UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008

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)

Registrant’s Telephone Number, Including Area Code: (770) 448-2193

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding as of April 30, 2008
Class A Common Stock, $0.01 par value		38,115,735

 

 

ROCK-TENN COMPANY
INDEX

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the three and six months ended March 31, 2008 and 2007			1
Condensed Consolidated Balance Sheets at March 31, 2008 and September 30, 2007			2
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2008 and 2007			3
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			33
PART II OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			34
Item 4. Submission of Matters to a Vote of Security Holders			35
Item 6. Exhibits			35
Index to Exhibits			37
EX-10.2 EMPLOYMENT AGREEMENT DATED JANUARY 1, 2006
EX-10.3 AMENDED AND RESTATED EARNINGS SHARE UNITS
EX-10.4 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
EX-10.5 AMENDMENT NO. 2 TO ROCK-TENN COMPANY 2004 INCENTIVE STOCK PLAN
EX-23 CONSENT OF INDEPENDENT ACCOUNTANTS
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
EX-99.1 THE AUDITED CONSOLIDATED STATEMENTS OF SOUTHERN CONTAINER CORP.

PART I: FINANCIAL INFORMATION

See Accompanying Notes to Condensed Consolidated Financial Statements

Supplemental schedule of non-cash investing and financing activities:

     Liabilities assumed in the table below primarily reflect the March 5, 2008 acquisition of Southern Container Corp. (“ Southern Container ” and “ Southern Container Acquisition ”). In conjunction with the Southern Container Acquisition, we also assumed debt and accrued for an estimated working capital settlement (in millions):

     For additional information on the acquisition and financing see “ Note 5. Acquisitions ” and “ Note 9. Debt " .

See Accompanying Notes to Condensed Consolidated Financial Statements

ROCK-TENN COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

value measurement would be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS 157 is effective for fiscal years beginning after November 15, 2007 (October 1, 2008 for us). Management is presently evaluating the impact, if any, upon adoption.

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), “ Business Combinations ” (“ SFAS 141(R) ”). SFAS 141(R) expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. SFAS 141(R) also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. In addition, SFAS 141(R) requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 (October 1, 2009 for us) with early adoption prohibited. We are currently evaluating the effect the implementation of SFAS 141(R) will have on the consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 ” (“ SFAS 160 ”). SFAS 160 changes the accounting and reporting for minority interests such that minority interests will be recharacterized as noncontrolling interests and will be required to be reported as a component of equity, and requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions and, upon a loss of control, requires the interest sold, as well as any interest retained, to be recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 (October 1, 2009 for us) with early adoption prohibited. We are currently evaluating the effect the implementation of SFAS 160 will have on the consolidated financial statements.

     In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 ” (“ SFAS 161 ”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009 for us). We are currently evaluating the effect the implementation of SFAS 161 will have on the consolidated financial statements.

     The change in other comprehensive income due to foreign currency translation was primarily due to the change in the Canadian/U.S. dollar exchange rates.

     Options to purchase 0.3 million common shares were not included in computing diluted earnings per share in the three and six months ended March 31, 2008, respectively, because the effect would have been antidilutive. All outstanding options to purchase common shares were dilutive for the three and six months ended March 31, 2007 and were included in computing earnings per share.

Note 5. Acquisitions

Southern Container Acquisition

     On March 5, 2008, we acquired the stock of Southern Container Corp. The transaction had an effective date of March 2, 2008. We have included the results of Southern Container’s operations in our financial statements since that date in our Corrugated Packaging segment. We made the acquisition in order to expand our corrugated packaging business with the Southern Container assets that we believe have one of the lowest system costs and the highest EBITDA margins of any major integrated corrugated company in North America.

     The purchase price for the acquisition was $1,060.9 million, net of cash received of $54.0 million, including expenses. The purchase price is subject to adjustment based on the amount of working capital acquired. Rock-Tenn and Southern Container expect to make an election under section 338(h) (10) of the Internal Revenue Code of 1986, as amended (the “ Code ”) that will increase Rock-Tenn’s tax basis in the acquired assets and result in a net present value benefit of approximately $150 million, net of tax gross-up payments of $68.7 million to Southern Container’s stockholders. We incurred $27.3 million of financing costs. See “ Note 9. Debt ” .

     The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. We are in the process of analyzing the estimated values of assets and liabilities acquired and are obtaining third-party valuations of certain tangible and intangible assets and finalizing our operating plans and, thus, the allocation of the purchase price is subject to material revision.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

     Opening balance effective March 2, 2008 (in millions):

     We recorded preliminary estimated fair values for acquired assets and liabilities including goodwill and intangibles. We recorded $66.4 million of customer relationship intangibles, $27.3 million of trade names and trademarks and $34.2 million for a steam supply contract. None of the intangibles has significant residual value. The intangibles are expected to be amortized over estimated useful lives ranging from 11 to 40 years on a straight-line basis over a weighted average life of approximately 19 years, and 15 years for tax purposes. The goodwill is expected to be deductible for income tax purposes following the Code section 338(h) (10) election.

     The following unaudited pro forma information reflects our consolidated results of operations as if the acquisition had taken place as of the beginning of each of the periods presented. The pro forma information includes adjustments primarily for depreciation and amortization based on the estimated fair value of the acquired property, plant and equipment, amortization of acquired intangibles and interest expense on the acquisition financing debt. We have added back the minority interest in the earnings of the Solvay mill subsidiary, which interests were acquired by Southern Container prior to our acquisition; we have eliminated certain expenses that Southern Container historically incurred that the combined company does not expect to incur, due to changes in employment and other contractual arrangements. During the three and six months ended March 31, 2008, we have also eliminated certain non-recurring expenses directly associated with the acquisition including $7.1 million of inventory step up expense, $3.0 million for an acquisition bridge financing fee, $1.9 million of unamortized financing fees from our prior credit facility and $0.7 million of deferred compensation expense funded into escrow through a purchase price reduction from Southern Container’s stockholders. 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 these periods nor is it necessarily indicative of future results.

     Prior to the acquisition, Southern Container used a 52/53 week fiscal year and reported its results of operations in three 12-week periods and one 16-week period, with the 16-week period being the fourth period and ending on the last Saturday of the calendar year. The unaudited pro forma information above for the three and six months ended March 31, 2008 and 2007 utilizes the condensed consolidated statements of income for Rock-Tenn for the three and six months ended March 31, 2008 and 2007 and the condensed consolidated statements of operations of Southern Container for the 9 and 25 weeks ended March 2, 2008 and the 12 and 28 weeks ended March 24, 2007.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Note 6. Restructuring and Other Costs, Net

Summary of Restructuring and Other Initiatives

     We recorded pre-tax restructuring and other costs, net, of $0.8 million and $1.2 million for the three months ended March 31, 2008 and 2007, respectively, and recorded pre-tax restructuring and other costs, net, of $3.8 million and $1.7 million for the six months ended March 31, 2008 and 2007, 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.

     The following table presents a summary of restructuring and other charges, net, related to our active restructuring initiatives that we incurred during the three and six months ended March 31, 2008 and 2007, the cumulative recorded amount since we announced each initiative, and the total we expect to incur (in millions):

Summary of Restructuring and Other Costs (Income), Net

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

     The following table represents a summary of the restructuring accrual, which is primarily composed of accrued severance and other employee costs, and a reconciliation of the restructuring accrual to the line item “Restructuring and other costs, net” on our condensed consolidated statements of income for the six months ended March 31, 2008 and 2007 (in millions):

Reconciliation of accruals and charges to restructuring and other costs, net :

Note 7. Tax Provision

     The effective tax rates for the three and six months ended March 31, 2008 were approximately 37.4% and 34.7%, respectively. This is primarily due to the inclusion of a tax benefit of $1.1 million related to a tax rate reduction in Canada in the first quarter of fiscal 2008. Our effective tax rates for the three and six months ended March, 31 2007 were 37.5% and 34.4%, respectively, which included a net tax benefit of $1.4 million recorded in the first quarter of fiscal 2007 primarily due to research and development credits arising from the resolution of a review by the Canadian taxing authority, the extension of the federal research and development tax credits by the U.S. Government, and changes in estimates. We expect our marginal effective income tax rate to be approximately 37%.

     In July 2006, the FASB issued FIN 48 which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its consolidated financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). We adopted the provisions of FIN 48 on October 1, 2007.

     As a result of our adoption of FIN 48, we recorded an increase in the liability for unrecognized tax benefits of approximately $1.8 million. This increase was recorded as a reduction to the October 1, 2007 balance of retained earnings. As of October 1, 2007, the gross amount of unrecognized tax benefits was approximately $9.6 million,

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

exclusive of interest and penalties. Of this balance, if we were to prevail on all unrecognized tax benefits recorded, approximately $4.3 million of the $9.6 million reserve would benefit the effective tax rate. We regularly evaluate, assess and adjust the related liabilities in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period.

     We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense in the consolidated statements of income, which is consistent with the recognition of these items in prior reporting periods. As of October 1, 2007, we had a recorded liability of $1.3 million for the payment of interest and penalties related to the FIN 48 liability for unrecognized tax benefits.

     We file federal, state and local income tax returns in the U.S. and various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to fiscal 2001.

Note 8. Inventories

     We value substantially all of our U.S. inventories at the lower of cost or market, with cost determined on the last-in first-out (“ 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 (“ 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. Because LIFO is designed for annual determinations, it is possible to make an actual valuation of inventory under the LIFO method only at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, we base interim LIFO estimates on management’s projection of expected year-end inventory levels and costs. We value all other inventories at the lower of cost or market, with cost determined using methods which approximate cost computed on a FIFO basis. These other inventories represent primarily foreign inventories and spare parts inventories. Inventories were as follows (in millions):

     The following were the aggregate components of debt (in millions):

     A portion of the debt classified as long-term, which includes the revolving and swing facilities, may be paid down earlier than scheduled at our discretion without penalty. Included in the current portion of debt at March 31, 2008 and September 30, 2007 is an amount of $15.0 million to reflect amounts required to support normal working capital needs.

     For a discussion of certain of our debt characteristics, see “ Note 10. Debt ” of the Notes to Consolidated Financial Statements section of the Fiscal 2007 Form 10-K. Other than the items noted below, there have been no significant developments.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

     Interest on our 8.20% notes due August 2011 is payable in arrears each February and August. Interest on our 5.625% notes due March 2013 is payable in arrears each September and March. Interest on our 9.25% notes due March 2016 is payable in arrears each September and March. The 2011 and 2013 notes now share, on a pro-rata basis, certain of the same collateral that was provided to the Credit Facility lenders (i.e., any principal property of Rock-Tenn or any subsidiaries, or any shares of capital stock or other equity interests or indebtedness of any subsidiaries). The 2016 notes are unsecured. These notes are redeemable prior to maturity subject to certain rules and restrictions and are not subject to any sinking fund requirements. 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.

     As of March 31, 2008, the aggregate maturities of debt for the remaining fiscal year and succeeding five fiscal years are as follows (in millions):

Interest Rate Swaps

     We are exposed to changes in interest rates as a result of our debt. We use interest rate swap instruments from time to time to manage the interest rate characteristics of portions of our outstanding debt. On January 31, 2008, we entered into two forward starting floating-to-fixed interest rate swaps of an initial notional amount aggregating $550.0 million with a commencement date of April 1, 2008. These swaps are tiered and the notional amounts will decline through April 2012. These swaps are based on the one-month LIBOR rate, and the fixed rates average 3.11%, plus the applicable credit margin then in effect. We have designated these swaps as cash flow hedges of the interest rate exposure on an equivalent amount of certain floating rate debt we incurred to finance the Southern Container Acquisition.

     Periodically we may terminate or sell our interest rate swaps. Upon termination or sale of any cash flow swaps, any amounts received (or paid) are generally not immediately recognized as income but remain in “Other Comprehensive Income/(Loss)” and are amortized to earnings, as interest income (or expense), over the remaining term of the originally hedged item. The cash received (or paid) as a result of terminating the hedges is classified, in the statement of cash flows, in the same category as the cash flows relating to the items being hedged. At September 30, 2007, we had interest rate swap agreements in place with an aggregate notional amount of $200.0 million. We previously designated those swaps as cash flow hedges of the interest rate exposure on an equivalent amount of our floating rate debt. In October 2007, we paid $3.5 million to terminate all of our then open interest rate swaps.

     During the three and six months ended March 31, 2008 we contributed an aggregate of $8.7 million and $11.6 million, respectively, to our five defined benefit pension plans (“ U.S. Qualified Plans ”). Based on our current assumptions, we anticipate contributing the projected required minimum funding of approximately $16 million and approximately $18 million in fiscal 2008 and 2009, respectively, to the U.S. Qualified Plans. However, it is possible that we may decide to contribute greater amounts. During the three and six months ended March 31, 2007 we contributed an aggregate of $4.6 million and $4.6 million, respectively, to our U.S. Qualified Plans.

Note 11. Shareholders’ Equity

Stock Options

     The table below summarizes the changes in all stock options during the six months ended March 31, 2008:

     Our results of operations include compensation expense for stock options for the three months ended March 31, 2008 and 2007 of $0.4 million and $0.04 million, respectively (net of approximately $0.2 million and $0.02 million, respectively, of income taxes); and for the six months ended March 31, 2008 and 2007 include $0.7 million and $0.08 million, respectively (net of approximately $0.4 million and $0.05 million, respectively, of income taxes). The aggregate intrinsic value of options exercised during the three months ended March 31, 2008 and 2007 was $1.3 million and $19.7 million, respectively, and during the six months ended March 31, 2008 and 2007 it was $1.3 million and $33.0 million, respectively.

     During the second quarter of fiscal 2008, we granted options to purchase 307,734 shares of stock to certain employees. These options vest over three years. These grants were valued using the Black-Scholes option pricing model. The significant assumptions used were: an expected term of 5.02 years, an expected volatility of 37.82%, expected dividends of 1.48% and a risk free rate of 2.36%. We amortize these costs using the accelerated attribution method. As of March 31, 2008, there was $4.2 million of total unrecognized compensation cost related to nonvested stock options that is expected to be recognized over a weighted average remaining vesting period of approximately 1.5 years.

     Our results of operations for the three and six months ended March 31, 2008 includes $1.5 million and $2.8 million, respectively, of compensation expense for restricted stock; and for the three and six months ended March 31, 2007 includes $1.6 million and $3.1 million, respectively, of compensation expense for restricted stock including the acceleration of expense discussed below. The awards granted in fiscal 2004 and 2005 are subject to earlier vesting in one third increments on the first, second and third anniversary of the grant date upon satisfaction of certain earnings improvement criteria specific to each award. The measurement date for early vesting of all of these awards is March 31 of the respective year. In the first quarter of fiscal 2007 we accelerated recognition of compensation expense as we determined it was probable that the latter two-thirds of the fiscal 2004 awards and first two-thirds of the fiscal 2005 awards would satisfy the early vesting provisions on March 31, 2007, and that the last third of the fiscal 2005 award would satisfy the early vesting provisions on March 31, 2008.

     During the six months ended March 31, 2008, 83,165 shares of restricted stock vested. In the second quarter of fiscal 2008, 18,000 non-employee director awards granted in fiscal 2007 vested. At March 31, 2008, the last third of the fiscal 2005 awards met the early vesting provisions and 65,165 shares vested.

     During the second quarter of fiscal 2008, 25,000 shares of restricted stock, which vest over one year, were granted to our non-employee directors and target awards of 229,625 shares of restricted stock were granted to certain employees pursuant to our 2004 Incentive Stock Plan, as amended. The second quarter fiscal 2008 employee grants consisted of:

	•		A target award of 129,075 shares that contains a performance condition based on the level of our Debt to EBITDA Ratio (as defined in the applicable grant letter). Certain percentages of the target award will be issued as of the end of the first 12 month period upon the attainment of certain Debt to EBITDA Ratios. Subject to the level of performance attained, the target award may be increased to 150% of target or decreased to zero.
	•		A target award of 46,825 shares that contains a performance condition based on the annual average return over capital costs (“ ROCC ”). The target award will be adjusted based on our ROCC performance for the thirty-six months ended December 31, 2010 compared to the ROCC performance of our Peer Group (as defined in the applicable grant letter). Subject to the level of performance attained, the target award may be increased to 150% of the target or decreased to zero.
	•		A target award of 46,825 shares that contains a market condition based on the percentage return on Common Stock purchased on January 2, 2008 and held through December 31, 2010, including reinvestment of all dividends paid thereon during such period (the “ Total Shareholder Return ”). The target award will be adjusted based on our Total Shareholder Return for the thirty-six months ended December 31, 2010 compared to the Total Shareholder Return performance of our Peer Group (as defined). Subject to the level of performance attained, the target award may be increased to 150% of the target or decreased to zero.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

•

A target award of 6,900 shares that contains a performance condition based on the operating income of one of our segments. The target award may be adjusted based on the attainment of certain operating income levels during the 12 months ended December 31, 2008. Subject to the level of performance obtained, the target award may be increased to 125% of the target or decreased to zero.

     The first three target awards, as described above, will vest at the percent of target achieved upon completion of service to March 19, 2011, unless forfeited before such date. The last target award, as described above, will vest at the percent of target achieved upon completion of service to March 19, 2009, unless forfeited before such date. Expense is recognized on the shares granted with a performance condition and service condition on a straight-line basis over the explicit service period because we estimate that it is probable the performance condition will be satisfied. Expense is recognized on the shares granted with a market condition and service condition on a straight-line basis over the requisite service period which is based on the explicit service period. The restricted stock grants with a market condition were valued using a Monte Carlo simulation at $38.85 per share. The significant assumptions used in valuing these grants were: an expected volatility of 42.3%, expected dividends of 1.4%, and a risk free rate of 1.68%. We estimated the expected forfeiture rate to be 4.7%.

     There was approximately $18.1 million of total unrecognized compensation cost related to all unvested restricted shares as of March 31, 2008 that will be recognized over a weighted average remaining vesting period of 2.2 years.

Note 12. Commitments and Contingencies

Environmental and Other Matters

     We are subject to various federal, state, local and foreign environmental laws and regulations, including, among others, CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the US Environmental Protection Agency. In addition, some states in which we operate have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies.

     We believe that future compliance with these environmental laws and regulations will not have a material adverse effect on our results of operations, financial condition or cash flows. However, 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 impact or capital expenditures will not have a material adverse effect on our results of operations, financial condition or cash flows.

     We have been identified as a potentially responsible party (“ PRP ”) at nine active “superfund” sites pursuant to 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 nine sites:

	•		With respect to one site, 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.
	•		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 have incurred a liability with respect to the site, one of the following conclusions was applicable:

	•		With respect to each of six sites, we determined while it was not estimable, the potential liability was reasonably likely to be a de minimis amount and immaterial.
	•		With respect to one site, we have preliminarily determined the potential liability was best reflected by a range of reasonably possible liabilities, all of which we expect to be de minimis and immaterial.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

•

With respect to one site, we have preliminarily determined that it is probable that we have incurred a liability with respect to this site. The status of the site is unknown, pending further investigation.

     In addition to the above mentioned sites, four of our current or former locations are being investigated under various state regulations. These investigations may lead to remediation costs; however, we believe any such costs, if any, would be insignificant. Additional information on the four sites follows:

	•		Contamination was discovered at the time of the Gulf States acquisition in June 2005 at two sites we acquired. We did not assume any environmental liabilities as part of the acquisition, but have limited indemnification rights with respect to this contamination. We would expect to assert various defenses under applicable laws with respect to this contamination.
	•		One of these sites is one of our former locations that is involved in an investigation under the state hazardous waste sites program. It is expected that any potential issues will be handled through administrative controls, such as a deed restriction, rather than remediation.
	•		It is believed that the contamination discovered at one of the sites was due to an oil release by a previous owner. The previous owner is obligated to indemnify us for any contamination caused by the oil release.

     Except as stated above, we can make no assessment of our potential liability, if any, with respect to any site. Further, there can be no assurance that we will not be required to conduct some remediation in the future at any of these sites and that the 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. There can be no assurance that we will be successful with respect to any claim regarding these indemnification rights or that, if we are successful, any amounts paid pursuant to the indemnification rights will be sufficient to cover all costs and expenses.

     During the first quarter of fiscal 2008 we received approximately $1.7 million in recovery of previously expensed environmental remediation costs from a third party for a site we previously acquired. The recovery reduced the line item “cost of goods sold” on our condensed consolidated statements of income.

Guarantees

     We have made the following guarantees as of March 31, 2008:

	•		We have a 49% ownership interest in Seven Hills. The partners guarantee funding of net losses in proportion to their share of ownership.
	•		As part of the Southern Container Acquisition we have an unconsolidated subsidiary for which we guarantee certain debt in an amount less than $5 million.
	•		We lease certain manufacturing and warehousing facilities and equipment under various operating leases. A substantial number of these leases require us to indemnify the lessor in the event that additional taxes are assessed due to a change in the tax law. We are unable to estimate our maximum exposure under these leases because it is dependent on changes in the tax law.

     Over the past several years, we have disposed of assets and/or subsidiaries and have retained liabilities. The related agreements contain representations and warranties relating to matters such as title to assets; accuracy of financial statements; legal proceedings; contracts; employee benefit plans; compliance with environmental laws; patent and trademark infringement; taxes; and products, as well as various covenants. These agreements may also provide specific indemnities for breaches of representations, warranties, or covenants and may contain specific indemnification provisions. These indemnification provisions address potential losses, including, among others, losses related to liabilities other than those assumed by the buyer and liabilities under environmental laws. These indemnification provisions may be affected by various conditions and external factors. Many of the indemnification provisions have expired either by operation of law or by the terms of the agreement. Our specified maximum aggregate potential liability (on an undiscounted basis) is approximately $7.6 million, other than with respect to certain specified liabilities, including liabilities relating to title, taxes, and certain environmental matters, with respect to which there may be no limitation. We estimate the fair value of our aggregate liability for outstanding indemnities,

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

including the indemnities described above with respect to which there are no limitations, to be approximately $0.1 million. Accordingly, we have recorded a liability for that amount.

Insurance Placed with Kemper

     During fiscal 1985 through 2002, Kemper Insurance Companies/Lumbermens Mutual provided us with workers’ compensation insurance, auto liability insurance and general liability insurance. Kemper has made public statements that they are uncertain that they will be able to pay all of their claims liabilities in the future. At present, based on public comments made by Kemper, we believe it is reasonably possible they will not be able to pay some or all of the future liabilities associated with our open and reopened claims. However, we cannot reasonably estimate the amount that Kemper may be unable to pay. Additionally, we cannot reasonably estimate the impact of state guarantee funds and any facultative and treaty reinsurance that may be available to pay such liabilities. If Kemper is ultimately unable to pay such liabilities, we believe the range of our liability is between approximately $0 and $2 million, and we are unable to estimate the liability more specifically because of the factors described above. There can be no assurance that any associated liabilities we may ultimately incur will not be material to our results of operations, financial condition or cash flows.

Note Receivable

     We have a note payable to and a note receivable from an obligor who has filed for Chapter 11 bankruptcy protection. We have offset these notes on our condensed consolidated balance sheets for the periods ending March 31, 2008 and September 30, 2007. Based on the terms of the note, we do not believe that it is probable a loss will be incurred. If we ultimately do suffer a loss, we believe the loss could range from $0 to $3 million.

Seven Hills Option

     Seven Hills commenced operations on March 29, 2001. Our partner has the option to put its interest in Seven Hills to us, at a formula price, effective on the sixth or any subsequent anniversary of the commencement date by providing notice to purchase its interest no later than two years prior to the anniversary of the commencement date on which such transaction is to occur. No notification has been received from our partner to date. Therefore, the earliest date at which a put could be completed would be March 29, 2011. We have not recorded any liability for our partner’s right to put its interest in Seven Hills. We currently project this contingent obligation to purchase our partner’s interest (based on the formula) to be approximately $17 million at March 31, 2008, which would result in a purchase price of approximately 60% of our partner’s net equity reflected on Seven Hills’ March 31, 2008 balance sheet.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Note 13. Segment Information

     In the first quarter of fiscal 2008 we changed the name of our Packaging Products segment to Consumer Packaging to more clearly describe the segment and we reorganized our segments to move our St. Paul, MN recycled corrugated medium mill into our Corrugated Packaging segment in the second quarter of fiscal 2008. The financial statements presented have been reclassified for all periods presented to reflect this reorganization. We have included the results of Southern Container’s operations in our condensed consolidated financial statements since the March 2, 2008 acquisition effective date in our Corrugated Packaging segment.

     The following table shows certain operating data for our segments (in millions). 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 or in other line items in the table below after Total segment income.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

     We have provided a summary of our identifiable assets and goodwill as of March 31, 2008 and September 30, 2007 in the table below (in millions):