UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT

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ROCK-TENN COMPANY

(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)

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December 17, 2007

 

To our Shareholders:

 

It is our pleasure to invite you to attend our annual meeting of shareholders, which is to be held on January 25, 2008, at the Northeast Atlanta Hilton at Peachtree Corners, 5993 Peachtree Industrial Boulevard, Norcross, Georgia 30092. The meeting will start at 9:00 a.m., local time.

 

The following Notice of 2008 Annual Meeting of Shareholders outlines the business to be conducted at the meeting.

 

Please complete, sign and return your proxy in the enclosed envelope or follow the other voting procedures described in the proxy statement as soon as possible to ensure that your shares will be represented and voted at the annual meeting. If you attend the annual meeting, you may vote your shares in person even though you have previously voted your proxy.

 

Very truly yours,

 

James A. Rubright
Chairman and
Chief Executive Officer

 

NOTICE OF 2008 ANNUAL MEETING OF SHAREHOLDERS

To Be Held on January 25, 2008

 

ROCK-TENN COMPANY
504 Thrasher Street
Norcross, Georgia 30071

 

 

 

PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 25, 2008

 

 

 

PROXY SOLICITATION AND VOTING INFORMATION

 

Who is furnishing this proxy statement?

 

This proxy statement is being furnished to our shareholders by our board of directors in connection with the solicitation of proxies by the board of directors. The proxies will be used at our annual meeting of shareholders to be held on January 25, 2008 (which we refer to as the “annual meeting”).

 

What am I voting on?

 

You will be voting on each of the following:

 

 

As of the date of this proxy statement, the board of directors knows of no other matters that will be brought before the annual meeting.

 

You may not cumulate your votes for any matter being voted on at the annual meeting and you are not entitled to appraisal or dissenters’ rights.

 

Who can vote?

 

You may vote if you owned Class A Common Stock as of the close of business on November 30, 2007, the record date for the annual meeting. As of November 30, 2007, there were 38,012,340 shares of our Class A Common Stock outstanding.

 

What if my certificates represent Class B Common Stock?

 

Each share of our Class B Common Stock was automatically converted into one share of Class A Common Stock on June 30, 2002. Each certificate that represented shares of Class B Common Stock represents the same number of shares of Class A Common Stock into which the Class B Common Stock was converted. We refer to our Class A Common Stock (including certificates that represented shares of Class B Common Stock) as the “Common Stock.”

How do I vote?

 

You have four voting options. You may vote using one of the following methods:

 

 

Please follow the directions on your proxy card carefully. If you hold your shares in the name of a bank or broker, the availability of telephone and Internet voting depends on their voting processes and you should contact your bank or broker for more information.

 

Can I vote at the annual meeting?

 

You may vote your shares at the annual meeting if you attend in person. Even if you plan to be present at the annual meeting, we encourage you to vote your shares by proxy. You may vote your proxy via the Internet, by telephone or by mail.

 

What if my shares are registered in more than one person’s name?

 

If you own shares that are registered in the name of more than one person, each person must sign the proxy. If an attorney, executor, administrator, trustee, guardian or any other person signs the proxy in a representative capacity, the full title of the person signing the proxy should be given and a certificate should be furnished showing evidence of appointment.

 

What does it mean if I receive more than one proxy?

 

It means you have multiple accounts with brokers and/or our transfer agent. Please vote all of these shares. We recommend that you contact your broker and/or our transfer agent to consolidate as many accounts as possible under the same name and address. Our transfer agent is Computershare, 250 Royall Street, Canton, MA 02021 and may be reached at 1-800-568-3476.

 

What if I return my proxy but do not provide voting instructions?

 

If you sign and return your proxy but do not include voting instructions, your proxy will be voted FOR the election of the five nominee directors named on pages 4 and 5 of this proxy statement and FOR the ratification of the E&Y Appointment.

 

Can I change my mind after I vote?

 

You may change your vote at any time before the polls close at the annual meeting. You may do this by using one of the following methods:

 

 

How many votes am I entitled to?

 

You are entitled to one vote for each share of Common Stock you own.

How many votes must be present to hold the annual meeting?

 

In order for us to conduct the annual meeting, the holders of a majority of the votes of the Common Stock outstanding as of November 30, 2007 must be present at the annual meeting. This is referred to as a quorum. Your shares will be counted as present at the annual meeting if you do one of the following:

 

 

How many votes are needed to elect directors?

 

The five nominees receiving the highest number of “yes” votes will be elected directors. This number is called a plurality.

 

How many votes are needed to ratify the E&Y Appointment?

 

To ratify the E&Y Appointment, the “yes” votes cast in favor of the matter must exceed the “no” votes cast against the matter.

 

How many votes are needed for other matters?

 

To approve any other matter that properly comes before the annual meeting, the “yes” votes cast in favor of the matter must exceed the “no” votes cast against the matter. The board of directors knows of no other matters that will be brought before the annual meeting. If other matters are properly introduced, the persons named in the proxy as the proxy holders will vote on such matters in their discretion.

 

Will my shares be voted if I do not provide my proxy?

 

Your shares may be voted under certain circumstances if they are held in the name of a brokerage firm. Brokerage firms have the authority under rules of the New York Stock Exchange (which we refer to as the “NYSE”) to vote customers’ unvoted shares on “routine” matters, which includes the election of directors and ratification of the appointment of our independent registered public accounting firm. Accordingly, if a brokerage firm votes your shares on these matters in accordance with these rules, your shares will count as present at the annual meeting for purposes of establishing a quorum and will count as “yes” votes or “no” votes, as the case may be, with respect to all “routine” matters voted on at the annual meeting. If you hold your shares directly in your own name, they will not be voted if you do not vote them or provide a proxy.

 

ELECTION OF DIRECTORS
ITEM 1

 

Board of Directors

 

Our board of directors currently has 12 members. The directors are divided into three classes with the directors in each class serving a term of three years. Directors for each class are elected at the annual meeting of shareholders held in the year in which the term for their class expires. At the annual meeting on January 25, 2008, five nominees for director are to be elected to serve on our board of directors. Four of the nominees will be elected to serve until the annual meeting in 2011, or until their successors are qualified and elected, and one of the nominees will be elected to serve until the annual meeting in 2009, or until her successor is qualified and elected. Our board is authorized to increase the size of the board and is authorized to fill the vacancies created by the increase. Any directors elected by the board in this manner will stand for re-election at the next annual meeting of shareholders after their election even if that class of directors is not subject to election in that year. On November 20, 2007, our board authorized an increase in the size of the board from 11 members to 12 members and elected Robert M. Chapman to serve as the new director. Our shareholders will vote at the annual meeting whether to elect him to serve a full term as a director with a term expiring in

2011. On November 2, 2007, the board elected Bettina M. Whyte to fill the vacancy created by James M. Johnson’s resignation. While Ms. Whyte’s term will not expire until the annual meeting in 2009 and until her successor is qualified and elected, the board of directors has recommended that our shareholders vote at the annual meeting to elect Ms. Whyte to a term expiring at the annual meeting in 2009. Our board is also authorized to fill any other vacancies occurring in the board of directors. A director elected by the board in this manner may serve for the unexpired term of his or her predecessor in office and until the election and qualification of his or her successor.

 

We do not believe that any of the nominees for director will be unwilling or unable to serve as director. However, if at the time of the annual meeting any of the nominees should be unwilling or unable to serve, proxies will be voted as recommended by the board of directors to do one of the following:

 

 

In no event, however, can a proxy be voted to elect more than five directors.

 

Recommendation of the Board of Directors

 

The board of directors recommends a vote FOR J. Hyatt Brown, Robert M. Chapman, Russell M. Currey and G. Stephen Felker to hold office until the annual meeting of shareholders in 2011, or until each of their successors is qualified and elected. The board of directors also recommends a vote FOR Bettina M. Whyte to hold office until the annual meeting of shareholders in 2009, or until her successor is qualified and elected. Proxies returned without instructions will be voted FOR these nominees.

 

Nominees for Election — Term Expiring 2011

 

Incumbent Directors — Term Expiring 2009

 

 

Incumbent Directors — Term Expiring 2010

 

 

Corporate Governance

 

Corporate Governance Guidelines.  We have posted our Corporate Governance Guidelines on our Internet website at www.rocktenn.com.  Copies of our Corporate Governance Guidelines are available, 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, GA 30071, Attention: Corporate Secretary.

 

Director Independence.  Our board of directors annually conducts an assessment of the independence of each director in accordance with our Corporate Governance Guidelines, applicable rules and regulations of the Securities and Exchange Commission (which we refer to as the “SEC”), and the corporate governance standards of the NYSE. The board assesses each director’s independence by reviewing any potential conflicts of interest and significant outside relationships. In determining each director’s independence, the board broadly considers all relevant facts and circumstances, including specific criteria included in the NYSE’s corporate governance standards. For these purposes, the NYSE requires the board to consider certain relationships that existed during a three-year look-back period. The board considers the issue not merely from the standpoint of a director, but also from the standpoint of persons or organizations with which the director has an affiliation. An independent director is free of any relationship with our company or our management that impairs the director’s ability to make independent judgments.

 

The board of directors conducted an assessment of the independence of each director other than Mr. Chapman and Ms. Whyte at its last regularly scheduled meeting. Based on this assessment, the board affirmatively determined that the following directors were independent: Dr. Anderson, Messrs. Brown, Robert Currey, Felker, Gellerstedt, Hopkins, Johnson, Spiegel and Young. The board of directors separately conducted an assessment of the independence of Mr. Chapman and Ms. Whyte and determined that they are also independent. The board of directors determined that each of these directors had no material relationship with our company (either directly or as a partner, shareholder or officer of an organization that has a material relationship with our company). The board determined that neither of Messrs. Russell Currey and Rubright is independent because each is an employee of our company. The board determined that each of Dr. Anderson, Messrs. Chapman, Hopkins, Johnson and Young and Ms. Whyte is independent because he or she had no significant relationship with our company (other than as a director and shareholder). The board determined that no relationship that each of Messrs. Brown, Robert Currey, Felker, Gellerstedt and Spiegel has with our company was material for purposes of determining his independence. In making that determination, the board considered the following relationships that each of Messrs. Brown, Robert Currey, Felker, Gellerstedt and Spiegel had with our company (one of which is also described under the heading “Certain Transactions” elsewhere in this proxy statement):

 

Messrs. Brown, Gellerstedt and Spiegel:  Mr. Brown serves on the board of directors of SunTrust Banks, Inc. Mr. Gellerstedt serves on the board of directors of SunTrust Bank, Atlanta, a subsidiary of SunTrust Banks, Inc. Mr. Spiegel served as a non-executive Vice Chairman of SunTrust Bank Holding Company, a subsidiary of SunTrust Banks, Inc. (a non-executive position) through March 31, 2005. Our company made payments to SunTrust Banks, Inc. and its subsidiaries during fiscal 2007, 2006 and 2005 for various banking

and financial consulting services, including for certain services related to our credit facility and our letter of credit facility during fiscal 2007, 2006 and 2005 and for our asset securitization facility during fiscal 2007 and 2006. The aggregate of these payments did not exceed 1% of our gross revenues during fiscal 2007 or 1% of SunTrust Bank’s gross revenues during its fiscal year ended December 31, 2006. The board determined that these payments and relationships were not material for these purposes.

 

J. Hyatt Brown:  Mr. Brown is an executive officer of Brown & Brown, Inc. Our company made payments to Brown & Brown, Inc. for insurance services during fiscal 2007 as described below under the heading “Certain Transactions.” Our board also considered similar payments made during fiscal 2006 and 2005. The board determined that these payments and relationships were not material for these purposes.

 

Robert B. Currey:  Mr. Currey is an owner and was an executive officer of Currey & Company, which purchased products from our company during fiscal 2006 and 2005. No purchases were made in fiscal 2007. The board determined that these payments and relationships were not material for these purposes.

 

G. Stephen Felker:  Mr. Rubright serves on the board of directors of Avondale Incorporated, of which Mr. Felker is a director, an executive officer and a substantial shareholder. The board determined that this relationship was not material for these purposes.

 

Our company purchases products and services in the normal course of business from many suppliers and sells products and services to many customers. In some instances, these transactions occur with companies with which members of our board of directors have relationships as directors or executive officers. Further, members of the board have relationships as directors or executive officers with certain companies that hold or held our equity securities. For purposes of our board’s affirmative determinations of director independence, none of these relationships was considered significant, either individually or collectively, except as described above or under the heading “Certain Transactions” elsewhere in this proxy statement. For these purposes, the board determined that these relationships were not material either individually or collectively.

 

Audit Committee Membership Criteria.  The NYSE requires that if listed companies do not limit the number of audit committees on which its audit committee members may serve to three or less, then in the event that a director simultaneously serves on the audit committees of more than three public companies, the board must determine that such simultaneous service would not impair the ability of that member to effectively serve on the company’s audit committee and disclose that determination. Our company has not adopted any specific requirements limiting the number of audit committees on which board members may serve.

 

Since retiring as an executive officer of SunTrust Banks, Inc., Mr. Spiegel advised our board in August 2004 and September 2005 that he had been nominated to join the audit committees of S1 Corporation, which is a publicly held company, and HomeBanc Corp, which, at the time, was a publicly held company. This resulted in Mr. Spiegel serving on the audit committees of more than three public companies. The board determined that serving on an additional audit committee would not impair Mr. Spiegel’s ability to effectively serve on our audit committee. HomeBanc Corp. is no longer a publicly held company. Mr. Spiegel currently serves on four audit committees of publicly held companies.

 

Director Self-Evaluation.  Our board of directors conducts an annual self-evaluation of the board, its committees and its individual members pursuant to our Corporate Governance Guidelines. The nominating and corporate governance committee is responsible for overseeing the self-evaluation process and making a report to the board of directors pursuant to our Corporate Governance Guidelines.

 

Meetings of Non-Management Directors.  Our non-management directors generally meet separately from the other directors in executive session after board meetings and board committee meetings. Pursuant to our Corporate Governance Guidelines, our non-management directors will meet in regularly scheduled executive sessions after board meetings and at such other times as may be scheduled by our chairman of the board or by our presiding independent director.

 

Presiding Independent Director.  Mr. Brown is currently serving as the presiding independent director, in accordance with our Corporate Governance Guidelines.

Director Education.  Our board of directors has adopted a director education policy under which we will reimburse directors for tuition and all customary and reasonable expenses incurred in connection with attending a director education seminar once every two years. In addition, any director desiring to be reimbursed for additional programs may be reimbursed upon approval of the chairman of the nominating and corporate governance committee.

 

Communicating with Our Directors.  So that shareholders and other interested parties may make their concerns known, we have established a method for communicating with our directors, including our presiding independent director and other non-management directors. There are two ways to communicate with our directors:

 

 

Communications that are intended specifically for our presiding independent director or other non-management directors should be marked “Attention: Independent Director Communications.” All other director communications should be marked “Attention: Director Communications.” Our legal department will facilitate all of these communications. We have posted a summary of this method for communicating with our directors on our Internet website at www.rocktenn.com.

 

Our directors are encouraged to attend and participate in the annual meeting. Except for Mr. Spiegel, all of our directors attended the annual meeting of shareholders held on January 26, 2007.

 

Codes of Business Conduct and Ethics

 

Employee Code of Business Conduct.  Our board of directors has adopted a code of business conduct for our employees. Failure to comply with this code of business conduct is a serious offense and will result in appropriate disciplinary action. We will disclose, to the extent and in the manner required by any applicable law or NYSE corporate governance standard, any waiver of any provision of this code of business conduct for executive officers of the company.

 

Code of Business Conduct and Ethics for Board of Directors.  Our board of directors has also adopted a code of business conduct and ethics for our board of directors. Failure to comply with this code of business conduct and ethics is a serious offense and will result in appropriate disciplinary action. We will disclose, to the extent and in the manner required by any applicable law or NYSE corporate governance standard, any waiver of any provision of this code of business conduct and ethics.

 

Code of Ethical Conduct for Chief Executive Officer and Senior Financial Officers.  Our board of directors has also adopted a code of ethical conduct for our principal executive officer (our chief executive officer), our principal financial officer (our chief financial officer) and our principal accounting officer (our chief accounting officer). These officers are expected to adhere at all times to this code of ethical conduct. Failure to comply with this code of ethical conduct for our chief executive officer and senior financial officers is a serious offense and will result in appropriate disciplinary action. Our board of directors and our audit committee each has the authority to independently approve, in their sole discretion, any such disciplinary action as well as any amendment to and any waiver or material departure from a provision of this code of ethical conduct. We will disclose on our Internet website at www.rocktenn.com, to the extent and in the manner permitted by Item 5.05 of Form 8-K under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”), the nature of any amendment to this code of ethical conduct (other than technical, administrative, or other non-substantive amendments), our approval of any material departure from a provision of this code of ethical conduct, and our failure to take action within a reasonable period of time regarding any material departure from a provision of this code of ethical conduct that has been made known to any of our executive officers.

 

Copies.  We have posted copies of each of these codes of business conduct and ethics on our Internet website at www.rocktenn.com. Copies of these codes of business conduct and ethics are also available,

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, GA 30071, Attention: Corporate Secretary.

 

Director Nominations

 

As provided in its charter, our nominating and corporate governance committee is responsible for evaluating and recommending candidates for the board of directors, including incumbent directors whose terms are expiring and potential new directors. The committee utilizes a variety of methods for identifying and evaluating nominees for director. The committee periodically assesses the appropriate size of the board, and whether any vacancies on the board are expected due to retirement or otherwise. If no vacancies are anticipated, the committee considers the current qualifications of incumbent directors whose terms are expiring. If vacancies arise or the committee anticipates vacancies, the committee considers various potential candidates for director. Candidates may come to the attention of the committee through current board members, professional search firms the committee may seek to engage or other persons. Under our bylaws, Mr. Hyatt Brown will be required to retire from the board at the time of the 2010 annual meeting. Other than Mr. Brown’s future retirement, our board of directors does not currently expect any additional board vacancies to arise due to retirement or otherwise. Three of the nominees that the board has recommended for election by the shareholders, as described above under the heading “Election of Directors — Recommendation of the Board of Directors”, are incumbent directors whose terms are expiring. Mr. Chapman, who the board has recommended for election by the shareholders, as described above under the heading “Election of Directors — Recommendation of the Board of Directors”, is an incumbent director who was elected by the board on November 20, 2007 to fill a vacancy on the board that resulted when the board increased the number of directors from 11 to 12 members. Ms. Whyte, the other nominee that the board has recommended for election by the shareholders, as described above under the heading “Election of Directors — Recommendation of the Board of Directors”, is an incumbent director who was elected by the board of directors on November 2, 2007 to fill the vacancy caused by James W. Johnson’s retirement from the board of directors. The board of directors has recommended that the shareholders vote at the annual meeting to elect Ms. Whyte to a term expiring at the annual meeting in 2009.

 

The nominating and corporate governance committee will also consider and evaluate candidates properly submitted for nomination by shareholders in accordance with the procedures set forth in our bylaws, which are described below under the heading “Additional Information — Shareholder Nominations for Election of Directors.” Following verification of the shareholder status of persons proposing candidates, the committee will aggregate and consider qualifying nominations. If a shareholder provides materials in connection with the nomination of a director candidate, our Corporate Secretary will forward the materials to the nominating and corporate governance committee. Based on its evaluation of any director candidates nominated by shareholders, the nominating and corporate governance committee will determine whether to include the candidate in its recommended slate of director nominees.

 

When the nominating and corporate governance committee reviews a potential new candidate, consistent with our Corporate Governance Guidelines, the committee will apply the criteria it considers appropriate. The committee generally considers the candidate’s qualifications in light of the needs of the board and our company at that time given the current mix of director attributes. Our Corporate Governance Guidelines contain specific criteria for board and board committee membership. In accordance with our Corporate Governance Guidelines, the board of directors will strive to select as candidates for board membership a mix of individuals who represent diverse experience at policy-making levels in business, government, education and technology, and in areas that are relevant to our company’s activities as well as other characteristics that will contribute to the overall ability of the board to perform its duties and meet changing conditions. Our Corporate Governance Guidelines also provide that each director must meet the following criteria:

 

 

 

Our bylaws also provide that directors must retire when they reach the age of 72, although they may continue to serve until the next annual or special meeting of shareholders at which directors are to be elected. The Corporate Governance Guidelines also provide that any director who has a significant change in his or her full time job responsibilities must give prompt written notice to the board of directors, specifying the details, and must submit to the board of directors a letter of resignation from the board of directors and from each committee of the board of directors on which the director serves. Submission of a letter of resignation provides the board of directors the opportunity to review the continued appropriateness of the director’s membership on the board of directors and committees of the board of directors under the circumstances. The board of directors may reject or accept the letter of resignation as it deems to be appropriate.

 

The nominating and corporate governance committee also considers the candidate’s independence, as defined in the Corporate Governance Guidelines and in the corporate governance standards of the NYSE, as described above under the heading “Election of Directors — Corporate Governance — Director Independence.” The committee expects a high level of commitment from our directors and considers a candidate’s service on other boards and board committees to ensure that the candidate has sufficient time to effectively serve our company. Different requirements apply with respect to submitting shareholder proposals for inclusion in the proxy statement and with respect to other proposals to be considered at an annual meeting of our shareholders, as described under the heading “Additional Information — Shareholder Proposals.”

 

Meetings of the Board of Directors

 

Our board of directors held seven meetings during fiscal 2007. Each director attended at least 75% of all meetings of the board and committees combined on which they served in fiscal 2007.

 

Committees of the Board of Directors

 

The board of directors has an executive committee, an audit committee, a compensation committee, and a nominating and corporate governance committee.

 

Executive Committee.  Messrs. Brown, Hopkins, Rubright and Spiegel are members of the executive committee. Mr. Brown is chairman of the committee.

 

The executive committee is authorized to exercise the authority of the full board in managing the business and affairs of our company. However, the executive committee does not have the power to do any of the following: (1) approve or propose to shareholders action that Georgia law requires to be approved by shareholders; (2) fill vacancies on the board or any of its committees; (3) amend our charter; (4) adopt, amend or repeal our bylaws; or (5) approve a plan of merger not requiring shareholder approval.

 

The executive committee held one meeting during fiscal 2007.

 

Audit Committee.  Dr. Anderson and Messrs. Robert Currey, Spiegel and Young are members of the audit committee. Mr. Spiegel is chairman of the committee.

 

The board of directors has determined that Mr. Spiegel is an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K under the Securities Act of 1933, as amended (which we refer to as the “Securities Act”), and the Exchange Act. The board of directors has also determined that all members of the committee are independent. See “Election of Directors — Corporate Governance — Director Independence” above.

The board of directors established the audit committee in accordance with Section 3(a)(58)(A) of the Exchange Act to assist the board of directors in fulfilling its responsibilities with respect to the oversight of the following: (1) the integrity of our financial statements; (2) our system of internal control over financial reporting; (3) the performance of our internal audit function; (4) the independence, qualifications and performance of our independent auditor; and (5) our system of compliance with legal and regulatory requirements. The principal duties and responsibilities of the audit committee are set forth in its charter, which was adopted by the board of directors. The audit committee may exercise additional authority prescribed from time to time by the board of directors.

 

The audit committee held six meetings during fiscal 2007, including meetings to review and discuss with the independent auditor and management our quarterly earnings releases as well as the financial statements and the disclosure under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our quarterly reports on Form 10-Q and in our annual report on Form 10-K.

 

Compensation Committee.  Messrs. Felker, Gellerstedt and Spiegel are members of the compensation committee. The board of directors has determined that all members of the committee are independent. See “Election of Directors — Corporate Governance — Director Independence” above. Mr. Gellerstedt is chairman of the committee.

 

The purpose of the compensation committee is to assist the board of directors in fulfilling its responsibilities with respect to compensation of our executives and non-employee directors. The compensation committee is responsible for the following: (1) establishing salaries, bonuses and other compensation for our CEO and our other senior executives (14 senior executives in fiscal 2007, which include our 7 executive officers); and (2) administering our equity incentive plans, our employee stock purchase plan, our SERP (as defined below), our Supplemental Plan (as defined below), our annual executive bonus program and our 2005 Incentive Plan (as defined below).

 

The committee’s principal duties and responsibilities are to do the following:

 

 

 

 

 

 

We describe the processes and procedures we use to consider and determine executive compensation, including the scope of authority of the compensation committee, the role of our CEO in determining or recommending executive compensation and the role of our compensation consultant, in this proxy statement in the section below titled “Executive Compensation — Compensation Discussion and Analysis.”

 

The compensation committee held three meetings during fiscal 2007.

Compensation Committee Interlocks and Insider Participation

 

Messrs. Felker, Gellerstedt, and Spiegel comprised the entire compensation committee during all of fiscal 2007. None of the compensation committee is or has been an officer or employee of Rock-Tenn or had any relationship that is required to be disclosed as a transaction with a related party.

 

Nominating and Corporate Governance Committee.  Dr. Anderson and Messrs. Brown and Hopkins are members of the nominating and corporate governance committee, and Mr. Johnson was a member of the nominating and corporate governance committee until his resignation on October 10, 2007. Mr. Hopkins is chairman of the committee. The board of directors has determined that all members of the committee are independent, as was Mr. Johnson. See “Election of Directors — Corporate Governance — Director Independence” above.

 

The purpose of the nominating and corporate governance committee is to serve as the primary resource for the board of directors in fulfilling its corporate governance responsibilities including, without limitation, with respect to identifying and recommending qualified candidates for our board of directors and its committees; overseeing the evaluation of the effectiveness of the board of directors and its committees; and developing and recommending corporate governance guidelines. The committee’s principal duties and responsibilities are to do the following:

 

 

The nominating and corporate governance committee will also consider and evaluate candidates properly submitted for nomination by shareholders in accordance with the procedures set forth in our bylaws, which are described below under the heading “Additional Information — Shareholder Nominations for Election of Directors.” See also “Election of Directors — Director Nominations” above.

 

The nominating and corporate governance committee held three meetings during fiscal 2007.

 

Copies of Committee Charters.  We have posted on our Internet website at www.rocktenn.com copies of the charters of each of the audit committee, the compensation committee and the nominating and corporate governance committee. Copies of these charters are also available, 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, GA 30071, Attention: Corporate Secretary.

Compensation of Directors

 

The following table provides information concerning the compensation of the directors who are not named executive officers for fiscal 2007. Except as noted below, all of our non-employee directors are paid at the same rate. The differences among directors in the table below are a function of additional compensation for chairing a committee, varying numbers of meetings attended and corresponding payments of meeting fees, and Mr. Russell Currey’s employment with us. In accordance with SEC regulations, grants of restricted stock and stock options are valued at the grant date fair value computed in accordance with Statement of Financial Accounting Standards No. 123 (Revised) (“SFAS 123(R)”). The SFAS 123(R) fair value per share of grants of restricted stock with a market condition and service condition in fiscal 2007 was valued using a Monte Carlo simulation. The SFAS 123(R) fair value per share of grants of restricted stock that contained a market condition and service condition in fiscal 2006 was valued using a binomial model. For all other grants of restricted stock, the SFAS 123(R) fair value per share is equal to the closing price of our Common Stock on the date of grant (i.e., $32.91 on January 26, 2007). We disclose such expense ratably over the vesting period but without reduction for assumed forfeitures (as we do for financial reporting purposes). For stock options, the fair value per share was valued using a Black-Scholes option pricing model. We include in the table below the ratable portion of grants made both in the current and in prior years to the extent the vesting period for these grants fell in such a year.

 

For fiscal 2007, directors who are not employees of our company received $32,500 plus $2,000 for each board and committee meeting attended in person and $1,000 for each meeting attended via conference call. Each director who chairs a committee and is not an employee of our company received an additional $5,000. In addition, each non-employee director received, on January 26, 2007, pursuant to our Incentive Stock Plan (as defined below), a grant of 2,000 shares of our Common Stock that will vest on January 26, 2008.

 

Director Compensation Table for Fiscal 2007

 

 

 

 

 

COMMON STOCK OWNERSHIP BY MANAGEMENT
AND PRINCIPAL SHAREHOLDERS

 

The table below shows, as of November 30, 2007, how many shares of our Common Stock each of the following beneficially owned: our directors, named executive officers (as defined below under “Executive Compensation — Compensation Discussion and Analysis — Introduction”), owners of 5% or more of our Common Stock and our directors and executive officers as a group. Under the rules of the SEC, a person “beneficially owns” securities if that person has or shares the power to vote or dispose of the securities. The person also “beneficially owns” securities that the person has the right to purchase within 60 days. Under these rules, more than one person may be deemed to beneficially own the same securities, and a person may be deemed to beneficially own securities in which he or she has no financial interest. Except as shown in the footnotes to the table, the shareholders named below have the sole power to vote or dispose of the shares shown as beneficially owned by them.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXECUTIVE OFFICERS

 

Identification of Executive Officers

 

The executive officers of our company are as follows as of November 30, 2007:

 

 

James A. Rubright has served as our CEO since October 1999 and chairman of the board since January 2000. Mr. Rubright is also a director of AGL Resources Inc., an energy company, Oxford Industries, Inc., a manufacturer and seller of branded and private label apparel, and Avondale Incorporated, a former textile manufacturer.

 

David E. Dreibelbis has served as executive vice president and general manager of our paperboard division since November 2000. From September 1992 to October 2000, Mr. Dreibelbis was the executive vice president and general manager of our mill group. Mr. Dreibelbis joined our company in April 1979.

 

James L. Einstein has served as executive vice president and general manager of our Alliance division since November 2000. From January 1995 until October 2000, Mr. Einstein served as vice president and general manager of our display operations.

Michael E. Kiepura has served as executive vice president of our folding carton division since June 2005. From August 2001 to June 2005, Mr. Kiepura was the senior vice president of sales in the folding carton division. From November 1999 to July 2001, Mr. Kiepura was senior vice president, eastern region, folding carton division.

 

Steven C. Voorhees has served as our executive vice president and chief financial officer since September 2000.

 

Robert B. McIntosh has served as our senior vice president, general counsel and secretary since August 2000.

 

A. Stephen Meadows joined our company in July 2006 and was elected as our chief accounting officer in November 2006. From March 2005 to March 2006, Mr. Meadows was chief accounting officer of Drummond Company, Inc., which is principally engaged in the business of mining, purchasing, processing and selling of coal and coal derivatives. From May 2002 to January 2005, Mr. Meadows was vice president finance and risk management at Progress Energy, a diversified energy company.

 

All of our executive officers are elected annually by and serve at the discretion of either the board of directors or the chairman of the board.

 

EXECUTIVE COMPENSATION

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Introduction

 

In this section, we discuss our compensation program as it pertains to our chief executive officer, our chief financial officer, and our three other most highly-compensated executive officers in fiscal 2007. We refer to these five persons throughout as the “named executive officers” or our “NEOs”. Our discussion focuses on compensation and practices relating to our most recently completed fiscal year.

 

Executive Compensation Philosophy

 

Our executive compensation philosophy is based on the belief that the compensation of our employees, including our named executive officers, should be set at levels that allow us to attract and retain employees who are committed to achieving high performance and who demonstrate the ability to do so. We seek to provide an executive compensation package that is driven by our overall financial performance, increased shareholder value, the success of areas of our business directly impacted by the executive’s performance, and the performance of the individual executive. The main principles of this strategy include the following:

 

 

The following table shows the use of these principles in the weighting of the target total direct compensation elements used in fiscal 2007:

 

 

 

 

Objectives of Our Executive Compensation Program

 

The objectives of our executive compensation program are to attract and retain high quality executives capable of and committed to achieving superior performance; enhance each individual executive’s performance; align incentives with the areas of our business most directly impacted by the executive’s leadership and performance; improve the overall performance of our company; increase shareholder value by creating a mutuality of interest between the executive officers and shareholders through equity compensation structures that promote the sharing of the rewards and risks of strategic decision-making; and enhance the financial effectiveness of the program by taking into consideration the accounting treatment, deductibility and taxation of compensation decisions.

Administration of Our Executive Compensation Program

 

Our executive compensation program is administered by the compensation committee of our board of directors. As reflected in its charter, the compensation committee approves executive compensation-related corporate and individual goals and objectives, determines the compensation of our CEO and our other 14 senior executives, and evaluates our CEO’s performance relative to established goals and objectives.

 

Over the course of each year, the compensation committee reviews the relationship between our executive compensation program and the achievement of business objectives, as well as the competitiveness of the program.

 

The compensation committee has retained Mercer Human Resources Consulting, a compensation consulting firm, to provide objective analysis, advice and information to the compensation committee, including competitive market data and compensation recommendations related to our CEO and our 14 other senior executives. Mercer reports to the chairman of the compensation committee and has direct access to the other members of the compensation committee. Mercer attends committee meetings and also meets with the compensation committee in person in executive sessions without management present. The decisions made by the compensation committee are the responsibility of the committee and may reflect factors and considerations other than the information and recommendations provided by Mercer. Mercer does not provide any other services to us.

 

The compensation committee considers input from the CEO in making determinations regarding our overall executive compensation program and the individual compensation of the senior executives other than the CEO. As part of the annual planning process, the CEO develops targets for our annual bonus program and presents them to the compensation committee for consideration. Based on performance appraisals and information regarding competitive market practices provided by Mercer, the CEO recommends base salary adjustments, annual bonus opportunities, and long-term incentives levels for our senior executives other than our CEO. Each year, the CEO presents to the compensation committee and the non-management directors his evaluation of each senior executive’s contribution and performance over the past year, strengths and development needs and actions, and reviews succession plans for each of the senior executives.

 

After taking into account input from our CEO and Mercer, the compensation committee determines what changes, if any, should be made to the executive compensation program and sets the level of compensation for each senior executive with respect to each element in the compensation program. In setting these levels, the compensation committee reviews a detailed analysis of each senior executive’s annual total direct compensation (base salary, annual bonus opportunity and long-term incentives), including the competitive market data discussed below and the value of benefits under our retirement plans.

 

Consideration of Competitive Market Data Regarding Executive Compensation

 

In determining the amount of senior executive compensation each year, the compensation committee reviews competitive market data from a combination of a specific peer group of companies within the paper and packaging industry and various published survey data for similarly sized companies or business units in the “non-durable goods manufacturing” sector. In some cases, these surveys include “all manufacturing” or “general industry” data, when non-durable goods manufacturing categories are not available. For fiscal 2007, the peer group consisted of the following companies:

 

The compensation committee uses this peer group and survey data for benchmarking executive compensation practices and levels of base salary, annual performance bonuses and long-term incentives. The following sets forth the compensation committee’s competitive positioning of various components of executive compensation for our named executive officers relative to the competitive market data for executive talent discussed above:

 

 

The compensation committee attempts to make compensation decisions consistent with the foregoing objectives and competitive considerations, including market levels of compensation it believes are necessary to attract, retain and motivate our senior executives. The compensation committee does not take into account an individual’s net worth or the aggregate wealth accumulated or realized by the individual from past compensation grants.

 

Components of Our Executive Compensation Program

 

We provide a combination of pay elements and benefits to accomplish our executive compensation objectives, including both short-term and long-term compensation. We believe that long-term incentives are particularly useful in aligning our executives’ interests with our shareholders’ interests and creating an effective retention measure.

 

The four primary components of our executive compensation program include:

 

 

A description of these four components and related programs follows.

 

Base Salary.  Base salary is designed to provide competitive levels of compensation to executives based upon their responsibilities, performance and experience, as well as competitive market data. No specific

formula is applied to determine the weight of each factor. We pay base salaries because they provide a basic level of compensation and are necessary to recruit and retain executives.

 

At lower executive levels, base salaries represent a larger proportion of total compensation. At more senior executive levels, a greater portion of overall compensation is progressively replaced with larger variable compensation opportunities. The compensation committee has historically followed a policy of using primarily performance bonus awards rather than base salary to reward outstanding performance.

 

Base salary levels are also important because we generally tie the amount of annual performance bonus and long-term incentive opportunities and a substantial portion of our retirement benefits to a percentage of each executive’s base salary.

 

Annual Performance Bonus.  Our annual executive bonus program is designed to motivate senior executives and reward the achievement of specific performance goals. Annual bonus goals are established for each of the executives who participates in the program, including each of our named executive officers.

 

Annual executive bonus program awards are designed to provide competitive levels of compensation to executives based upon their experience, duties and scope of responsibilities. The amount of an executive’s bonus opportunity is influenced by these factors, as well as competitive market data and individual performance. For fiscal 2007, the compensation committee set the competitive benchmarks for target total cash compensation (base salary and target annual bonus) slightly above the 50th percentile of the competitive market data. Awards earned under the annual executive bonus program are contingent upon employment with us through the end of the fiscal year and as otherwise determined by the compensation committee.

 

The ultimate amount paid to an executive under the annual executive bonus program is a function of the following variables: the executive’s overall bonus opportunity, which is based on a percent of the executive’s year-end base salary; the goals established by the compensation committee for the executive; for each goal, the attainment of minimum achievement levels (threshold), capped by maximum achievement levels, and the compensation committee’s determination of the extent to which the executive’s goals were met.

 

The fiscal 2007 bonus goals of each of our named executive officers are set forth below. The bonus goals of Mr. Rubright were based exclusively on consolidated company measures because his position with us has a substantial impact on the achievement of those measures. The fiscal 2007 bonus goals of Messrs. Dreibelbis, Kiepura and Einstein were based primarily on the measures of the divisions over which they each lead as executive vice president. In the case of Mr. Dreibelbis, one of his goals was based on the operating income of the folding carton division because the success of the folding carton division depends in part on the level of support provided by the paperboard division. In the case of Mr. Kiepura, one of his goals was based on the operating income of the paperboard division because the success of the paperboard division depends in part on the level of support provided by the folding carton division. The fiscal 2007 bonus goals of Mr. Voorhees were based on both consolidated company measures and home office measures because his position with us has a substantial impact on the achievement of each of those measures.

 

The primary performance goals for each of our NEOs are operating income, customer satisfaction ratings and safety measures, with operating income having the greatest weighting because we believe that maximizing the operating income of each of our divisions and the consolidated company over the long-term will drive shareholder value. Customer satisfaction ratings are an important component of our performance goals because it provides us with an objective measure of how our customers view the quality of our products, the level of our service and the value they receive from conducting business with us. We use CSM Marketing, an independent market research firm, to conduct our annual customer satisfaction surveys (which reports on a scale of 1 — 10, with 10 being the highest rating). Safety has long been an important aspect of our culture. Not so much because a workplace free of accidents will save us money, which it will, but because we do not want any of our employees to get hurt at work. We therefore include safety measures as part of the performance goals for all of our NEOs, other than Mr. Voorhees, who has limited responsibility for manufacturing operations. Our safety performance measures include the number of workers’ compensation claims (“TWCC”) and the severity of injuries as measured by the number of workdays lost due to injuries (“LWD”). In the case of Mr. Voorhees, home office cost savings are an important area of our performance

goals because he has responsibility for a substantial portion of our corporate administrative costs. These cost savings goals include maintaining or increasing prior year savings and reducing current year costs.

 

For fiscal 2007, the compensation committee established the following bonus goals and performance benchmarks for Mr. Rubright under the annual executive bonus program. He was eligible to earn a cash bonus of up to a maximum of 125% of his year-end base salary to the extent we achieved the following goals at or in excess of the maximum performance benchmark:

 

 

For fiscal 2007, the compensation committee established the following bonus goals and performance benchmarks for Mr. Dreibelbis under the annual executive bonus program. He was eligible to earn a cash bonus of up to a maximum of 100% of his year-end base salary to the extent we achieved the following goals at or in excess of the maximum performance benchmark:

 

For fiscal 2007, the compensation committee established the following bonus goals and performance benchmarks for Mr. Voorhees under the annual executive bonus program. He was eligible to earn a cash bonus of up to a maximum of 100% of his year-end base salary to the extent we achieved the following goals at or in excess of the maximum performance benchmark:

 

 

For fiscal 2007, the compensation committee established the following bonus goals and performance benchmarks for Mr. Kiepura under the annual executive bonus program. He was eligible to earn a cash bonus of up to a maximum of 100% of his year-end base salary to the extent we achieved the following goals at or in excess of the maximum performance benchmark:

 

For fiscal 2007, the compensation committee established the following bonus goals and performance benchmarks for Mr. Einstein under the annual executive bonus program. He was eligible to earn a cash bonus of up to a maximum of 80% of his year-end base salary to the extent we achieved the following goals at or in excess of the maximum performance benchmark:

 

 

The compensation committee sets these performance goals and related performance benchmarks at the beginning of each fiscal year based largely on management’s confidential business plan and budget for that fiscal year. The compensation committee sets the required performance benchmark to achieve a maximum payout for a particular performance goal at ambitious levels that can only be attained when applicable results are exceptional and which justify the higher award payments. We would expect an executive to achieve a maximum payout with respect to a particular performance goal one or two years out of 10. Similarly, we would expect an executive to achieve a threshold payout or less with respect to a particular performance goal one or two years out of 10.

 

Potential bonus payouts under our annual executive bonus program depend on the level at which the performance benchmarks are achieved as set forth in the table below based on a percentage of the executive’s year-end base salary. The failure to achieve at least a threshold performance benchmark with respect to a particular bonus goal will result in no payout with respect to that bonus goal. The achievement in excess of the maximum performance benchmark with respect to a particular bonus goal will result in a maximum payout with respect to that bonus goal. The achievement in excess of the threshold performance benchmark with respect to the particular bonus goal, but at a level below the maximum performance benchmark, will result in a payout with respect to the particular bonus goal based on straight-line interpolation. The compensation committee is responsible for assessing actual performance relative to performance benchmarks for each goal and, in doing so, determines the amount of any final bonus payout. For fiscal 2007, the compensation committee determined that the named executive officers achieved overall performance benchmarks resulting in the annual executive bonus payout as a percentage of year-end base salary set forth below in the column entitled “Actual 2007 Executive Bonus Payout.”

 

 

During fiscal 2002 through 2006, our CEO received an average bonus payout that is 94.1% of the target level, while during that same period, our named executive officers (other than our CEO) received an average bonus that is 92.1% of target level.

For fiscal 2008, the bonus goals and their relative weighting for each of the named executive officers will be the same as those applicable for fiscal 2007; however, the performance benchmarks required to achieve threshold, target and maximum benchmarks have been changed. The compensation committee may change the performance goals for fiscal 2009 and later years.

 

Long-Term Incentives.  We emphasize long-term variable compensation at the senior executive level over short-term variable compensation because of our desire to reward effective long-term management decision-making and our desire to attract and retain executives who have the potential to positively impact both our short-term and long-term profitability. Long-term incentives are designed to allow us to focus attention on long-range objectives and future returns to our shareholders and are presently delivered to the named executive officers through the 2004 Incentive Stock Plan (the “Incentive Stock Plan”). The compensation committee administers the Incentive Stock Plan and may award (a) stock options, (b) stock appreciation rights, (c) stock grants and (d) stock unit grants. Each year, the compensation committee makes awards under the Incentive Stock Plan during the first two weeks of May. In recent years, the compensation committee has made awards to our named executive officers that included either only restricted stock or a combination of restricted stock and stock options.

 

Restricted Stock and Stock Options.  On May 10, 2007, the compensation committee made long-term incentive award grants to our named executive officers as described below. The awards included three tranches of restricted stock grants pursuant to our Incentive Stock Plan, each of which has a service condition and either a performance condition or a market condition.

 

The first tranche (“Tranche 1”) has a performance condition based on the annual average return over capital costs (“ROCC”) for each of the 12 months ended March 31, 2008 and 2009 and the nine months ended December 31, 2009. The target award of each of the grants will be adjusted based on our ROCC from March 31, 2007 through December 31, 2009 compared to the ROCC during the same period of each entity included in the peer group described below, as follows:

 

 

The second tranche (“Tranche 2”) has a market condition based on the percentage return on Common Stock purchased on March 31, 2007 and held through December 31, 2009, including reinvestment of all dividends paid on that Common Stock during such period (the “Total Shareholder Return”). The target award of each of the grants will be adjusted based on our Total Shareholder Return from March 31, 2007 through December 31, 2009 compared to the Total Shareholder Return during the same period of each entity included in the peer group, as follows:

 

 

The peer group used for purposes of Tranche 1 includes Caraustar Industries Inc., Cascades Corp., Chesapeake Corp., Graphic Packaging International Corp., International Paper Company, MeadWestvaco Corp., The Newark Group, Smurfit Stone Container Corp., Sonoco Products Co. and Temple-Inland Inc. The peer group used for purposes of Tranche 2 includes all of the same entities, except for The Newark Group, which does not have publicly traded stock.

All grants made under Tranche 1 and Tranche 2 will vest upon completion of service on March 31, 2010, unless forfeited or vested before such date. The shares will not have voting or dividend rights until they vest. Grants will vest upon death, disability or termination of employment at the convenience of the company. In addition, grants will fully vest at 150% of the Target Award upon a change of control.

 

The third tranche (“Tranche 3”) has a performance condition that required the achievement of either of the following two criteria:

 

(1) the achievement of “credit agreement debt to EBITDA” (as defined in our senior credit facility) ratio of 3.25 or lower for the six-month period ending September 30, 2007 (provided that the EBITDA for the six-month period shall be annualized); or

 

(2) the achievement of net earnings of at least $0.60 per share for the six-month period ending September 30, 2007, adjusted to exclude any restructuring costs.

 

The Tranche 3 performance conditions were met as of September 30, 2007.

 

Grants made under Tranche 3 will vest in one-third increments upon completion of service on each of May 8, 2009, 2010 and 2011, unless forfeited or vested before such dates. Grants will vest upon death, disability, termination of employment at the convenience of the company or upon a change in control. The shares did not have voting or dividend rights until the relevant performance conditions were met.

 

On May 10, 2007, the compensation committee also approved awards of stock options under the Incentive Stock Plan for the purchase of shares of Common Stock with an exercise price of $35.95, the closing sale price on the NYSE on May 10, 2007. The stock options will vest in one-third increments on each of May 10, 2008, 2009 and 2010. The compensation committee approved the following restricted stock (Tranche 1, 2 and 3) and stock option grants to our named executive officers:

 

 

Each of the named executive officers is required to retain ownership of fifty percent (50%) of the restricted stock awarded to him for a period of one year following the vesting of the restricted stock. The one-year retention period will not apply to any shares (1) to the extent that the executive continues to own an amount of our Common Stock at least equal to the amount of shares required under the preceding sentence, plus an amount of shares required under our stock ownership guidelines (described below) or (2) after termination of employment of the named executive officer; provided, however, the fifty percent (50%) requirement will apply only to the amount of restricted stock remaining after shares of Common Stock have been sold or otherwise reduced to satisfy any federal, state or local withholding tax liability arising from the granting or vesting of such restricted stock.

 

2005 Incentive Plan.  On June 6, 2005, our compensation committee adopted and approved the 2005 Shareholder Value Creation Incentive Plan (which we refer to as the “2005 Incentive Plan”).

 

The 2005 Incentive Plan was intended to (1) incentivize management to achieve the goals that we established to value the Pulp and Paperboard Packaging business of Gulf States Paper Corporation (which we refer to as “GSPP”) that we acquired on June 6, 2005, including (a) administrative and operating synergies related to the acquired GSPP business and (b) the reduction of debt incurred to finance the acquisition and (2) allow us to provide plan participants with a meaningful reward for their role in achieving these goals.

 

The 2005 Incentive Plan permits the granting of cash incentive awards. The 2005 Incentive Plan is administered by the compensation committee. On June 6, 2005, the compensation committee granted awards

under the 2005 Incentive Plan. The maximum value of the award for our CEO was $2 million. The maximum value of the awards for other named executive officers ranged from $333,300 to $500,000. Other than Mr. Einstein, the awards to our NEOs were based 50% on each of the two performance metrics summarized below included in the 2005 Incentive Plan (which we refer to as the “Standard Performance Metrics”).

 

The value of the grants under the 2005 Incentive Plan, other than Mr. Einstein’s, were determined on the basis of the achievement of the following two Standard Performance Metrics: (1) the amount of realized and sustained synergies from the acquisition of the GSPP operations and actions taken to improve the efficiency and effectiveness of the combined operations as measured at the end of fiscal 2007; and (2) the ratio of our consolidated debt as of September 30, 2007 to an annualized EBITDA amount for the period April 1, 2007 to September 30, 2007 calculated in accordance with the rules set forth in the 2005 Incentive Plan. The award to Mr. Einstein incorporated one of the Standard Performance Metrics regarding the ratio of Debt to EBITDA (as defined in the 2005 Incentive Plan) and was also based on performance goals tied to his division’s adjusted EBIT for fiscal 2007.

 

The compensation committee has determined that each of the NEOs have earned a maximum payout under the 2005 Incentive Plan, 50% of which vested on September 30, 2007 and was paid on November 7, 2007, and 50% of which will vest on September 30, 2008 and be payable on October 1, 2008. See “Executive Compensation Tables — Summary Compensation Table.”

 

Retirement Benefits.  We also provide certain retirement benefits to our named executive officers. These are discussed in detail below in the section titled “Retirement Plans.”

 

Employment Agreement with James A. Rubright.  On February 7, 2006, we entered into an employment agreement with Mr. Rubright concerning his employment as our CEO.

 

Pursuant to his employment agreement, Mr. Rubright’s base pay will continue as in effect as of February 6, 2006, subject to annual review and periodic increases (but not decreases) in accordance with our customary practices for our senior executives. In addition, Mr. Rubright will continue to participate in all bonus, option, stock, insurance and other employee benefit and welfare plans, programs and policies maintained by us and in which Mr. Rubright is eligible by their terms to participate. Mr. Rubright’s participation relative to other senior officers as a class will continue to be at a level that is commensurate with his position as CEO and, to the extent that the level of participation is measured by performance criteria, at such level as reflects both Mr. Rubright’s position and achievement of the relevant performance criteria.

 

We may terminate Mr. Rubright’s employment at any time, and Mr. Rubright may resign at any time. Mr. Rubright is entitled to certain rights and benefits upon termination if:

 

 

 

 

 

 

The rights and benefits upon termination, in connection with the foregoing circumstances described in the immediately preceding paragraph, will include (1) within 30 days of termination, a lump sum payment in cash in the amount of three times Executive’s Earnings (as defined in the employment agreement and which include base pay, bonuses and the value of stock options, restricted stock and other long-term incentive compensation), except where Mr. Rubright’s employment is terminated less than 36 months before his 65th birthday, in which case the amount of the lump sum will be reduced according to the months remaining before his 65th birthday, (2) within 30 days of termination, a retirement benefit in the form of cash lump sum in an amount equal to the excess of (A) the amount that would be required to be paid to Mr. Rubright under the SERP benefit level 3, if the date of his termination was Mr. Rubright’s Employment Termination Date under the SERP and a Change in Control had occurred under the SERP and the date of such Change in Control was the date of Mr. Rubright’s termination, over (B) the amount that is required to be paid to Mr. Rubright under the SERP benefit level 3 as of Mr. Rubright’s Termination (capitalized terms are defined in the SERP), (3) continued coverage for Mr. Rubright and his eligible dependents in all employee health, medical and life insurance plans of our company for 36 months following the termination or until Mr. Rubright’s 65th birthday, whichever is sooner, substantially equivalent to those insurance benefits in effect before termination, (4) all of Mr. Rubright’s then unvested rights under the Incentive Stock Plan will vest, and Mr. Rubright will continue to be treated as a participant in the 2005 Incentive Plan as though he remained an employee, and (5) continued participation in other benefit plans in which Mr. Rubright currently participates or which are available to executive personnel.

 

Pursuant to the employment agreement, we will have no obligation to provide to Mr. Rubright the rights and benefits described in the preceding paragraph after Mr. Rubright’s 65th birthday or upon the occurrence of any of the following events: (1) we terminate Mr. Rubright’s employment for Cause, i.e., (x) conviction of a felony, (y) gross neglect by Mr. Rubright of his duties as CEO that continues uncured for 60 days after receipt of written notice thereof or (z) willful gross misconduct by Mr. Rubright in the performance of his duties as the CEO that remains uncured for 60 days after receipt of written notice thereof, (2) we terminate Mr. Rubright’s employment because he is “totally disabled,” (3) Mr. Rubright does not, promptly after termination of his employment and upon receiving a written request to do so, resign as a director and/or officer of our company and of each subsidiary and affiliate of our company of which Mr. Rubright is then serving as a director and/or officer or (4) Mr. Rubright resigns his employment without Good Reason.

 

Mr. Rubright also will be entitled to receive certain additional Gross-Up Payments (as defined in the employment agreement) to cover any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), on any payment or distribution by us to or for the benefit of Mr. Rubright, or any benefit, arrangement regarding the exercise or vesting of options, restricted stock or other securities of our company, or other plan, agreement or arrangement regarding a change of control of our company. Mr. Rubright

also will be entitled to receive certain additional payments to indemnify and hold him harmless on an after-tax basis from any tax or interest penalty imposed on him under Section 409A of the Code with respect to any payment made or benefit provided under his employment agreement.

 

In the employment agreement, Mr. Rubright has agreed that during his employment and for three years following the date of termination of his employment or his resignation for any reason, he will not knowingly, without our prior written consent, disclose to any person, firm or corporation any material confidential information of our company or its subsidiaries that is now known to Mr. Rubright or that hereafter may become known to Mr. Rubright as a result of his employment or association with our company and that would be helpful to a competitor. Mr. Rubright has also agreed that, for a period of three years following the date of termination of his employment or his resignation for any reason, he will not induce, either directly or indirectly, any salaried employee of our company or any of its subsidiaries to terminate his or her employment, and he will not call on or solicit for the purpose of competing with our company or its subsidiaries any customers of our company or its subsidiaries.

 

Mr. Rubright further has agreed that, for a period of three years following the date of termination of his employment or his resignation for any reason (or until his 65th birthday, if shorter), (1) he will not assume or perform any responsibilities and duties that are substantially the same as those he performs for us for or on behalf of any other corporation, partnership, venture or other business entity that engages in our company’s business in the United States and (2) he will furnish such information and render such assistance and cooperation as reasonably may be requested in connection with any litigation or legal proceedings concerning our company or any of its subsidiaries (other than any legal proceedings concerning Mr. Rubright’s employment), in connection with such cooperation, we will pay or reimburse Mr. Rubright for reasonable expenses. In the event of a breach by Mr. Rubright of these covenants, we will have the right to an injunction or other equitable relief in any court of competent jurisdiction enjoining any such breach, in addition to pursuing any other rights and remedies at law or in equity that we may have.

 

Stock Ownership Guidelines

 

In order to better align the interests of our shareholders, executives and directors, our board of directors has adopted the following stock ownership guidelines. These guidelines reflect current corporate practices and result in the linking of a portion of the personal financial interests of the named executive officers, as well as certain other employees, through the ownership of our Common Stock, with the financial interests of our shareholders.

 

The guidelines are as follows:

 

 

Tax Considerations

 

The compensation committee has reviewed the applicability of Section 162(m) of the Code, as amended by the Omnibus Budget Reconciliation Act of 1993. In certain circumstances, Section 162(m) may deny a federal income tax deduction for compensation to our named executive officers in excess of $1 million per year, effective for tax years beginning on or after January 1, 1994. Certain compensation that qualifies as “performance based” and is approved by shareholders may be exempt from the Section 162(m) limit. We intend to qualify certain compensation paid to our named executive officers for deductibility under the Code, including Section 162(m). However, we believe that the interests of our company and our shareholders may sometimes be best served by providing compensation that is not deductible in order to attract, retain, motivate and reward executive talent. Accordingly, the compensation committee intends to retain the flexibility to provide for payments of compensation that is not deductible. Payments under our annual executive bonus

program and restricted stock awards under our Incentive Stock Plan are currently qualified as performance based compensation and exempt from the Section 162(m) limit.

 

Some of the provisions of Mr. Rubright’s employment agreement and the provisions of our bonus programs and our nonqualified deferred compensation arrangements are subject to Section 409A of the Code. Section 409A was effective on January 1, 2005 and can impose a 20% additional tax plus penalties on compensation which is treated as deferred compensation under Section 409A and which fails to satisfy the requirements set forth in that section of the Code. Final regulations under Section 409A were effective on April 17, 2007, but our company has until December 31, 2008 to make the requisite amendments to bring Mr. Rubright’s employment agreement and the provisions of our bonus programs and nonqualified deferred compensation into compliance with Section 409A. The company in the meantime is subject to a “good faith” compliance standard, and we will seek to continue to comply in good faith with the requirements of Section 409A.

 

COMPENSATION COMMITTEE REPORT

 

The compensation committee has reviewed and discussed the Compensation Discussion and Analysis with the company’s management. Based on this review and discussion, the compensation committee recommended that the board of directors include the Compensation Discussion and Analysis in this proxy statement and the annual report on Form 10-K for the fiscal year ended September 30, 2007.

 

L. L. Gellerstedt, III, chairman, compensation committee

G. Stephen Felker, compensation committee member

John W. Spiegel, compensation committee member

 

The foregoing report should not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act or under the Exchange Act, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed to be soliciting material or to be filed under such Acts.

 

EXECUTIVE COMPENSATION TABLES

 

Summary Compensation Table

 

The table below shows the total compensation earned during fiscal 2007 by those persons who: (1) served as our chief executive officer during fiscal 2007, (2) served as our chief financial officer during fiscal 2007, and (3) were our three other most highly compensated executive officers who were serving as executive officers at the end of fiscal 2007.

 

Summary Compensation Table for Fiscal 2007

 

 

 

 

All Other Compensation Table for Fiscal 2007

 

 

 

 

 

 

Grants of Plan-Based Awards

 

The following table provides information as to the grants of plan-based awards to each named executive officer during fiscal 2007. This includes restricted stock and stock option awards under the Incentive Stock Plan, which is discussed in greater deal in this proxy statement under the section titled “Compensation, Discussion and Analysis — Restricted Stock and Stock Options.”

 

Grants of Plan-Based Awards for Fiscal 2007

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table summarizes stock-based compensation awards outstanding as of September 30, 2007 for the named executive officers. The following table provides information concerning unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer outstanding as of the end of our most recently completed fiscal year. Each outstanding award is represented by a separate row which indicates the number of securities underlying the award, including awards that have been transferred other than for value (if any). For option awards, the table discloses the exercise price and the expiration date. For stock awards, the table provides the total number of shares of stock that have not vested and the aggregate market value of shares of stock that have not vested. We computed the market value of stock awards by multiplying the closing market price of our Common Stock at the end of the most recently completed fiscal year by the number of shares of stock or the amount of equity incentive plan awards, respectively.

 

Outstanding Equity Awards at Fiscal 2007 Year-End