates.
Commodities
      The principal raw material we use in the production of recycled paperboard and corrugating medium is recycled fiber. Our purchases of old corrugated containers and double-lined kraft clippings account for our largest fiber costs and approximately 54% of our fiscal year 2005 fiber purchases. The remaining 46% of our fiber purchases consists of a number of other grades of recycled paper.
      From time to time we make use of financial swap agreements to limit our exposure to changes in OCC prices. With the effect of our OCC swaps, a hypothetical 10% increase in total fiber prices would have increased our costs by $10 million in fiscal 2005 and 2004, respectively. In times of higher fiber prices, we may have the ability to pass a portion of the increased costs on to our customers in the form of higher finished product pricing; however, there can be no assurance that we will be able to do so.
Coated Unbleached Kraft
      We purchase Coated Unbleached Kraft (which we refer to as “CUK”) from external sources to use in our folding carton converting business. A hypothetical 10% increase in CUK prices would have increased our costs by approximately $6 million during fiscal 2005 and by approximately $5 million during fiscal 2004. In times of

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higher CUK prices, we may have the ability to pass a portion of our increased costs on to our customers in the form of higher finished product pricing; however, there can be no assurance that we will be able to do so.
Linerboard/ Corrugating Medium
      We have the capacity to produce approximately 180,000 tons per year of corrugating medium at our St. Paul, Minnesota operation. From time to time, we make use of swap agreements to limit our exposure to falling corrugating medium prices at our St. Paul operation. We estimate market risk as a hypothetical 10% decrease in selling price. With the effect of our medium swaps, such a decrease would have resulted in lower sales of approximately $6 million during both fiscal 2005 and fiscal 2004.
      We convert approximately 86,000 tons per year of corrugating medium and linerboard in our corrugated box converting operations. A hypothetical 10% increase in linerboard and corrugating medium pricing would have resulted in increased costs of approximately $4 million during both fiscal 2005 and fiscal 2004. We may have the ability to pass a portion of our increased costs on to our customers in the form of higher finished product pricing; however, there can be no assurance that we will be able to do so.
Energy
      Energy is one of the most significant manufacturing costs of our paperboard operations. We use natural gas, electricity, fuel oil and coal to generate steam used in the paper making process and to operate our recycled paperboard machines and primarily electricity for our converting equipment. Our bleached paperboard mill uses wood by-products for most of its energy. We generally purchase these products from suppliers at market rates. Occasionally, we enter into long-term agreements to purchase natural gas.
      We spent approximately $87 million on all energy sources in fiscal 2005. Natural gas accounted for approximately 53% (5.0 million MMBtu) of our total purchases in fiscal 2005. Without the effect of fixed price natural gas forward contracts, a hypothetical 10% change in the price of energy would have increased our cost of energy by $8.7 million.
      We spent approximately $86 million on energy in fiscal 2004. Natural gas accounted for approximately 50% (5.7 million MMBtu) of our total energy purchases in fiscal 2004. Without the effect of fixed price natural gas forward contracts, a hypothetical 10% change in the price of energy would have increased our cost of energy by $8.6 million during fiscal 2004.
      We may have the ability to pass a portion of our increased costs on to our customers in the form of higher finished product pricing; however, there can be no assurance that we will be able to do so. We periodically evaluate alternative scenarios to manage these risks.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
         
Description    
     
    Page  41  
    Page  42  
    Page  43  
    Page  44  
    Page  46  
    Page  90  
    Page  91  
    Page  93  
      For supplemental quarterly financial information, please see “Note 17. Financial Results by Quarter (Unaudited)” of the Notes to Consolidated Financial Statements section of the Financial Statements included herein.

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ROCK-TENN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
                           
    Year Ended September 30,
     
    2005   2004   2003
             
    (In thousands, except per share data)
Net sales
  $ 1,733,481     $ 1,581,261     $ 1,433,346  
Cost of goods sold
    1,459,217       1,313,931       1,170,990  
                   
Gross profit
    274,264       267,330       262,356  
Selling, general and administrative expenses
    204,918       197,078       182,729  
Restructuring and other costs
    7,525       32,738       1,494  
                   
Operating profit
    61,821       37,514       78,133  
Interest expense
    (36,640 )     (23,566 )     (26,871 )
Interest and other income (expense)
    465       (143 )     73  
Income (loss) from unconsolidated joint venture
    (958 )     119       (399 )
Minority interest in income of consolidated subsidiary
    (4,832 )     (3,419 )     (3,248 )
                   
Income from continuing operations before income taxes
    19,856       10,505       47,688  
Provision for income taxes
    2,242       854       18,147  
                   
Income from continuing operations
    17,614       9,651       29,541  
Income from discontinued operations (net of $0, $4,844 and $22 income taxes)
          7,997       35  
                   
Net income
  $ 17,614     $ 17,648     $ 29,576  
                   
Basic earnings per share:
                       
 
Income from continuing operations
  $ 0.50     $ 0.28     $ 0.86  
                   
 
Net income
  $ 0.50     $ 0.51     $ 0.86  
                   
Diluted earnings per share:
                       
 
Income from continuing operations
  $ 0.49     $ 0.27     $ 0.85  
                   
 
Net income
  $ 0.49     $ 0.50     $ 0.85  
                   
See accompanying notes.

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ROCK-TENN COMPANY
CONSOLIDATED BALANCE SHEETS
                   
    September 30,
     
    2005   2004
         
    (In thousands, except
    share
    and per share data)
ASSETS
Current Assets:
               
 
Cash and cash equivalents
  $ 26,839     $ 28,661  
 
Investment in marketable securities
          28,230  
 
Accounts receivable (net of allowances of $5,063 and $6,431)
    199,493       177,378  
 
Inventories
    201,965       127,359  
 
Other current assets
    30,484       22,286  
 
Assets held for sale
    3,435       1,526  
             
Total current assets
    462,216       385,440  
Property, plant and equipment at cost:
               
 
Land and buildings
    267,212       221,338  
 
Machinery and equipment
    1,287,505       955,315  
 
Transportation equipment
    10,473       9,034  
 
Leasehold improvements
    5,623       6,043  
             
      1,570,813       1,191,730  
 
Less accumulated depreciation and amortization
    (685,808 )     (638,927 )
             
Net property, plant and equipment
    885,005       552,803  
Goodwill
    350,941       297,060  
Intangibles, net
    67,992       19,014  
Other assets
    32,280       29,496  
             
    $ 1,798,434     $ 1,283,813  
             
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
 
Current portion of debt
  $ 62,079     $ 83,906  
 
Hedge adjustments resulting from terminated interest rate derivatives or swaps
          2,148  
 
Hedge adjustments resulting from existing interest rate derivatives or swaps
          (294 )
             
 
Total current portion of debt
    62,079       85,760  
 
Accounts payable
    116,423       94,483  
 
Accrued compensation and benefits
    50,887       48,751  
 
Other current liabilities
    49,821       40,522  
             
Total current liabilities
    279,210       269,516  
Long-term debt due after one year
    840,747       381,694  
Hedge adjustments resulting from terminated interest rate derivatives or swaps
    12,255       19,087  
Hedge adjustments resulting from existing interest rate derivatives or swaps
          (2,480 )
             
Total long-term debt, less current maturities
    853,002       398,301  
Accrued pension
    106,767       79,264  
Deferred income taxes
    82,974       84,947  
Other long-term liabilities
    3,655       6,732  
Commitments and contingencies (Notes 9 and 15)
               
Minority interest
    16,604       7,452  
Shareholders’ equity:
               
 
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares outstanding
           —  
 
Class A common stock, $0.01 par value; 175,000,000 shares authorized; 36,280,164 and 35,640,784 shares outstanding at September 30, 2005 and September 30, 2004, respectively
    363       356  
 
Capital in excess of par value
    166,423       159,012  
 
Deferred compensation
    (4,015 )     (3,795 )
 
Retained earnings
    326,041       321,557  
 
Accumulated other comprehensive loss
    (32,590 )     (39,529 )
             
Total shareholders’ equity
    456,222       437,601  
             
    $ 1,798,434     $ 1,283,813  
             
See accompanying notes.

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ROCK-TENN COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
                                                           
    Class A   Capital in           Accumulated    
    Common Stock   Excess of           Other    
        Par   Deferred   Retained   Comprehensive    
    Shares   Amount   Value   Compensation   Earnings   (Loss)   Total
                             
    (In thousands, except share and per share data)
Balance at October 1, 2002
    34,346,467     $ 343     $ 141,235     $ (2,267 )   $ 298,279     $ (32,443 )   $ 405,147  
Comprehensive income:
                                                       
 
Net income
                            29,576             29,576  
 
Foreign currency translation adjustments
                                  16,902       16,902  
 
Net unrealized loss on derivative instruments (net of $171 tax)
                                  (276 )     (276 )
 
Minimum pension liability (net of $15,806 tax)
                                  (25,019 )     (25,019 )
                                           
Comprehensive income
                                        21,183  
Income tax benefit from exercise of stock options
                955                         955  
Shares granted under restricted stock plan
    120,500       2       1,687       (1,689 )                  
Compensation expense under restricted stock plan
                      851                   851  
Cash dividends — $0.32 per share
                            (11,064 )           (11,064 )
Issuance of Class A common stock
    600,274       6       6,271                         6,277  
Purchases of Class A common stock
    (105,200 )     (1 )     (426 )           (886 )           (1,313 )
                                           
Balance at September 30, 2003
    34,962,041       350       149,722       (3,105 )     315,905       (40,836 )     422,036  
Comprehensive income:
                                                       
 
Net income
                            17,648             17,648  
 
Foreign currency translation adjustments
                                  10,439       10,439  
 
Net unrealized loss on derivative instruments (net of $128 tax)
                                  (425 )     (425 )
 
Minimum pension liability (net of $5,018 tax)
                                  (8,707 )     (8,707 )
                                           
Comprehensive income
                                        18,955  
Income tax benefit from exercise of stock options
                401                         401  
Shares granted under restricted stock plan
    144,000       1       2,220       (2,221 )                  
Compensation expense under restricted stock plan
                      1,531                   1,531  
Cash dividends — $0.34 per share
                            (11,996 )           (11,996 )
Issuance of Class A common stock
    534,743       5       6,669                         6,674  
                                           
Balance at September 30, 2004
    35,640,784       356       159,012       (3,795 )     321,557       (39,529 )     437,601  
Comprehensive income:
                                                       
 
Net income
                            17,614             17,614  
 
Foreign currency translation adjustments
                                  13,789       13,789  
 
Net unrealized gain on derivative instruments (net of $(2,376) tax)
                                  3,645       3,645  
 
Minimum pension liability (net of $8,175 tax)
                                  (10,495 )     (10,495 )
                                           
Comprehensive income
                                        24,553  
Income tax benefit from exercise of stock options
                212                         212  
Shares granted under restricted stock plan
    200,000       2       2,262       (2,264 )                  
Compensation expense under restricted stock plan
                      1,683                   1,683  
Restricted Stock grant cancelled
    (24,333 )           (361 )     361                    
Cash dividends — $0.36 per share
                            (12,949 )           (12,949 )
Issuance of Class A common stock net of stock received for tax withholdings
    463,713       5       5,298             (181 )           5,122  
                                           
Balance at September 30, 2005
    36,280,164     $ 363     $ 166,423     $ (4,015 )   $ 326,041     $ (32,590 )   $ 456,222  
                                           
See accompanying notes.

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ROCK-TENN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
                               
    Year Ended September 30,
     
    2005   2004   2003
             
    (In thousands)
Operating activities:
                       
 
Income from continuing operations
  $ 17,614     $ 9,651     $ 29,541  
 
Items in income not affecting cash:
                       
   
Depreciation and amortization
    84,040       74,189       72,683  
   
Deferred income taxes
    3,963       (4,678 )     11,689  
   
Income tax benefit of employee stock options
    212       401       955  
   
Loss on bond purchase
          948        
   
Deferred compensation expense
    1,683       1,531       851  
   
Gain on disposal of plant and equipment and other, net
    (1,820 )     (2,121 )     (766 )
   
Minority interest in income of consolidated subsidiary
    4,832       3,419       3,248  
   
(Income) loss from unconsolidated joint venture
    958       (119 )     399  
   
Pension funding (more) less than expense
    8,717       (2,996 )     (11,554 )
   
Impairment loss and other non-cash charges
    2,893       28,598       1,635  
 
Change in operating assets and liabilities, net of acquisitions:
                       
   
Accounts receivable
    23,393       (11,417 )     (710 )
   
Inventories
    9,506       (7,287 )     2,096  
   
Other assets
    (5,182 )     (6,360 )     (4,667 )
   
Accounts payable
    3,143       6,922       2,946  
   
Accrued liabilities
    728       386       1,865  
                   
     
Cash provided by operating activities from continuing operations
    154,680       91,067       110,211  
     
Cash provided by operating activities from discontinued operations
          373       4,584  
                   
     
Net cash provided by operating activities
    154,680       91,440       114,795  
Investing activities:
                       
 
Capital expenditures
    (54,326 )     (60,823 )     (57,402 )
 
Purchases of marketable securities
    (195,250 )     (318,900 )      
 
Maturities and sales of marketable securities
    223,480       290,670        
 
Cash paid for purchase of assets under synthetic lease
                (21,885 )
 
Cash paid for purchase of businesses, net of cash received
    (552,291 )     (15,047 )     (81,845 )
 
Cash contributed to joint venture
    (120 )     (158 )     (332 )
 
Proceeds from sale of property, plant and equipment
    6,071       6,061       8,316  
                   
     
Cash used for investing activities from continuing operations
    (572,436 )     (98,197 )     (153,148 )
     
Cash provided by (used for) investing activities by discontinued operations
          61,916       (3,598 )
                   
     
Net cash used for investing activities
    (572,436 )     (36,281 )     (156,746 )
Financing activities:
                       
 
Proceeds from issuance of public debt
                99,748  
 
Net additions (repayments) to revolving credit facilities
    216,000       (3,500 )     1,103  
 
Additions to debt
    320,800       146       53,645  
 
Repayments of debt
    (100,545 )     (34,177 )     (106,226 )
 
Proceeds from monetizing swap contracts
          4,385       9,390  
 
Payment on termination of swap contracts
    (4,245 )            —  
 
Industrial revenue bond proceeds
                3,649  
 
Debt issuance costs
    (4,047 )     (29 )     (1,016 )
 
Issuances of common stock
    5,122       6,674       6,277  
 
Purchases of common stock
                (1,313 )
 
Cash dividends paid to shareholders
    (12,949 )     (11,996 )     (11,064 )
 
Distribution to minority interest
    (5,075 )     (2,625 )     (3,780 )
                   
     
Cash provided by (used for) financing activities
    415,061       (41,122 )     50,413  
Effect of exchange rate changes on cash
    873       451       (849 )
                   
Increase (decrease) in cash and cash equivalents
    (1,822 )     14,488       7,613  
Cash and cash equivalents at beginning of year
    28,661       14,173       6,560  
                   
Cash and cash equivalents at end of year
  $ 26,839     $ 28,661     $ 14,173  
                   

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ROCK-TENN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
Supplemental disclosure of cash flow information:
                           
    Year Ended September 30,
     
    2005   2004   2003
             
    (In thousands)
Cash paid during the period for:
                       
 
Income taxes, net of refunds
  $ 4,219     $ 15,032     $ 11,168  
 
Interest, net of amounts capitalized
    38,445       27,379       29,516  
Supplemental schedule of non-cash investing and financing activities:
      On June 6, 2005, we acquired from Gulf States Paper Corporation and certain of its related entities substantially all of the assets of Gulf States’ Pulp and Paperboard and Paperboard Packaging operations and assumed certain of Gulf States’ related liabilities. We paid an aggregate purchase price of $552.2 million, which included an estimated $51.0 million of goodwill. We expect all $51.0 million of the goodwill to be deductible for tax purposes. The purchase price of the transaction is subject to adjustment based on the amount of working capital acquired.
      In fiscal 2004, cash paid for the purchase of businesses was $15.0 million. In August 2004, we acquired a corrugator for $13.7 million in cash which did not exceed the fair value of the assets and liabilities acquired; therefore, we recorded no goodwill. In conjunction with the acquisitions, liabilities were assumed as follows:
                 
    September 30,
     
    2005   2004
         
    (In thousands)
Fair value of assets acquired including goodwill
  $ 586,589     $ 16,729  
Cash paid
    552,291       15,047  
             
Liabilities assumed
  $ 34,298     $ 1,682  
             
See accompanying notes.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
      Unless the context otherwise requires, “we,” “us,” “our” and “the Company” refer to the business of Rock-Tenn Company and its consolidated subsidiaries, including RTS Packaging, LLC, which we refer to as “RTS” and GSD Packaging, LLC , which we refer to as “GSD.” We own 65% of RTS and conduct our interior packaging business through RTS. We own 60% of GSD and conduct some folding carton operations through GSD. These terms do not include Seven Hills Paperboard, LLC, which we refer to as “Seven Hills.” We own 49% of Seven Hills, a manufacturer of gypsum paperboard liner, which we do not consolidate for purposes of our financial statements.
      We are primarily a manufacturer of packaging, merchandising displays, and paperboard. In October 2003, we sold our plastic packaging operations.
Consolidation
      The consolidated financial statements include our accounts and all of our majority-owned subsidiaries. We have eliminated all significant intercompany accounts and transactions.
Unconsolidated Joint Venture
      We formed the Seven Hills joint venture with Lafarge. Lafarge owns 51% and we own 49% of the joint venture. Seven Hills commenced operations on March 29, 2001. Our partner has the option to sell us its interest in Seven Hills, at a formula price, effective on the sixth or any subsequent anniversary of the commencement date by providing notice no later than two years prior to the anniversary of the commencement date on which such transaction is to occur. We estimate this contingent obligation to be approximately $8.0 million at September 30, 2005. We have determined that Seven Hills is a variable interest entity, but we are not its primary beneficiary. Accordingly, we use the equity method to account for our investment in Seven Hills. The partners of the joint venture guaranteed funding of Seven Hills’ net losses in relation to their proportionate share of ownership. However, there is no third party debt at Seven Hills. We have invested a total of $23.1 million in Seven Hills as of September 30, 2005. Our share of cumulative losses by Seven Hills that we have recognized as of September 30, 2005 and 2004 were $2.2 million and $1.6 million, respectively. Our pre-tax income from the Seven Hills joint venture, including the fees we charge the venture and our share of the joint venture’s net income was $0.7 million, $2.8 million and $1.3 million, for fiscal 2005, 2004, and 2003, respectively. We contributed cash of $0.1 million, $0.2 million, and $0.3 million for fiscal 2005, 2004, and 2003, respectively. Of the total cash we contributed to the joint venture, our contributions for capital expenditures amounted to $0.1 million, $0.2 million, and $0.3 million during fiscal 2005, 2004, and 2003, respectively.
      During fiscal 2005 and 2003 our share of operating losses incurred at Seven Hills amounted to $1.0 million and $0.4 million, respectively. During fiscal 2004, our share of operating income at Seven Hills was $0.1 million. The loss in fiscal 2005 included approximately $1.5 million that we recorded in our third fiscal quarter in connection with the arbitration to determine price components and fees for services rendered by us to Seven Hills. In addition, we expect that the arbitrator’s ruling will reduce our future pre-tax income by approximately $0.8 million annually.
Use of Estimates
      The preparation of financial statements in conformity with GAAP 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 may differ from those estimates and the differences could be material.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with our evaluation of the recoverability of goodwill and property, plant and equipment as well as those used in the determination of taxation, insurance and restructuring. In addition, significant estimates form the basis for our reserves with respect to collectibility of accounts receivable, inventory valuations, pension benefits, and certain benefits provided to current employees. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial techniques. We regularly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.
Revenue Recognition
      We recognize revenue when persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured.
      Items that we net against our gross revenue include provisions for discounts, returns, allowances, customer rebates and other adjustments. We account for such provisions during the same period in which we record the related revenues, except for changes in the fair value of derivatives, which we recognize as described below, and expense for cash discounts, which we record as earned when we receive payments from our customers. We classify as revenue amounts billed to a customer in a sales transaction related to shipping and handling.
Shipping and Handling Costs
      We classify shipping and handling costs as a component of cost of goods sold.
Derivatives
      We enter into a variety of derivative transactions. We use swap agreements to manage the interest rate characteristics of a portion of our outstanding debt. We from time to time use forward contracts to limit our exposure to fluctuations in Canadian foreign currency rates with respect to our receivables denominated in Canadian dollars. We also use commodity swap agreements to limit our exposure to falling sales prices and rising raw material costs. We are exposed to counterparty credit risk for nonperformance and, in the event of nonperformance, to market risk for changes in interest rates. We manage exposure to counterparty credit risk through minimum credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk.
      For each derivative instrument that is designated and qualifies as a fair value hedge, we recognize the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk in current earnings during the period of the changes in fair values. For each derivative instrument that is designated and qualifies as a cash flow hedge, we report the effective portion of the gain or loss on the derivative instrument as a component of accumulated other comprehensive income or loss and reclassify that portion into earnings in the same period or periods during which the hedged transaction affects earnings. We recognize the ineffective portion of the hedge, if any, in current earnings during the period of change. The amount that is reclassified into earnings and the ineffective portion of a hedge are reported on the same line item as the hedged item. Adjustments to the carrying value of debt arising from fair value hedges are recognized as an adjustment to interest expense of the related debt instrument over the remaining term of the related debt instrument. For derivative instruments not designated as hedging instruments, we recognize the gain or loss in current earnings during the period of change. We include the fair value of cash flow hedges in other long-term liabilities and other assets on the balance sheet. We base the fair value of our derivative instruments on market quotes. Fair value represents the net amount required for us to terminate the position,

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
taking into consideration market rates and counterparty credit risk. We report derivative contracts that are an asset from our perspective as other assets. We record contracts that are liabilities from our perspective as other liabilities.
Cash Equivalents
      We consider all highly liquid investments that mature three months or less from the date of purchase to be cash equivalents. The carrying amounts we report in the consolidated balance sheets for cash and cash equivalents approximate fair market values. We place our cash and cash equivalents in large banks, which limits the amount of our credit exposure.
Marketable Securities
      We classify our marketable securities as available-for-sale. We carry these securities at fair market value based on current market quotes and report any unrealized gains and losses in shareholders’ equity as a component of other comprehensive income. We base gains or losses on securities sold on the specific identification method. Our policy is to only invest in high-grade bonds issued by corporations, government agencies and municipalities. We review our investment portfolio as we deem necessary and, where appropriate, adjust individual securities for other-than-temporary impairments. We recognized no material unrealized gain or loss at September 30, 2004 or 2005. We do not hold these securities for speculative or trading purposes.
      Beginning in the first quarter of fiscal 2004, we acquired auction rate securities and classified them as cash and cash equivalents in our balance sheet. At September 30, 2004, we included $28.2 million of these securities in cash and cash equivalents. During the second quarter of fiscal 2005, we reclassified all of our auction rate securities as marketable securities. These investments generally have long-term maturities of up to 30 years, but have certain characteristics of short-term investments due to an interest rate setting mechanism and the ability to liquidate them through an auction process that occurs on intervals of approximately 30 days. Our intent in holding these securities is to have the cash available for current operations. Therefore, we classify these investments as short-term and as available-for-sale due to management’s intent. This reclassification did not affect our net income or results of operations. The reclassification of the securities as marketable securities as well as the purchase and sale of the securities does not impact cash provided by operating activities.
      The reclassification of our auction rate securities on our September 30, 2004 consolidated balance sheet reduced cash and cash equivalents from $56.9 million to $28.7 million, and investment in marketable securities increased from zero to $28.2 million. Net cash used for investing activities on our fiscal 2004 consolidated statements of cash flows increased from $8.1 million to $36.3 million. At September 30, 2005, we had no auction rate securities.
Accounts Receivable
      We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. Receivables generally are due within 30 days. We serve a diverse customer base primarily in North America and, therefore, have limited exposure from credit loss to any particular customer or industry segment.
      We state accounts receivable at the amount owed by the customer, net of an allowance for estimated uncollectible accounts. We do not discount accounts receivable because we generally collect accounts receivable over a very short time. We estimate our allowance for doubtful accounts based on our historical experience, current economic conditions and the credit worthiness of our customers. We charge off receivables when they are determined to be no longer collectable. In fiscal 2005 and 2004, we recorded bad debt expense of $0.5 million and $3.0 million, respectively. In fiscal 2003, we recorded income of $0.6 million resulting from a reduction in an allowance.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories
      We value substantially all U.S. inventories at the lower of cost or market, with cost determined on the last-in, first-out (LIFO) basis. We value all other inventories 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 27.5% and 28.4% of FIFO cost of all inventory at September 30, 2005 and 2004, respectively.
      Our operating divisions use a variety of methods to estimate the FIFO cost of their finished goods inventories. One of our divisions uses a standard cost system. Another division divides the actual cost of goods manufactured by the tons produced and multiplies this amount by the tons of inventory on hand. Other divisions calculate a ratio, on a plant by plant basis, the numerator of which is the cost of goods sold and the denominator is net sales. This ratio is applied to the estimated sales value of the finished goods inventory. Variances and other unusual items are analyzed to determine whether it is appropriate to include those items in the value of inventory. Examples of variances and unusual items are, but are not limited to, abnormal production levels, freight, handling costs, and wasted materials (spoilage) to determine the amount of current period charges. Cost includes raw materials and supplies, direct labor, indirect labor related to the manufacturing process and depreciation and other factory overheads.
Property, Plant and Equipment
      We state property, plant and equipment at cost. Cost includes major expenditures for improvements and replacements that extend useful lives, increase capacity, increase revenues or reduce costs. During fiscal 2005, 2004, and 2003, we capitalized interest of approximately $0.5 million, $0.3 million, and $0.3 million, respectively. For financial reporting purposes, we provide depreciation and amortization 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 are depreciated over the shorter of the asset life or the lease term. Depreciation expense for fiscal 2005, 2004, and 2003 was approximately $79.0 million, $70.1 million, $69.3 million, respectively.
Impairment of Long-Lived Assets and Goodwill
      We account for our goodwill under SFAS 142. We review the recorded value of our goodwill annually during the fourth quarter of each fiscal year, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. We determine recoverability by comparing the estimated fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit.
      Reporting units are businesses one level below segments for which discrete financial information is available and segment management regularly reviews the operating results. The amount of goodwill allocated to a reporting unit is the excess of the fair value of the acquired business (or portion thereof) to be included in the reporting unit over the fair value assigned to the individual assets acquired and liabilities assumed that are assigned to the reporting unit.
      The SFAS 142 goodwill impairment model is a two-step process. In step 1, we utilize the present value of expected net cash flows to determine the estimated fair value of our reporting units. This present value model requires management to estimate future net cash flows, the timing of these cash flows, and a discount rate (based on a weighted average cost of capital), which represents the time value of money and the inherent risk and uncertainty of the future cash flows. Factors that management must estimate when performing this step in

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the process include, among other items, sales volume, prices, inflation, discount rates, exchange rates, tax rates and capital spending. The assumptions we use to estimate future cash flows are consistent with the assumptions that the reporting units use for internal planning purposes, updated to reflect current expectations. If we determine that the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If we determine that the carrying amount of the reporting unit exceeds its estimated fair value, we must complete step 2 of the impairment analysis. Step 2 involves determining the implied fair value of the reporting unit’s goodwill and comparing it to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, we recognize an impairment loss in an amount equal to that excess.
      We completed the annual test of the goodwill associated with each of our reporting units during fiscal 2005 and we identified no indicators of impairment.
      We follow SFAS 144 in determining whether the carrying value of any of our long-lived assets, including intangibles, is impaired. The SFAS 144 test is a 3-step test for assets that are “held and used” as that term is defined by SFAS 144. First, we determine whether indicators of impairment are present. SFAS 144 requires us to review long-lived assets for impairment only when events or changes in circumstances indicate that the carrying amount of the long-lived asset might not be recoverable. Accordingly, while we do routinely assess whether impairment indicators are present, we do not routinely perform tests of recoverability. Second, we determine whether the estimated undiscounted cash flows for the potentially impaired assets are less than the carrying value. This model requires management to estimate future net cash flows. The assumptions we use to estimate future cash flows are consistent with the assumptions we use for internal planning purposes, updated to reflect current expectations. Third, we estimate the fair value of the asset and record an impairment charge if the carrying value is greater than the fair value of the asset. The test is similar for assets classified as “held for sale,” except that the assets are recorded at the lower of their carrying value or fair value less anticipated cost to sell.
      Other intangible assets are amortized based on the estimated pattern in which the economic benefits are realized over their estimated useful lives ranging from 1 to 40 years and have an average of approximately 18.5 years. We identify the weighted average lives of our intangible assets by category in “Note 7. Other Intangible Assets.”
      Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance. Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating the impairment also requires us to estimate future operating results and cash flows, which also require judgment by management. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
Self-Insurance
      We are self-insured for the majority of our group health insurance costs, subject to specific retention levels. We calculate our group insurance reserve based on estimated reserve rates. We utilize claims lag data provided by our claims administrators to compute the required estimated reserve rate per carrier. We calculate our average monthly claims paid using the actual monthly payments during the trailing 12-month period. At that time, we also calculate our required reserve using the reserve rates discussed above. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our group health insurance costs.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Workers’ Compensation
      We purchase large risk deductible workers’ compensation policies for the majority of our workers’ compensation liabilities that are subject to various deductibles. We calculate our workers’ compensation reserves based on estimated actuarially calculated development factors which are applied to total reserves as provided by the insurance companies we do business with.
Accounting for Income Taxes
      We account for income taxes under the liability method, which requires that we recognize 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. We record a valuation allowance against deferred tax assets when the weight of available evidence indicates it is more likely than not that the deferred tax asset will not be realized. Historically, we have elected to treat all earnings of our Cartem Wilco, RTS Empaques, S. De R.L. CV, and RTS Embalajes De Chile Limitada operations from the date we acquired the operations as subject to repatriation and we provide for taxes accordingly. We consider all other earnings of our foreign operations indefinitely reinvested in the respective operations other than those we intend to repatriate under the American Jobs Creation Act of 2004 as extraordinary dividends. Other than the extraordinary dividends, we have not provided for any taxes that would be due upon repatriation of those earnings into the United States. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both United States income taxes, subject to an adjustment for foreign tax credits, and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred United States income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
Pension and Other Post-Retirement Benefits
      The determination of our obligation and expense for pension and other post-retirement benefits is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. We describe these assumptions in “Note 11. Retirement Plans,” which include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation levels. We accumulate actual results that differ from our assumptions and amortize the difference over future periods. Therefore, these differences generally affect our recognized expense, recorded obligation and funding requirements in future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other post-retirement benefit obligations and our future expense.
Stock Options
      We have elected to follow the intrinsic value method of APB 25 and related interpretations in accounting for our employee stock options. Under APB 25, because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, we recognize no compensation expense. We disclose pro forma information regarding net income and earnings per share in “Note 13. Shareholders’ Equity.”
Repair and Maintenance Costs
      We expense routine repair and maintenance costs as we incur them. We defer expenses we incur during planned major maintenance activities and recognize the expenses ratably over the shorter of the life provided or until replaced by the next major maintenance activity. Our bleached paperboard mill is the only facility that currently conducts annual planned major maintenance activities. This maintenance is generally done in our first fiscal quarter and has a material impact on our results of operations in that period.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign Currency
      We generally translate the assets and liabilities of our foreign operations from the functional currency at the rate of exchange in effect as of the balance sheet date. We generally translate the revenues and expenses of our foreign operations at a daily average rate prevailing during the year. We reflect the resulting translation adjustments in shareholders’ equity. We include gains or losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, in the consolidated statements of income. We recorded losses of $0.7 million and $0.5 million in fiscal 2005 and fiscal 2003, respectively, and a gain of $0.01 million in fiscal 2004.
Environmental Costs
      Our policy with respect to accounting for environmental related costs is as follows:
  •  We accrue for losses associated with our environmental remediation obligations when both of the following are true: it is probable that we have incurred a liability and the amount of the loss can be reasonably estimated.
 
  •  We generally recognize accruals for estimated losses from our environmental remediation obligations no later than completion of the remedial feasibility study.
 
  •  We adjust such accruals as further information develops or circumstances change.
 
  •  We recognize recoveries of our environmental remediation costs from other parties as assets when we deem their receipt probable.
New Accounting Standards
      EITF Issue 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty” issued in September 2005 provides that inventory purchase and sale transactions with the same counterparty that are entered into in contemplation of one another should be combined for purposes of applying Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” and that exchanges of inventory should be recognized at carryover basis except for exchanges of finished goods for either raw materials or work-in-process, which would be recognized at fair value. EITF 04-13 is to be applied to new arrangements entered into in the first interim or annual reporting period beginning after March 15, 2006, and applies to previous arrangements that are modified or renegotiated after the effective date. We currently have several “swap” arrangements with other manufacturers of paperboard. Our accounting for modifications or renegotiations of existing arrangements after April 1, 2006, and our accounting for new arrangements entered into after April 1, 2006, may be different than our accounting for swap arrangements currently in effect.
      Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” issued in June 2005 will require entities that voluntarily make a change in accounting principle apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS 154 supersedes Accounting Principles Board Opinion No. 20, “Accounting Changes,” which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, nonfinancial assets, the change must be accounted for as a change in accounting estimate. Under APB 20, such a change would have been reported as a change in accounting principle. SFAS 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” issued in December 2004 (which we refer to as “SFAS 123(R)”) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. After the effective date, pro forma disclosure will no longer be an alternative.
      In April 2005 Rule 4-01(a) of Regulation S-X was amended to provide that registrants that are not small business issuers may adopt SFAS 123(Revised) beginning with the first interim or annual reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005, and we will do so.
      SFAS 123(R) permits public companies to adopt its requirements using one of two methods:
  •  A “modified prospective” method in which the entity would recognize compensation cost beginning with the effective date: (a) based on the requirements of SFAS 123(R) for all share-based payments to be granted or modified after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date that remain unvested on the effective date.
 
  •  A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either for (a) all prior periods presented or (b) the prior interim periods of the year of adoption.
      We have not yet made a decision as to which method we will use to adopt SFAS 123(R).
      We currently account for share-based payments to employees using the intrinsic value method and, as such, generally recognize no compensation cost for share-based payments. Our adoption of SFAS 123(R)’s fair value method will likely have a significant impact on our results of operations. If we had adopted SFAS 123(R) in prior periods, the impact would have approximated the amounts disclosed in “Note 13. Shareholders’ Equity” of the Notes to Consolidated Financial Statements. The pro forma stock-based employee compensation expense was $3.9 million, $2.8 million, and $2.8 million, net of taxes, in fiscal 2005, 2004, and 2003, respectively. SFAS 123(R) will also require us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow, rather than as an operating cash flow as required under current accounting standards. This requirement will reduce our net operating cash flows and increase our net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows we recognized in prior periods for such excess tax deductions were $0.2 million, $0.4 million, and $1.0 million in fiscal 2005, 2004, and 2003, respectively.
      Statement of Financial Accounting Standards No, 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4” issued in November 2004 (which we refer to as “SFAS 151”) requires us to recognize abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) as current-period charges and to base our allocation of fixed production overheads to the costs of conversion on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect our adoption of SFAS 151 to have a material effect on our consolidated financial statements.
Reclassifications
      We have made certain reclassifications to prior year amounts to conform to the current year presentation. Certain group insurance costs related to the indirect plant personnel were reclassified from SG&A to cost of goods sold. The prior year amounts were reclassified as well. In addition, franchise taxes were reclassified from provision for income taxes to SG&A. Note 17 provides the impact of these reclassifications by quarter for fiscal 2003, 2004, and 2005.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. Basic and Diluted Earnings Per Share
      The following table sets forth the computation of basic and diluted earnings per share (in thousands except for earnings per share information):
                           
    Year Ended September 30,
     
    2005   2004   2003
             
Numerator:
                       
 
Income from continuing operations
  $ 17,614     $ 9,651     $ 29,541  
 
Income from discontinued operations, net of tax
     —       7,997       35  
                   
 
Net income
  $ 17,614     $ 17,648     $ 29,576  
                   
Denominator:
                       
 
Denominator for basic earnings per share — weighted average shares
    35,492       34,922       34,320  
 
Effect of dilutive stock options and restricted stock awards
    605       556       423  
                   
 
Denominator for diluted earnings per share — weighted average shares and assumed conversions
    36,097       35,478       34,743  
                   
Basic earnings per share:
                       
 
Income from continuing operations
  $ 0.50     $ 0.28     $ 0.86  
 
Income from discontinued operations, net of tax
     —       0.23        
                   
 
Net income per share — basic
  $ 0.50     $ 0.51     $ 0.86  
                   
Diluted earnings per share:
                       
 
Income from continuing operations
  $ 0.49     $ 0.27     $ 0.85  
 
Income from discontinued operations, net of tax
     —       0.23        
                   
 
Net income per share — diluted
  $ 0.49     $ 0.50     $ 0.85  
                   
Note 3. Accumulated Other Comprehensive Loss
      Accumulated other comprehensive income (loss) is comprised of the following, net of taxes, where applicable (in thousands):
                 
    September 30,
     
    2005   2004
         
Foreign currency translation
  $ 32,209     $ 18,420  
Net unrealized gain (loss) on derivative instruments, net of tax
    3,095       (550 )
Minimum pension liability, net of tax
    (67,894 )     (57,399 )
             
Total accumulated other comprehensive loss
  $ (32,590 )   $ (39,529 )
             

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 4. Inventories
      Inventories at September 30, 2005 and 2004 are as follows (in thousands):
                 
    September 30,
     
    2005   2004
         
Finished goods and work in process
  $ 134,144     $ 97,139  
Raw materials
    59,905       42,953  
Supplies and spare parts
    30,735       14,460  
             
Inventories at FIFO cost
    224,784       154,552  
LIFO reserve
    (22,819 )     (27,193 )
             
Net inventories
  $ 201,965     $ 127,359  
             
      It is impracticable to segregate the LIFO reserve between raw materials, finished goods and work in process. In fiscal 2005, 2004, and 2003, we reduced inventory quantities in some of our LIFO pools. This reduction generally results in a liquidation of LIFO inventory quantities typically carried at lower costs prevailing in prior years as compared with the cost of the purchases in the respective fiscal years, the effect of which typically decreases cost of goods sold. In fiscal 2005, we reduced inventory quantities in a pool where current costs had declined; the effect of which was an aggregate increase in cost of goods sold of $0.1 million. In fiscal 2004 and 2003, the reduced inventory quantities decreased cost of goods sold by approximately $0.9 million and $0.4 million, respectively.
Note 5. Discontinued Operations and Assets and Liabilities Held for Sale
Discontinued Operations
      In the first quarter of fiscal 2004, we sold our plastic packaging division and received approximately $59.0 million in cash and recorded an after-tax gain of approximately $7.3 million; and we sold certain assets and liabilities that we acquired in the January 2003 Cartem Wilco Acquisition and received approximately $2.9 million in cash and recorded no gain or loss from the asset sale. We have classified the results of operations for these assets as income from discontinued operations, net of tax, on the consolidated statements of income for all periods presented.
      Revenue from discontinued operations was $7.4 million and $72.6 million and pre-tax profit from discontinued operations was $0.9 million and $0.1 million for fiscal 2004 and 2003, respectively, excluding the gain on sale recorded in fiscal 2004.
Assets and Liabilities Held for Sale
      The assets we recorded as held for sale at September 30, 2005 and September 30, 2004, consisted of property, plant and equipment from a variety of plant closures and are as follows (in thousands):
                 
    September 30,
     
    2005   2004
         
Property, plant and equipment
  $ 3,435     $ 1,526  
Note 6. Acquisitions, Restructuring and Other Matters
Acquisitions
      On June 6, 2005, we acquired from Gulf States Paper Corporation and certain of its related entities (which we refer to collectively as “Gulf States”) substantially all of the assets of Gulf States’ Paperboard and

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Packaging operations (which we refer to as “GSPP”) and assumed certain of Gulf States’ related liabilities. We refer to this acquisition as the “GSPP Acquisition”. We have included the results of GSPP’s operations in our consolidated financial statements since that date. We made the acquisition in order to acquire the bleached paperboard mill and 11 folding carton plants owned by Gulf States, which serve primarily food packaging, food service and pharmaceutical and health and beauty markets.
      The aggregate purchase price for the GSPP Acquisition was $552.2 million, net of cash received of $0.7 million, including expenses. The purchase price, and final allocation, is subject to adjustment based on the amount of working capital acquired. Any adjustment will be immaterial.
      Included in the GSPP assets is a 60% interest in a joint venture, GSD, that was formed in 1998 to manufacture and sell food pail products. It is a variable interest entity as defined in FASB Interpretation 46(R), “Consolidation of Variable Interest Entities.” We are the primary beneficiary and we have consolidated the assets and liabilities of the joint venture based on their fair values on the date we acquired the interest from Gulf States and recorded minority interest based its fair value.
      Included in the GSPP assets and the related liabilities we assumed from Gulf States is a capital lease obligation totaling $280 million for certain assets at the Demopolis, Alabama bleached paperboard mill. The lease is with the Industrial Development Board of the City of Demopolis, Alabama which financed the acquisition and construction of substantially all of the assets at the Demopolis mill by issuing a series of industrial development revenue bonds which were purchased by Gulf States. Included in the assets acquired from Gulf States are these bonds. We also assumed Gulf States’ obligations under these bonds as part of the GSPP Acquisition. The bonds indicate that principal and interest due on the bonds can only be satisfied by payments received from the lessee. There is no recourse to the lessee by the bondholder. Accordingly, we included the leased assets in property, plant and equipment on our balance sheet and offset the capital lease obligation and bonds on our balance sheet.
      The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the GSPP Acquisition. At June 6, 2005 (in thousands):
         
Current assets, net of cash received
  $ 127,626  
Property, plant, and equipment
    357,093  
Goodwill
    50,990  
Intangible assets — customer relationships (22.3 year weighted-average useful life)
    50,679  
Other long-term assets
    340  
       
Total assets acquired
    586,728  
       
Current liabilities
    24,628  
Minority interest
    9,395  
Other long-term liabilities
    489  
       
Total liabilities assumed
    34,512  
       
Net assets acquired
  $ 552,216  
       
      We assigned the goodwill to our Paperboard and Packaging Products segments in the amounts of $37.2 million and $13.8 million, respectively. We expect all $51.0 million of the goodwill to be deductible for income tax purposes.
      The following unaudited pro forma information reflects our consolidated results of operations as if the GSPP Acquisition had taken place on October 1, 2003. The pro forma information includes primarily adjustments for depreciation based on the estimated fair value of the property, plant and equipment we acquired, amortization of acquired intangibles and interest expense on the debt we incurred to finance the

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
acquisition. The pro forma information is not necessarily indicative of the results of operations that we would have reported had the transaction actually occurred at the beginning of fiscal 2004 nor is it necessarily indicative of future results.
                 
    Year Ended September 30,
     
    2005   2004
         
    (In thousands, except per
    share data)
Net sales
  $ 2,075,188     $ 2,041,366  
             
Net income
  $ 30,074     $ 21,917  
             
Diluted earnings per common share
  $ 0.83     $ 0.61  
             
      In fiscal 2004, cash paid for purchase of businesses was $15.0 million, which consisted primarily of $13.7 million for the August 2004 Athens Acquisition. The purchase price did not exceed the fair value of the assets and liabilities acquired; therefore, under the purchase method of accounting, we recorded no goodwill. We included the results of operations of the Athens operations in our consolidated statements of income, from the date of acquisition. Included in the assets acquired were $2.2 million of intangible assets. We are amortizing the customer relationships over 10 years and the non-compete agreement over five years. The pro forma impact of the Athens Acquisition was not material. In fiscal 2005, we finalized the appraisal of the intangibles acquired in the corrugator acquisition. We reduced the initially recorded value of the customer list and non-compete agreements by $0.6 million and $0.2 million, respectively, and reallocated that amount to property, plant and equipment. In fiscal 2004, we completed our third party appraisals of Pacific Coast Packaging, which we acquired in fiscal 2003. We reclassified $1.5 million to goodwill, of which $1.8 million was a reduction in the customer list intangible, $0.4 million was an increase in property, plant and equipment, and $0.1 million was a decrease in inventory. In fiscal 2004, we also completed the final adjustments to our fiscal 2003 Cartem Wilco Acquisition and recorded $0.6 million of additional goodwill. We recorded $3.3 million in goodwill in fiscal 2004, approximately $2.5 million of which is deductible for U.S. income tax purposes.
Restructuring and Other Costs
      We recorded pre-tax restructuring and other costs of $7.5 million, $32.7 million, and $1.5 million for fiscal 2005, 2004, and 2003, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with a restructuring can vary. We discuss these charges in more detail below.
Summary of Restructuring and Other Initiatives
      On October 4, 2005, we announced our decision to close our Marshville, North Carolina folding carton plant. We will transfer the majority of the facility’s current production to our other folding carton facilities. We incurred pre-tax restructuring and other costs of approximately $2.5 million for the quarter ended September 30, 2005 for equipment impairment and expect to record $1.1 million during fiscal 2006 primarily for severance and other employee related costs.
      In the fourth quarter of fiscal 2005, we announced the closure of our Waco, Texas folding carton facility that we acquired as part of the GSPP Acquisition. We have ceased manufacturing operations at the facility and continue to ship product from the facility. We anticipate closing the facility during the first quarter of fiscal 2006. We have shifted a majority of the production to our other folding carton facilities. We have classified the land and building as held for sale and recorded a liability for $1.5 million primarily for severance and other employee related costs as part of the purchase.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      In the third quarter of fiscal 2005, we acquired certain GSPP assets and assumed certain of Gulf States’ related liabilities. We have expensed as incurred various incremental transition costs to integrate the operations into our mill and folding carton operations. We also restructured our folding carton division.
      In April 2005, we sold 9.4 acres of real estate adjacent to our Norcross, Georgia headquarters and received proceeds of $2.8 million and recognized a gain of $1.9 million.
      In the fourth quarter of fiscal 2004, we announced the closure of our St. Paul, Minnesota folding carton facility. We closed the facility in January 2005. We shifted a majority of the production to our other folding carton facilities. We recognized an impairment charge to reduce the carrying value of certain equipment to its estimated fair value less cost to sell. We have other operations at this complex. We will retain the land and building; and they will remain available for use by those operations.
      In the fourth quarter of fiscal 2004, we announced the closure of our Otsego, Michigan paperboard mill. We shifted approximately one third of the capacity of this facility to our remaining recycled paperboard facilities. We recognized an impairment charge to reduce the carrying value of certain equipment and the facility to its estimated fair value.
      In fiscal 2004, we reviewed our corporate structure and reorganized our subsidiaries, reducing the number of corporate entities and the complexity of the organizational structure. We substantially completed the reorganization process in the fiscal 2005.
      In the third quarter of fiscal 2004, we announced the closure of the laminated paperboard products converting lines at our Aurora, Illinois facility. We recognized an impairment charge to reduce the carrying value of the equipment to its estimated fair value less cost to sell and classified it as held for sale.
      In the second quarter of fiscal 2004, we announced the closure of our Wright City, Missouri laminated paperboard products facility effective March 31, 2004. We recognized an impairment charge to reduce the carrying value of certain equipment and the facility to its estimated fair value less cost to sell and we classified the property, plant and equipment as held for sale. We sold the facility in the first quarter of fiscal 2005.
      In the fourth quarter of fiscal 2003, we announced the closure of our Dallas, Texas laminated paperboard products facility. We recognized an impairment charge to reduce the carrying value of certain equipment from this facility to its estimated fair value less cost to sell and we have classified the facility as held for sale.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following table represents a summary of restructuring and other charges related to our active restructuring initiatives that we incurred during the fiscal year, cumulatively since we announced the initiative, and the total we expect to incur (in thousands):
Summary of Restructuring and Other Charges
                                                             
            Severance                    
            and Other                    
        Net Property,   Employee   Equipment and   Facility            
        Plant and   Related   Inventory   Carrying   Corp.        
Initiative and Segment   Period   Equipment(a)   Costs   Relocation   Costs   Reorg.   Other   Total
                                 
Dallas,
  Fiscal 2005   $ (73 )   $ (3 )   $     $ 134     $     $ 2     $ 60  
Paperboard
  Cumulative     105       165       59       196             10       535  
    Expected     105       165       59       246             10       585  
Wright City,
  Fiscal 2005     (677 )     (29 )           31             (92 )     (767 )
Paperboard
  Cumulative     5,875       607       181       187             273       7,123  
    Expected     5,875       607       181       187             273       7,123  
Aurora,
  Fiscal 2005     (319 )     33                         5       (281 )
Paperboard
  Cumulative     3,142       730       1                   12       3,885  
    Expected     3,142       730       1                   12       3,885  
Otsego,
  Fiscal 2005     28       264       595       610             82       1,579  
Paperboard
  Cumulative     14,549       1,948       735       768             136       18,136  
    Expected     14,549       1,948       835       1,068             136       18,536  
St. Paul,
  Fiscal 2005     30       2,409       206                   104       2,749  
Packaging
  Cumulative     2,333       3,038       236                   104       5,711  
Products
  Expected     2,333       3,063       236                   104       5,736  
Restructuring,
  Fiscal 2005           1,610                               1,610  
Folding
  Cumulative           1,610                               1,610  
    Expected           1,610                               1,610  
Corporate
  Fiscal 2005                             192             192  
Reorganization,
  Cumulative                             1,330             1,330  
Corporate
  Expected                             1,330             1,330  
Norcross Real
  Fiscal 2005                                   (1,873 )     (1,873 )
Estate Sale,
  Cumulative                                   (1,873 )     (1,873 )
Corporate
  Expected                                   (1,873 )     (1,873 )
Waco,
  Fiscal 2005           229       291                         520  
Folding
  Cumulative           229       291                         520  
    Expected           229       441       150             100       920  
Marshville,
  Fiscal 2005     2,488                                     2,488  
Folding
  Cumulative     2,488                                     2,488  
    Expected     2,488       625       75       200             225       3,613  
Other
  Fiscal 2005     (112 )     (43 )     8       15             1,380       1,248  
                                               
Totals
  Fiscal Year   $ 1,365     $ 4,470     $ 1,100     $ 790     $ 192     $ (392 )   $ 7,525  
                                               
    Cumulative   $ 28,492     $ 8,327     $ 1,503     $ 1,151     $ 1,330     $ (1,338 )   $ 39,465  
                                               
    Expected   $ 28,492     $ 8,977     $ 1,828     $ 1,851     $ 1,330     $ (1,013 )   $ 41,465  
                                               
 
(a) For purposes of the tables in this Note 6, we have defined “Net property, plant and equipment” as: property, plant and equipment impairment losses, and subsequent adjustments to fair value for assets classified as held for sale, subsequent (gains) or losses on sales of property, plant and equipment, and property, plant and equipment related parts and supplies.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal 2005
      We recorded aggregate pre-tax restructuring and other costs of $7.5 million in fiscal 2005. We incurred $2.7 million related to the closure of our St. Paul folding carton facility. The St. Paul union contract allows more senior folding carton employees from this facility to replace other union employees at our St. Paul mill. The replacement process requires one-on-one training for a specific period of time per position. As a result, we have included in the severance and other employee costs $1.2 million of duplicate mill labor. We recorded a charge of $2.5 million related to the closure of the Marshville folding carton plant to reduce the carrying value of certain equipment. We incurred pre-tax charges of $1.6 million for severance and other employee costs related to our folding carton division restructuring. We incurred pre-tax charges of $1.6 million in connection with the closure of our Otsego, Michigan paperboard mill consisting primarily of facility carrying costs and equipment relocation expenses. We recorded a charge of $0.6 million to expense previously capitalized patent defense costs. We incurred pre-tax charges of $0.7 million for GSPP Acquisition transition costs, and $0.5 million of charges primarily to relocate equipment and inventory relocation expenses from our Waco folding carton facility. During fiscal 2005, we recorded a gain from the sale of our Wright City laminated paperboard converting facility of $0.8 million and recognized a pre-tax gain of approximately $1.9 million from the sale of real estate adjacent to our Norcross headquarters. See the table above under the heading “Summary of Restructuring and Other Charges.”
      We do not allocate restructuring and other costs to the respective segments for financial reporting purposes. If we had allocated these costs, we would have charged $7.4 million to our Packaging Products segment, $0.5 million to the Paperboard segment, and recorded a gain of $0.4 million to our corporate operations. Of these costs, $2.0 million were non-cash. Facilities that we closed or announced that we planned to close during fiscal 2005 had combined revenues of $41.6 million, $73.7 million and $68.1 million for fiscal years 2005, 2004 and 2003, respectively, and combined pre-tax operating losses of $2.2 million, $1.0 million and $2.9 million for fiscal years 2005, 2004 and 2003, respectively.
      The following table represents a summary of the restructuring accrual and a reconciliation of the restructuring accrual to the line item “Restructuring and other costs” on our consolidated statements of income for fiscal 2005 (in thousands):
                                         
    Reserve at               Reserve at
    September 30,   Restructuring       Adjustment   September 30,
    2004   Charges   Payments   to Accrual   2005
                     
Severance and other employee costs
  $ 1,029     $ 2,720     $ (2,179 )   $ (4 )   $ 1,566  
Other
    123             (15 )     (31 )     77  
                               
Total restructuring
  $ 1,152     $ 2,720     $ (2,194 )   $ (35 )   $ 1,643  
                               
Adjustment to accrual (see table above)     (35 )                        
Severance and other employee costs     1,754                          
Net property, plant and equipment     1,365                          
Equipment relocation     1,100                          
Facility carrying costs     790                          
Corporate reorganization project     192                          
Other     (361 )                        
                         
Total restructuring and other costs   $ 7,525                          
                         

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal 2004
      In the second quarter of fiscal 2004, we announced the closure of our Wright City, Missouri laminated paperboard products facility effective March 31, 2004. During fiscal 2004, we recorded a pre-tax charge of $7.9 million. The charge consisted of an asset impairment charge of $6.7 million to record the equipment and facility at their estimated fair value less cost to sell, severance and other employee costs of $0.6 million, a goodwill impairment charge of $0.2 million, and other costs of $0.4 million.
      In the third quarter of fiscal 2004, we announced the closure of the laminated paperboard products converting lines at our Aurora, Illinois facility. During fiscal 2004, we recorded a pre-tax charge of $4.2 million. The charge consisted of a net asset impairment charge of $3.5 million to record the equipment at its estimated fair value less cost to sell, and severance and other employee costs of $0.7 million.
      In the third quarter of fiscal 2004, we consolidated our laminated paperboard products division and mill division under common management and reduced the size of the combined divisional staffs. We renamed the combined division as the paperboard division. During fiscal 2004, we recorded a pre-tax charge of $0.5 million for severance and other employee costs in connection with this reorganization.
      In the fourth quarter of fiscal 2004, we announced the closure of our Otsego, Michigan paperboard mill. During fiscal 2004, we recorded a pre-tax charge of $16.6 million that consisted of an asset impairment charge of $13.9 million to write down the equipment and facility to fair value, severance and other employee costs of $1.7 million, $0.7 million for property, plant and equipment related parts and supplies, and other costs of $0.3 million.
      In connection with the shutdown of the laminated paperboard products converting lines at our Aurora, Illinois facility and our decision to close our Otsego, Michigan paperboard mill, we completed step 1 of the impairment test for the paperboard division as required under SFAS 142, and determined the goodwill of the paperboard division was not impaired.
      In the fourth quarter of fiscal 2004, we announced the closure of our St. Paul, Minnesota folding carton facility. During fiscal 2004, we recorded a pre-tax charge of $3.0 million that consisted of an asset impairment charge of $1.6 million to write down the equipment to estimated fair value less cost to sell, $0.7 million for property, plant and equipment related parts and supplies, severance and other employee costs of $0.6 million, and other costs of $0.1 million.
      In fiscal 2004, we reviewed our corporate structure and reorganized our subsidiaries, reducing the number of corporate entities and the complexity of the organizational structure. We recorded expenses of $1.1 million in connection with this project. We also sold our previously closed Mundelein, Illinois merchandising displays facility site for a pre-tax gain of $1.8 million. In addition, we recorded a variety of charges primarily from previously announced facility closures totaling $1.2 million. The charges consisted primarily of $0.9 million for machinery and equipment impairments, $0.2 million for equipment relocation, and $0.1 million of other costs.
      We do not allocate restructuring and other costs to the respective segments for financial reporting purposes. If we had allocated these costs, we would have charged $3.3 million to our Packaging Products segment, $29.9 million to the Paperboard segment, and $1.1 million to our corporate operations and recorded a gain of $1.6 million for our Merchandising Displays and Corrugated Packaging segment. Of these costs, $26.8 million were non-cash. Facilities that we closed or announced that we planned to close during fiscal 2004 had combined revenues of $69.2 million and $81.9 million fiscal years 2004 and 2003, respectively, including the laminated paperboard product converting lines at our Aurora facility. We cannot separately identify operating losses at our Aurora facility because the facility manufactures other items and utilizes shared services. However, we can reasonably estimate pre-tax operating losses of the laminated paperboard products converting lines. Facilities that we closed or announced that we planned to close during fiscal 2004 had

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
combined pre-tax operating losses of $8.9 million and $9.4 million for fiscal years 2004 and 2003, respectively, including the laminated paperboard products converting lines at our Aurora facility.
      The following table represents a summary of the restructuring accrual as well as a reconciliation of the restructuring accrual to the line item “Restructuring and other costs” on our consolidated statements of income for fiscal 2004 (in thousands):
                                         
    Reserve at               Reserve at
    September 30,   Restructuring       Adjustment   September 30,
    2003   Charges   Payments   to Accrual   2004
                     
Severance and other employee costs
  $ 160     $ 3,033     $ (2,403 )   $ 239     $ 1,029  
Other
    10       125       (7 )     (5 )     123  
                               
Total restructuring
  $ 170     $ 3,158     $ (2,410 )   $ 234     $ 1,152  
                               
Adjustment to accrual (see table above)     234                          
Property, plant and equipment impairment loss     26,518                          
Gain on sale of property, plant and equipment     (2,046 )                        
Property, plant and equipment related parts and supplies     1,447                          
Corporate reorganization project     1,138                          
Pension curtailment     850                          
Equipment relocation     476                          
Facility carrying costs     456                          
Goodwill impairment     244                          
Other     263                          
                         
Total restructuring and other costs   $ 32,738                          
                         
Fiscal 2003
      In the second quarter of fiscal 2003, we announced the closure of our Hunt Valley, Maryland and Mundelein, Illinois merchandising displays facilities. We recorded a pre-tax charge $0.5 million, which consisted of $0.3 million for equipment removal and relocation costs and other costs of $0.2 million.
      In the fourth quarter of fiscal 2003, we announced the closure of our Dallas, Texas laminated paperboard products facility. In connection with this closing during fiscal 2003, we recorded a pre-tax charge of $0.4 million that consisted of an asset impairment charge of $0.2 million to write down the equipment to fair value less cost to sell, and severance and other employee costs of $0.2 million.
      In addition, we had accrual adjustments totaling $1.1 million of income resulting primarily from the reversal of certain accruals for severance and other costs at our closed laminated paperboard products plant in Vineland, New Jersey and the earlier than planned sales of property at Vineland and our closed folding carton plant in Augusta, Georgia. Expenses recognized as incurred from previously announced facility closings totaling $1.2 million were attributable to equipment relocation costs of $1.4 million primarily from Vineland and a closed folding carton plant in El Paso, Texas, $0.3 million due to changes in estimated workers’ compensation claims, a net gain on sale of property and equipment of $0.8 million primarily due to the sale of the Vineland and El Paso facilities, and $0.3 million in other miscellaneous items. Expenses recognized as incurred of $0.5 million were attributable to our decision to remove from service certain equipment in the folding carton and paperboard divisions.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      We do not allocate restructuring and other costs to the respective segments for financial reporting purposes. If we had allocated these costs, we would have charged $0.6 million to our Packaging Products segment, $0.5 million to our Merchandising Displays and Corrugated Packaging segment, and $0.4 million to the Paperboard segment. Of these costs, $0.2 million income was non-cash. Facilities that we closed during fiscal 2003 had combined revenues of $13.1 million and combined operating losses of $2.6 million during fiscal 2003.
Note 7. Other Intangible Assets
      The gross carrying amount and accumulated amortization relating to intangible assets, excluding goodwill, is as follows (in thousands):
                                         
        September 30,
         
        2005   2004
             
    Weighted   Gross Carrying   Accumulated   Gross Carrying   Accumulated
    Avg. Life   Amount   Amortization   Amount   Amortization
                     
Customer relationships
    20.0     $ 65,618     $ (6,099 )   $ 14,680     $ (2,783 )
Non-compete agreements
    8.8       6,474       (5,337 )     8,327       (6,182 )
Financing costs
    8.2       7,955       (1,845 )     5,850       (2,854 )
Patents
    5.5       1,038       (210 )     2,120       (617 )
Trademark
    20.0       800       (577 )     759       (523 )
License Costs
    5.0       309       (134 )     309       (72 )
                               
Total
    18.5     $ 82,194     $ (14,202 )   $ 32,045     $ (13,031 )
                               
      During fiscal 2005, our net intangible balance increased $49.0 million primarily due to customer relationship intangibles acquired in the GSPP Acquisition. Our allocation of the purchase price of the GSPP Acquisition is preliminary and subject to refinement. We preliminarily estimate the intangibles we acquired to be approximately $50.7 million. The lives vary by segment acquired, and we are amortizing them on a straight-line basis over a weighted average life of 22.3 years. We incurred financing costs of $4.0 million in fiscal 2005. We finalized the appraisal of the intangibles acquired in the Athens Acquisition in fiscal 2004 and reduced their initially recorded value by $0.8 million and reallocated that amount to property, plant and equipment. We recorded a charge of $0.6 million to expense previously capitalized patent defense costs that were not included in the sale of our plastic packaging division. Intangibles at our foreign locations, primarily our Canadian customer lists, increased $0.6 million due to currency translation.
      We are amortizing all of our intangibles and none of our intangibles have significant residual values. During fiscal 2005, 2004, and 2003, amortization expense was $5.1 million, $4.0 million, and $3.4 million, respectively. Estimated amortization expense for the succeeding five fiscal years is as follows (in thousands):
         
2006
  $ 7,546  
2007
    7,103  
2008
    6,848  
2009
    6,349  
2010
    4,396  

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 8. Debt
      The following were individual components of debt (in thousands):
                 
    September 30,
     
    2005   2004
         
Face value of 5.625% notes due March 2013, net of unamortized discount of $188 and $213
  $ 99,812     $ 99,787  
Hedge adjustments resulting from terminated interest rate derivatives or swaps
    2,374       4,263  
Hedge adjustments resulting from existing interest rate derivatives or swaps
          (1,357 )
             
      102,186       102,693  
Face value of 8.20% notes due August 2011, net of unamortized discount of $399 and $467
    249,601       249,533  
Hedge adjustments resulting from terminated interest rate derivatives or swaps
    9,881       14,824  
Hedge adjustments resulting from existing interest rate derivatives or swaps
          (1,123 )
             
      259,482       263,234  
Face value of 7.25% notes due August 2005, net of unamortized discount of $0 and $9 (a)
          83,491  
Hedge adjustments resulting from terminated interest rate derivatives or swaps
          2,148  
Hedge adjustments resulting from existing interest rate derivatives or swaps
          (294 )
             
            85,345  
Term debt (b)
    250,000        
Revolving credit facility (b)(c)
    216,000        
Receivables-backed financing facility (d)
    55,000        
Industrial development revenue bonds, bearing interest at variable rates (4.30% at September 30, 2005, and 2.90% at September 30, 2004), due through October 2036 (e)
    30,120       30,120  
Other notes
    2,293       2,669  
             
      915,081       484,061  
Less total current portion of debt
    62,079       85,760  
             
Long-term debt due after one year
  $ 853,002     $ 398,301  
             
The following were the aggregate components of debt (in thousands):
               
Face value of debt instruments, net of unamortized discounts
  $ 902,826     $ 465,600  
Hedge adjustments resulting from terminated interest rate derivatives or swaps
    12,255       21,235  
Hedge adjustments resulting from existing interest rate derivatives or swaps
          (2,774 )
             
    $ 915,081     $ 484,061  
             

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(a) During the first quarter of fiscal 2005, we purchased $6.0 million of our Notes due August 2005 at an average price of 103.1% of par value, or $0.18 million over par value, excluding the favorable impact of unamortized realized interest rate swap gains. The average price including the favorable impact of unamortized realized interest rate swap gains was 101.6% of par value, or $0.1 million over par value. During the second quarter of fiscal 2005, we purchased $3.5 million of our Notes due August 2005 at an average price of 101.75% of par value, or $0.06 million over par value, excluding the favorable impact of unamortized realized interest rate swap gains. The average price including the favorable impact of unamortized realized interest rate swap gains was 101.05% of par value, or $0.04 million over par value. On August 1, 2005, we retired the remaining $74.0 million of our Notes due August 2005 with $14.0 million of cash and $60.0 million of borrowings under our Senior Credit Facility.
 
(b) On June 6, 2005, we entered into the Senior Credit Facility. The Senior Credit Facility includes revolving credit, swing, and term loan facilities in the aggregate principal amount of $700 million. The Senior Credit Facility is pre-payable at any time and is scheduled to expire on June 6, 2010. We have aggregate outstanding letters of credit under this facility of approximately $41 million. At September 30, 2005, due to the restrictive covenants on the revolving credit facility, maximum additional available borrowings under this facility were approximately $126 million. Borrowings in the United States under the Senior Credit Facility bear interest based either upon (1) LIBOR plus an applicable margin (which we refer to as “LIBOR Loans”) or (2) the alternative base rate plus an applicable margin (which we refer to as “Base Rate Loans”). The applicable margin for determining the interest rate applicable to LIBOR Loans ranges from 0.875% to 1.750% of the aggregate borrowing availability based on the ratio of our consolidated funded debt to an EBITDA measure calculated based on earnings before interest, taxes, depreciation and amortization less special items (which we refer to as “Credit Agreement EBITDA”). The applicable margin for determining the interest rate applicable to Base Rate Loans ranges from 0.000% to 0.750% of the aggregate borrowing availability based on the ratio of our consolidated funded debt to Credit Agreement EBITDA. The applicable percentage for determining the facility commitment fee ranges from 0.175% to 0.400% of the aggregate borrowing availability based on the ratio of our consolidated funded debt to Credit Agreement EBITDA. At September 30, 2005, the applicable margin for determining the interest rate applicable to LIBOR Loans and the applicable margin for determining the interest rate applicable to Base Rate Loans were 1.50% and 0.50%, respectively. The facility commitment fee at September 30, 2005 was 0.325% of the unused amount. Interest on the revolving credit facility and term loan facility are payable in arrears on each applicable payment date. At our election, we can choose Base Rate Loans, LIBOR Loans, or a combination thereof. If we chose LIBOR Loans, the interest rate reset options are 30, 60, 90 or 180 days. The Senior Credit Facility is secured by the real and personal property of the GSPP business that we acquired in the GSPP Acquisition and the following property of the Company and its wholly-owned subsidiaries: inventory and general intangibles, including, without limitation, specified patents, patent licenses, trademarks, trademark licenses, copyrights and copyright licenses. The agreement documenting the Senior Credit Facility includes restrictive covenants regarding the maintenance of financial ratios, the creation of additional long-term and short-term debt, the creation or existence of certain liens, the occurrence of certain mergers, acquisitions or disposals of assets and certain leasing arrangements, the occurrence of certain fundamental changes in the primary nature of our consolidated business, the nature of certain investments, and other matters. We are in compliance with these restrictions.
 
(c) Until June 6, 2005, we maintained a $75 million revolving credit facility. As of June 6, 2005 and September 30, 2004, there were no amounts outstanding under this facility. On June 6, 2005, contemporaneously with the execution and delivery of the Senior Credit Facility (as defined below), we terminated this facility.
 
(d) We maintained a $75.0 million receivables-backed financing facility (which we refer to as the “Receivables Facility”). A bank provided a back-up liquidity facility. The borrowing rate, which

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consisted of a daily commercial paper rate plus a fee for the used portion of the facility, was 4.10% as of September 30, 2005. The borrowing rate at September 30, 2004 was 2.17%. Both the Receivables Facility and the back-up liquidity facility have 364-day terms. At September 30, 2005, this facility was fully drawn. On October 26, 2005, we increased the facility to $100 million. The new facility is scheduled to expire on October 25, 2006.
 
(e) The industrial development revenue bonds are issued by various municipalities in which we maintain operations or other facilities. The bonds are fully secured by a pledge of payments to the municipality by us under a financing agreement. Each series of bonds are also secured by and payable through a letter of credit issued in favor of the Trustee to the bonds. We are required to maintain these letters of credit under the terms of the bond indenture. The letters of credit are renewable at our request so long as no default or event of default has occurred under the Senior Credit Facility. A remarketing agent offers the bonds for initial sale and uses its best efforts to remarket the bonds until they mature or are otherwise fully redeemed. The remarketing agent also periodically determines the interest rates on the bonds based on prevailing market conditions. The remarketing agent is paid a fee for this service. Our industrial development revenue bonds are remarketed on a periodic basis upon demand of the bondholders. If the remarketing agent is unable to successfully remarket the bonds, the remarketing agent will repurchase the bonds by drawing on the letters of credit. If this were to occur, we would immediately reimburse the issuing lender with the proceeds of a revolving loan obtained under the Senior Credit Facility. Accordingly, we have classified the industrial development revenue bonds as non-current.
      Interest on our 8.20% notes due August 2011 are payable in arrears each February and August. Interest on our 5.625% notes due March 2013 is payable in arrears each September and March. Our August 2011 and March 2013 notes are unsecured facilities. The indenture related to these notes restricts us and our subsidiaries from incurring certain liens and entering into certain sale and leaseback transactions, subject to a number of exceptions. Three of our Canadian subsidiaries have revolving credit facilities with Canadian banks. The facilities provide borrowing availability of up to $10.0 million Canadian and can be renewed on an annual basis. As of September 30, 2005 and September 30, 2004, there were no amounts outstanding under these facilities.
Interest Rate Swaps
      We are exposed to changes in interest rates as a result of our short-term and long-term debt. We use interest rate swap instruments to manage the interest rate characteristics of a portion of our outstanding debt. In May 2005, we paid $4.2 million to terminate $200 million of fixed-to-floating interest rate swaps designated as fair value hedges of our existing fixed rate debt. In June and September 2005, we entered into $350 million notional amount and $75 million notional amount of floating-to-fixed interest rate swaps, respectively, and designated them as cash flow hedges of a like amount of our floating rate debt. The start date of the $75 million is effective September 1, 2006. We recorded no ineffectiveness for the twelve month periods ended September 30, 2005 and 2004. The fair value of the swaps was a deferred gain of $5.4 million at September 30, 2005.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      As of September 30, 2005, the aggregate maturities of long-term debt for the succeeding five fiscal years are as follows (in thousands):
         
2006
  $ 62,079  
2007
    25,590  
2008
    38,019  
2009
    91,355  
2010
    312,250  
Thereafter
    374,120  
Unamortized fair value adjustments from terminated interest rate swap agreements
    12,255  
Unamortized bond discount
    (587 )
       
Total long-term debt
  $ 915,081  
       
Note 9. Leases and Other Agreements
      We lease 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, 2005, future minimum lease payments under all noncancelable leases, including certain maintenance charges on transportation equipment, are as follows (in thousands):
         
2006
  $ 10,186  
2007
    8,610  
2008
    6,813  
2009
    4,612  
2010
    2,874  
Thereafter
    5,029  
       
Total future minimum lease payments
  $ 38,124  
       
      Rental expense for the years ended September 30, 2005, 2004, and 2003 was approximately $18.0 million, $16.5 million and $16.4 million, respectively, including lease payments under cancelable leases.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 10. Income Taxes
      The provisions for income taxes consist of the following components (in thousands):
                           
    Year Ended September 30,
     
    2005   2004   2003
             
Current income taxes:
                       
 
Federal
  $ (3,483 )   $ 9,073     $ 2,048  
 
State
    538       (1,186 )     1,271  
 
Foreign
    1,224       3,290       2,765  
                   
Total current
    (1,721 )     11,177       6,084  
                   
Deferred income taxes:
                       
 
Federal
    2,908       (596 )     10,908  
 
State
    (178 )     (4,581 )     885  
 
Foreign
    1,233       (302 )     292  
                   
Total deferred
    3,963       (5,479 )     12,085  
                   
Provision for income taxes
  $ 2,242     $ 5,698     $ 18,169  
                   
      The components of deferred tax expense are as follows (in thousands):
                           
    Year Ended September 30,
     
    2005   2004   2003
             
Other accruals and allowances
  $ (177 )   $ (622 )   $ 2,498  
Employee related accruals and allowances
    (827 )     (1,533 )     179  
Federal net operating loss carryforward
     —             7,270  
State net operating loss carryforwards
    (2,652 )     (1,816 )      
State credit carryforwards, net of federal benefit
    271       (970 )      
Valuation allowance
    160       1,333        
Property, plant and equipment
    15,864       (12,541 )     5,675  
Deductible intangibles
    1,353       2,398       1,052  
Pension
    (3,949 )     7,447       (4,070 )
Inventory
    (2,256 )     1,443       (626 )
Other deferred tax assets
    287       (894 )     (159 )
Other deferred tax liabilities
    (4,111 )     276       266  
                   
Deferred income tax expense
  $ 3,963     $ (5,479 )   $ 12,085  
                   
Income tax expense is included in our consolidated statements of income as follows:
                       
 
Continuing operations
  $ 2,242     $ 854     $ 18,147  
 
Discontinued operations
     —       4,844       22  
                   
Provisions for income taxes
  $ 2,242     $ 5,698     $ 18,169  
                   

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The differences between the statutory federal income tax rate and our effective income tax rate are as follows:
                         
    Year Ended September 30,
     
    2005   2004   2003
             
Statutory federal tax rate
    35.0 %     35.0 %     35.0 %
Meals and entertainment expense
    2.5       2.0       1.2  
Permanent provision to return adjustments
    (1.8 )     (1.1 )     (0.3 )
Adjustment of deferred taxes for changes in state and foreign tax rates
    6.9       (1.8 )     0.7  
Other adjustments to deferred taxes
    (8.4 )     3.6       (0.1 )
Reduction in tax contingency reserve
    (20.8 )     (2.2 )     (2.1 )
U.S. residual tax on foreign earnings
    (0.4 )     1.8       0.6  
State taxes, net of federal benefit
    (3.5 )     1.2       4.3  
Adjustment of prior years taxes, net of federal benefit — restructuring
    1.4       (9.0 )      
Valuation allowance decrease — restructuring
          (5.3 )      
Other, net
    0.4       0.2       (1.2 )
                   
Effective tax rate
    11.3 %     24.4 %     38.1 %
                   
      The reduction in the tax contingency reserve results from the resolution of historical federal and state tax deductions that we had previously reserved. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our tax reserves totaling $2.3 million at September 30, 2005 reflect the probable outcome of known contingencies. Other adjustments to deferred taxes relates to adjustments to temporary differences that will not reverse in future periods. The state tax benefit recorded in 2005 relates primarily to additional state tax refunds not anticipated at September 30, 2004. In fiscal 2004, we reorganized our corporate subsidiaries, reducing the number of corporate entities and the complexity of our organizational structure. The changes implemented resulted in a one-time income tax benefit of $3.2 million. Approximately $1.2 million of the benefit relates to the filing of amended tax returns for fiscal years 2001 and 2002 and comparable adjustments made to the fiscal 2003 tax returns. The restructuring also allowed us to reduce the valuation allowance for certain state net operating loss and tax credit carryforwards that we had previously concluded were not likely to be realized.
      At September 30, 2005, we reclassified franchise tax expense to SG&A. As such, state taxes presented above for the years ended September 30, 2004 and September 30, 2003, reflect the reclassification of approximately $0.7 million and $0.6 million of state franchise tax expense.
      In fiscal 2004, we reorganized our corporate subsidiaries, reducing the number of corporate entities and the complexity of our organizational structure. The changes implemented resulted in a one-time income tax benefit of $3.2 million. Approximately $1.2 million of the benefit relates to the filing of amended tax returns for fiscal years 2001 and 2002 and comparable adjustments made to the fiscal 2003 tax returns.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities consist of the following (in thousands):
                 
    September 30,
     
    2005   2004
         
Deferred income tax assets:
               
Accruals and allowances
  $ 3,125     $ 2,944  
Employee related accruals and allowances
    6,561       5,734  
Minimum pension liability
    43,411       35,031  
State net operating loss carryforwards
    4,468       1,816  
State credit carryforwards, net of federal benefit
    856       1,127  
Other
    4,581       5,218  
Valuation allowance
    (1,651 )     (1,491 )
             
Total
    61,351       50,379  
             
Deferred income tax liabilities:
               
Property, plant and equipment
    108,180       90,820  
Deductible intangibles
    11,394       9,679  
Pension
    10,174       14,123  
Inventory
    1,983       4,240  
Other
    7,515       11,960  
             
Total
    139,246       130,822  
             
Net deferred income tax liability
  $ 77,895     $ 80,443  
             
      Deferred taxes are recorded as follows in the consolidated balance sheet:
                 
    September 30,
     
    2005   2004
         
Current deferred tax asset
  $ 5,079     $ 4,504  
Long-term deferred tax liability
    82,974       84,947  
             
Net deferred income tax liability
  $ 77,895     $ 80,443  
             
      At September 30, 2005 and September 30, 2004, state net operating losses were available for carryforward in the amounts of approximately $94 million and $42 million, respectively. These NOL carryforwards are subject to valuation allowances and generally expire within 5-20 years. At September 30, 2005, approximately $1.1 million of state credits were available for carryforward. The valuation allowance against deferred tax assets increased $0.2 million in fiscal 2005. The valuation allowance decreased $1.9 million in fiscal 2004 primarily as a result of the corporate reorganization discussed above. The valuation allowance increased $0.3 million in fiscal 2003.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The components of income before income taxes are as follows (in thousands):
                         
    Year Ended September 30,
     
    2005   2004   2003
             
United States continuing operations
  $ 12,973     $ (156 )   $ 37,014  
Discontinued operations
     —       12,541       57  
                   
      12,973       12,385       37,071  
Foreign continuing operations
    6,883       10,661       10,674  
Foreign discontinued operations
     —       300        
                   
      6,883       10,961       10,674  
                   
Income before income taxes
  $ 19,856     $ 23,346     $ 47,745  
                   
      The American Jobs Creation Act of 2004 creates a temporary incentive for United States corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. We plan to repatriate $30.9 million in extraordinary dividends, as defined in the Jobs Creation Act, from our Cartem Wilco operations and our Ling Industries, Inc. operations during the quarter ending December 31, 2005. Accordingly we recorded a tax liability of $0.8 million as of September 30, 2005.
      Other than the earnings we intend to repatriate under the Act, we intend to continue to consider all foreign earnings other than those generated by our Cartem Wilco, RTS Empaques, S. De R.L. CV, and RTS Embalajes De Chile Limitada operations as being indefinitely reinvested. As of September 30, 2005 we estimate those earnings to be approximately $24 million. We have not provided for any taxes that would be due upon repatriation of those earnings into the United States. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both United States income taxes, subject to an adjustment for foreign tax credits, and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred United States income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
Note 11. Retirement Plans
      We have five defined benefit pension plans with approximately 60% of our employees in the United States currently accruing benefits. In addition, under several labor contracts, we make payments based on hours worked into multi-employer pension plan trusts established for the benefit of certain collective bargaining employees in facilities both inside and outside the United States. Approximately 33% of our employees are covered by collective bargaining agreements. Approximately 7% of our employees are covered by collective bargaining agreements that have expired and another 7% are covered by collective bargaining agreements that expire within one year.
Defined Benefit Pension Plans
      The benefits under our defined benefit pension plans are based on either compensation or a combination of years of service and negotiated benefit level, depending upon the plan. We allocate our pension plans’ assets to several investment management firms across a variety of investment styles. Our Defined Benefit Investment Committee meets at least quarterly with an investment advisor to review each manager’s performance and

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
monitor their compliance with their stated goals, our investment policy and ERISA standards. Our pension plans’ asset allocations at September 30, by asset category, were as follows:
                 
    2005   2004
         
Equity managers
    66 %     71 %
Fixed income managers
    29 %     17 %
Cash and cash equivalents
    2 %     8 %
Alternative investment managers
    3 %     4 %
             
Total
    100 %     100 %
             
      The objective of our investment policy is to assure the management of our retirement plans in accordance with the provisions of the Employment Retirement Income Security Act of 1974 and the regulations pertaining thereto. Our investment policy focuses on a long-term view in managing the pension plans’ assets by following investment theory that assumes that over long periods of time there is a direct relationship between the level of risk assumed in an investment program and the level of return that should be expected. The formation of judgments and the actions to be taken on those judgments will be aimed at matching the long-term needs of the pension plans with the expected, long-term performance patterns of the various investment markets.
      We understand that investment returns are volatile. We believe that, by using multiple investment managers and alternative asset classes, we can create a portfolio that yields adequate returns with reduced volatility. After we consulted with actuaries and investment advisors, we adopted the following target allocations to produce desired performance.
Target Allocations
                 
    2005   2004
         
Equity managers
    50- 80 %     58- 91 %
Fixed Income Managers
    15- 45 %     15- 25 %
Alternative investments, cash and cash equivalents
    0- 35 %     0- 09 %
      These target allocations are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below target ranges. We revised our target allocations based on a review of our asset allocation with our investment advisor in fiscal 2005. Our alternative investments consist of investments in the Hedge Fund of Funds and a venture capital fund. In fiscal 2004, we undertook a retirement plan services request for proposal (which we refer to as “RFP”) and held our fiscal 2004 contribution to the pension plans in cash and cash equivalents pending a shift in investment managers resulting from the search. On September 30, 2004, our actual asset allocation was not consistent with the policy above because we were completing the RFP, which we anticipated would likely entail shifting assets among investment managers. In developing our weighted average expected rate of return on plan assets, we consulted with our investment advisor and evaluated criteria primarily based on historical returns by asset class, and included long-term return expectations by asset class. We currently expect to contribute approximately $35 million to our pension plans over the next two fiscal years. We use a September 30 measurement date.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Our projected benefit obligation, fair value of assets and net periodic pension cost include the following components (in thousands):
                 
    Year Ended September 30,
     
    2005   2004
         
Projected benefit obligation at beginning of year
  $ 300,081     $ 260,303  
Service cost
    9,411       9,013  
Interest cost on projected benefit obligations
    17,728       17,335  
Amendments
          326  
Curtailment (gain) loss
    (7,355 )     180  
Actuarial loss
    29,082       23,468  
Benefits paid
    (10,885 )     (10,544 )
             
Projected benefit obligation at end of year
    338,062       300,081  
             
Fair value of assets at beginning of year
    208,847       181,244  
Actual gain on plan assets
    21,416       18,514  
Employer contribution
    7,384       19,633  
Benefits paid
    (10,885 )     (10,544 )
             
Fair value of assets at end of year
    226,762       208,847  
             
Funded status
    (111,300 )     (91,234 )
Net unrecognized loss
    121,081       108,809  
Unrecognized prior service cost
    2,035       1,713  
             
Net amount recognized
  $ 11,816     $ 19,288  
             
Amounts recognized in the consolidated balance sheets consist of:
               
Prepaid benefit cost
  $ 11,816     $ 19,288  
Additional minimum liability
    (114,393 )     (96,271 )
Intangible asset
    3,144       3,692  
Accumulated other comprehensive loss
    111,249       92,579  
             
Net amount recognized
  $ 11,816     $ 19,288  
             

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The amounts we are required to recognize in the consolidated statements of income are as follows (in thousands):
                         
    Year Ended September 30,
     
    2005   2004   2003
             
Service cost
  $ 9,411     $ 9,013     $ 7,258  
Interest cost on projected benefit obligations
    17,728       17,335       16,123  
Expected return on plan assets
    (19,046 )     (16,320 )     (15,507 )
Net amortization of actuarial loss
    7,084       6,563       2,813  
Net amortization of prior service cost
    108       49       50  
Curtailment loss (gain)
    (429 )     679        
                   
Total company defined benefit plan expense
    14,856       17,319       10,737  
Multi-employer plans for collective bargaining employees
    512       450       340  
                   
Net periodic pension cost
  $ 15,368     $ 17,769     $ 11,077  
                   
                         
    2005   2004   2003
             
Weighted-average assumptions as of September 30:
                       
Discount rate
    5.50 %     6.00 %     6.50 %
Expected long-term rate of return on plan assets
    9.00 %     9.00 %     9.00 %
      Our weighted-average assumption for the expected increase in compensation levels as of September 30, 2005, was 2.75% for the next five years and 3.5% thereafter. Our weighted-average assumption for the expected increase in compensation levels as of September 30, 2004 and 2003 was 3% in each year. We typically review our expected long-term rate of return on plan assets every 3 to 5 years through an asset allocation study with either our actuary or investment advisor. Our assumption regarding the increase in compensation levels is reviewed periodically and the assumption is based on both our internal planning projections and recent history of actual compensation increases. Finally, our discount rate is reviewed annually to reflect the published yield of the Moody’s AA Utility Bond Index on September 15, rounded up to the nearest .25%. The accumulated benefit obligation for all defined benefit pension plans was $329.3 million and $285.3 million at September 30, 2005, and 2004, respectively.
      The estimated benefit payments, which reflect expected future service, as appropriate, that we project are as follows (in thousands):
         
2006
  $ 12,123  
2007
    12,981  
2008
    13,930  
2009
    14,883  
2010
    15,808  
Years 2011 – 2015
    96,450  
      The retirement plans review committee of our board of directors reviewed management’s recommendations with respect to certain modifications of our retirement benefits and requested that such recommendations be submitted to the board of directors for approval. On October 29, 2004, our board of directors approved and adopted changes to our 401(k) retirement savings plans that cover our salaried and nonunion hourly employees and to our defined benefit plans that cover our salaried and nonunion hourly employees (which we refer to as our “pension plan”). We have summarized these changes below. The changes were effective January 1, 2005 and March 1, 2005, based on an employee’s status on December 31, 2004. The changes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
resulted in curtailment income of $0.4 million, which we recognized when we adopted the pension plan changes.
      Beginning January 1, 2005, the following changes were effective for our salaried and non-union hourly employees:
  •  Effective January 1, 2005, employees hired on or after January 1, 2005, are not eligible to participate in our pension plan. We provide the following enhanced 401(k) plan match for such employees (the “enhanced 401(k) plan match”): 100% match on the first 3% of eligible pay contributed by the employee and 50% match on the next 2% of eligible pay contributed by the employee.
 
  •  Effective January 1, 2005, then current employees who were less than 35 years old and who had less than 5 years of vesting service on December 31, 2004, were no longer eligible to participate in our pension plan after December 31, 2004. We will pay pension benefits earned through December 31, 2004, upon retirement in accordance with applicable plan rules. We began providing the enhanced 401(k) plan match for such employees effective January 1, 2005.
 
  •  Effective March 1, 2005, then current employees who were 35 years old or older or who had 5 years or more of vesting service on December 31, 2004, were required to elect one of two options: (1) a reduced future pension accrual based on a revised benefit formula and the current 401(k) plans’ match or (2) no future pension accrual and the enhanced 401(k) Plan match. In either event, we will pay these employees pension benefits earned through February 28, 2005, upon retirement in accordance with applicable plan rules.
401(k) Plans
      We have 401(k) plans that cover our salaried and nonunion hourly employees as well as certain employees covered by union collective bargaining agreements. These 401(k) plans permit participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (which we refer to as the “Code”). During fiscal 2005, 2004, and 2003, we recorded matching expense, net of forfeitures, of $5.3 million, $4.5 million, and $4.6 million, respectively, related to the 401(k) plans.
Supplemental Retirement Plans
      We have supplemental retirement savings plans (the “Supplemental Plans”) that are nonqualified unfunded deferred compensation plans. We intend to provide participants with an opportunity to supplement their retirement income through deferral of current compensation. Amounts deferred and payable under the Supplemental Plans (the “Obligations”) are our unsecured obligations, and rank equally with our other unsecured and unsubordinated indebtedness outstanding from time to time. Each participant elects the amount of eligible base salary and eligible bonus to be deferred. Each Obligation will be payable on a date selected by us pursuant to the terms of the Supplemental Plans. Generally, we are obligated to pay the Obligations after termination of the participant’s employment or in certain emergency situations. We will adjust each participant’s account for investment gains and losses as if the credits to the participant’s account had been invested in the benchmark investment alternatives available under the Supplemental Plans in accordance with the participant’s investment election or elections (or default election or elections) as in effect from time to time. We will make all such adjustments at the same time and in accordance with the same procedures followed under our 401(k) plans for crediting investment gains and losses to a participant’s account under our 401(k) plans. The Obligations are denominated and payable in United States dollars. The benchmark investment alternatives available under the Supplemental Plan are the same as the investment alternatives available under our 401(k) plans or are, in our view, comparable to the investment alternatives

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
available under our 401(k) plans. We recorded matching expense of $0.1 million, $0.1 million, and $0.02 million in fiscal 2005, 2004, and 2003, respectively.
      We have a Supplemental Executive Retirement Plan (“SERP”) that provides unfunded supplemental retirement benefits to certain executives of the Company. The SERP provides for incremental pension benefits in excess of those offered in our principal pension plan. We recorded expense relating to the SERP of $0.8 million, $0.6 million, and $0.4 million for the years ended September 30, 2005, 2004, and 2003, respectively. Amounts we accrued as of September 30, 2005 and 2004 related to the SERP were $2.9 million and $2.2 million, respectively. The SERP benefit is paid in an annuity form for participants whose employment terminated before November 11, 2005 and a lump sum for participants whose employment terminates on or after November 11, 2005.
Note 12. Financial Instruments
Long-Term Notes
      On August 1, 2005, we retired our 2005 Notes. At September 30, 2004, the fair market value of the 2005 Notes was approximately $86.7 million, respectively, based on quoted market prices. At September 30, 2005 and 2004, the fair market value of the 2011 Notes was approximately $258.8 million and $296.5 million, respectively, based on quoted market prices. At September 30, 2005 and 2004, the fair market value of the 2013 Notes, was approximately $90.8 million and $103.1 million, respectively, based on quoted market prices. The carrying amount for variable rate long-term debt approximates fair market value since the interest rates on these instruments are reset periodically.
Derivatives
      The following is a summary of the net fair value of our derivative instruments outstanding as of September 30 (in thousands):
                 
    2005   2004
         
Interest rate swaps (fair value hedges)
  $  —     $ (2,773 )
Interest rate swaps (cash flow hedges)
    5,404        
Commodity swaps
    8       (844 )
             
Net fair value of derivative contracts
  $ 5,412     $ (3,617 )
             
      The fair value of our derivative instruments is based on market quotes and represents the net amount required to terminate the position, taking into consideration market rates and counterparty credit risk. The net pre-tax loss and related tax benefit from cash flow hedges reclassified from other comprehensive income into earnings during fiscal 2005 was approximately $0.9 million and $0.4 million, respectively. We expect to reclassify approximately $1.3 million of pre-tax income from cash flow hedges from other comprehensive income into earnings during fiscal 2006.
Note 13. Shareholders’ Equity
Capitalization
      Our capital stock consists solely of our Common Stock, which is Class A common stock, par value $0.01 per share. Holders of our Common Stock are entitled to one vote per share. The Articles of Incorporation also authorize preferred stock, of which no shares have been issued. The terms and provisions of such shares will be determined by our board of directors upon any issuance of such shares in accordance with the Articles of Incorporation.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Repurchase Plan
      Our board of directors has approved a stock repurchase plan that allows for the repurchase from time to time of shares of Common Stock over an indefinite period of time. As of September 30, 2005, we had 2.0 million shares of Common Stock available for repurchase under the amended repurchase plan. Pursuant to our repurchase plan, during fiscal 2005 and fiscal 2004, we did not repurchase any shares of Common Stock. During fiscal 2003, we repurchased 0.1 million shares of Common Stock.
Stock Option Plans
      Our 2004 Incentive Stock Plan, approved by our shareholders in January 2005, allows for the granting of options to certain key employees for the purchase of a maximum of 2,000,000 shares of Common Stock plus the number of shares which would remain available for issuance under each preexisting plan if shares were issued on the effective date of this plan sufficient to satisfy grants then outstanding, plus the number of shares of Stock subject to grants under any preexisting plan which are outstanding on the effective date of this plan and which are forfeited or expire on or after such effective date. Our 2000 Incentive Stock Plan, approved in January 2001, allowed for the granting of options through January 2005 to certain key employees for the purchase of a maximum of 2,200,000 shares of Common Stock. Our 1993 Stock Option Plan allowed for the granting of options through November 2003 to certain key employees for the purchase of a maximum of 3,700,000 shares of Common Stock. Options that we granted under these plans vest in increments over a period of up to three years and have ten-year terms.
      Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” which requires that the information be determined as if we had accounted for our employee stock options granted subsequent to September 30, 1995, under the fair value method of that statement. We estimated the fair values for the options granted subsequent to September 30, 1995, at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
                         
    2005   2004   2003
             
Expected Term in Years
    7       7       8  
Expected Volatility
    44.1 %     43.8 %     45.8 %
Risk-Free Interest Rate
    4.1 %     4.1 %     3.1 %
Dividend Yield
    2.6 %     2.2 %     2.3 %
      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 our 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 value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair values of our employee stock options. The estimated weighted average fair value of options granted during fiscal 2005, 2004 and 2003 with option prices equal to the market price on the date of grant was $4.47, $6.35 and $5.72 per share, respectively.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      For purposes of pro forma disclosures, we amortize the estimated fair value of our options to expense over the options’ vesting periods. Our pro forma information is as follows (in thousands except for earnings per share information):
                           
    2005   2004   2003
             
Net income, as reported
  $ 17,614     $ 17,648     $ 29,576  
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
    1,027       949       525  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (4,932 )     (3,776 )     (3,282 )
                   
Pro forma net income
  $ 13,709     $ 14,821     $ 26,819  
                   
Earnings per share: Basic — as reported
  $ 0.50     $ 0.51     $ 0.86  
                   
 
Basic — pro forma
  $ 0.39     $ 0.42     $ 0.78  
                   
 
Diluted — as reported
  $ 0.49     $ 0.50     $ 0.85  
                   
 
Diluted — pro forma
  $ 0.38     $ 0.42     $ 0.77  
                   
      For the pro forma information regarding net income and earnings per share we recognize compensation cost over the explicit service period (up to the date of actual retirement). Upon adoption of SFAS 123(R), we will be required to recognize compensation cost over a period to the date the employee first becomes eligible for retirement for awards granted or modified after the adoption of SFAS 123(R). Awards outstanding prior to the adoption of SFAS 123(R) will continue to be recognized over the explicit service period. Had we followed the nonsubstantive vesting provisions of Statement 123(R), the impact on pro forma net income and pro forma diluted earnings per share would have been de minimus.

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ROCK-TENN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The table below summarizes the changes in all stock options during the periods indicated:
                         
    Class A Common
     
        Weighted
        Average
        Exercise
    Shares   Price Range   Price
             
Options outstanding at October 1, 2002
    3,399,328     $ 7.42-20.31     $ 13.90  
Exercised
    (276,098 )   $ 7.42-15.45     $ 9.99  
Expired
    (69,474 )   $ 8.94-20.31     $ 17.73  
Forfeited
    (46,415 )   $ 8.94-18.19     $ 13.91  
Granted
    693,500     $ 14.01-14.60     $ 14.02  
                   
Options outstanding at September 30, 2003
    3,700,841     $ 8.00-20.31     $ 14.17  
Exercised
    (248,540 )   $ 8.00-16.51     $ 12.00  
Expired
    (158,535 )   $ 11.13-20.31     $ 15.94  
Forfeited
    (36,232 )   $ 11.25-18.19     $ 15.40  
Granted
    451,000     $ 15.40-16.15     $ 15.46  
                   
Options outstanding at September 30, 2004
    3,708,534     $ 8.00-20.31     $ 14.39  
Exercised
    (141,331 )   $ 8.94-15.45     $ 11.30  
Expired
    (221,099 )   $ 8.94-20.31    </