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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
of the
SECURITIES EXCHANGE ACT OF 1934
For the year ended Commission File
December 28, 1997 Number 1-7911
FORT JAMES CORPORATION
(Exact name of registrant as specified in its charter)
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VIRGINIA 54-0848173
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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1650 Lake Cook Road
Deerfield, Illinois 60015-4753
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code
(847) 317-5000
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.10 par value New York Stock Exchange
Rights to Purchase Series M New York Stock Exchange
Cumulative Participating
Preferred Stock, $10 par value
Series K $3.375 Cumulative New York Stock Exchange
Convertible Exchangeable
Preferred Stock, $10 par value
Depositary Shares Representing New York Stock Exchange
Series L $14.00 Cumulative
Convertible Exchangeable
Preferred Stock, $10 par value
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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, and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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Aggregate market value of voting stock held by non-affiliates
of the registrant, at close of business, February 23, 1998 ......... $8,800,283,804
Number of shares of $.10 par value common stock outstanding,
as of February 23, 1998 ............................................ 199,722,753
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Documents Incorporated by Reference:
(1) Portions of the registrant's Annual Report to Shareholders for the
year ended December 28, 1997, incorporated into Parts I and II hereof; and (2)
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on April 23, 1998, incorporated into Part III
hereof.
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FORT JAMES CORPORATION
Annual Report on Form 10-K
December 28, 1997
TABLE OF CONTENTS
PART I
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Page
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Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Executive Officers of the Registrant 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
Fort James Corporation ("Fort James" or the "Company") is a preeminent
worldwide manufacturer and marketer of paper-based consumer products, including
towel and tissue products as well as disposable tabletop and foodservice
products. Fort James is the result of the merger of a subsidiary of James River
Corporation of Virginia ("James River") with and into Fort Howard Corporation
("Fort Howard") in August 1997 (the "Merger"). In connection with the Merger,
James River was renamed "Fort James Corporation."
The Company's principal towel and tissue products include bathroom tissue,
paper towels, table napkins, boxed facial tissue and wipers. Disposable
tabletop and foodservice products include paper and plastic cups, paper plates,
and plastic cutlery. Fort James is the world's second largest producer of
tissue products, with approximately three million tons of worldwide capacity.
In the United States, Fort James ranks number one in tissue-making, with 2.1
million tons of annual capacity, representing approximately 30% of the U.S.
tissue industry capacity. In Europe, where Fort James has 860,000 tons of
annual tissue capacity, representing approximately 17% of European tissue
industry capacity, the Company believes it is tied for the number two position
in the European tissue industry. Fort James also produces and markets
paper-based packaging for food and pharmaceuticals and communications papers.
The Company believes that it is among the lowest-cost producers of tissue
products in North America. Fort James' operating margins in its North American
Consumer Products Business have increased steadily over the last several years,
rising to 19.4% for 1997, excluding restructuring charges. The Company believes
its cost advantage in North America is derived from a number of factors,
including the size and scale of certain of its manufacturing plants, the
competitive state of its tissue-making manufacturing assets and proprietary
deinking technology.
Portions of the Fort James Corporation Annual Report to Shareholders for
the year ended December 28, 1997, (the "1997 Annual Report") are incorporated
in this Form 10-K by specific reference.
Business Initiatives
Fort James' near-term business initiatives focus on three areas:
leveraging revenue growth opportunities, pursuing aggressive cost reduction,
including merger synergies, and achieving financing cost savings through both
refinancing activities and debt reduction.
Leveraging Revenue Growth Opportunities
As a result of the Merger, Fort James has a larger manufacturing and
customer base upon which to grow, greater critical mass and an improved
geographic balance. Additionally, the Company has attractive international
growth opportunities through which it can take advantage of less developed,
faster growing markets.
Fort James has a broader, more complete product line offering than did
either James River or Fort Howard separately. With the majority of its tissue
capacity based on virgin pulp-based products, James River had focused its
product offerings primarily in the near-premium to premium end of the product
quality spectrum. Conversely, Fort Howard, because of its use of wastepaper for
substantially all of its fiber requirements, had focused its product offerings
primarily in the value and economy end of the product quality spectrum. The
combination of these two targeted product lines has given Fort James a more
complete range of product offerings, expanding revenue growth opportunities
across a broader line of products and a broader customer base.
The Merger has also enabled the Company to improve its geographical
balance. Although James River's eight domestic tissue manufacturing facilities
were located across the U.S., its away-from-home tissue sales were more highly
concentrated in the western U.S., from its three northwestern mills. The former
Fort Howard, on the other hand, concentrated both its away-from-home and retail
tissue sales primarily in midwestern and eastern markets surrounding its mills
in Wisconsin, Georgia and Oklahoma. Fort James' broader geographical balance
has created revenue growth opportunities, as premium product offerings can be
more fully developed in the east and midwest, and value and economy product
offerings can be more fully developed in the west.
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Fort James also has attractive international revenue growth opportunities
both in Europe and in selected emerging markets. In Europe, the Company
believes it has greater than average growth opportunities resulting from a
combination of factors. Geographically, Fort James has a strong presence in
southern European countries such as Spain, Italy, Greece and Turkey, where per
capita consumption of tissue products is growing faster than in the northern
and western European regions. Additionally, the Company is well-positioned to
take advantage of the less-developed, faster growing away-from-home channel in
Europe through the former Fort Howard's away-from-home expertise and
proprietary deinking technology. The Company is also pursuing growth
opportunities for tissue sales in selected emerging markets. In 1997, Fort
James opened a tissue converting plant in Russia, and in 1995, the Company
formed a joint venture for a tissue converting operation in Shanghai, China. In
1998, the Company announced a 50,000 ton per year tissue capacity expansion at
its Turkish joint venture, which should strengthen the venture's already
leading position in Turkey, as well as providing it with greater access to
neighboring markets in the Middle East, Asia, Russia and other former Soviet
republics.
Finally, the Company believes it is well-positioned to support these
revenue growth activities. Prior to the Merger, Fort Howard had begun
construction of a new world-class tissue machine at its Rincon, Georgia, site
and James River was aggressively pursuing incremental tissue capacity growth
through streamlined operations. This additional capacity, augmented by
productivity gains expected to occur from technology sharing between former
Fort Howard and James River operations on product formation and tissue machine
optimization, will provide a broader manufacturing base to support additional
revenue growth.
Aggressive Cost Reduction
Fort James believes the Merger will enable it to achieve significant cost
reductions that were not available to either Fort Howard or James River
individually. By combining complementary technologies, optimizing product
manufacturing and logistics across the combined system, increasing purchasing
efficiencies, eliminating redundant overhead costs and consolidating work
forces where duplication exists, Fort James expects to reduce costs and
increase productivity. As a result of these integration efforts, Fort James
expects to realize cost savings estimated to be at a $150 million annual run
rate by the end of 1998, increasing to $200 million per year over time.
Approximately 30% of the synergy savings opportunities are expected to be
derived from technology transfers between the former Fort Howard and James
River. These opportunities include the benefits of applying Fort Howard's
proprietary deinking technology in James River's deinked-based mills, both
domestically and in Europe. This proprietary deinking process has historically
allowed Fort Howard to incur lower raw material costs than its competitors.
Additional technology transfer benefits are expected to accrue from
transferring James River product formation and development technologies to
former Fort Howard products, including the application of James River's
"multi-layer" technology in Fort Howard multi-ply tissue products.
An additional approximately 30% of the synergy savings opportunities are
expected to result from savings in logistics, distribution and transportation
costs. These savings will be achieved through increased mill-to-customer
shipments, improved geographic coverage, reduced outside warehouse needs and
increased opportunities to back-haul.
Purchasing cost savings are expected to account for another approximately
30% of total synergy savings. Historically, both Fort Howard and James River
purchased significant amounts of similar raw materials, including commodities
such as wastepaper, chemicals and packaging materials. Opportunities are
arising to lower the cost of these purchased raw materials by not only
comparing current purchasing costs and moving to the low-cost supplier, but
also by taking advantage of increased economies of scale. The remaining synergy
savings are expected to accrue from eliminating organizational redundancies and
making staffing reductions.
Financing Cost Savings
Fort James is focusing on reducing financing costs, both through
refinancing of higher-cost debt and through aggressive debt reduction. In
connection with the Merger, Fort James refinanced an aggregate of approximately
$2 billion principal amount of its $4 billion of total debt. The refinancing is
discussed in Note 9 of Notes to Consolidated Financial Statements in the 1997
Annual Report, which information is incorporated herein by reference. On a
combined basis, these debt refinancing activities are expected to result in an
annual reduction in interest expense of approximately $50 million. In addition,
Fort James plans to continue to reduce interest costs through an aggressive
focus on debt reduction, which will be the primary use of the Company's free
cash flow in the near-term future.
4
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Following the Merger, the Company also simplified its capital structure
and reduced cash dividend requirements. In the fall of 1997, the Company
converted its Series P 9% Cumulative Convertible Preferred Stock, with a face
value of $287.5 million, into 15.3 million shares of Common Stock and redeemed
its Series O 8 1/4% Preferred Stock for $98.1 million in cash. In March 1998,
the Company called all of its remaining convertible preferred stocks, having a
face value of $352.7 million, for redemption as of April 10, 1998. Based on the
premium versus the applicable conversion prices, the Company believes
substantially all of these remaining preferred stocks will be converted into
9.6 million common shares. On a combined basis, these conversions and
redemptions are expected to reduce the Company's annual net dividend
requirements by approximately $44 million while increasing interest expense by
only $7 million.
(b) Financial Information About Industry Segments
Fort James operates in three principal business segments: (1) consumer
products, which includes towel and tissue products such as bathroom and facial
tissue and paper towels and napkins, and disposable tabletop and foodservice
products, such as paper and plastic cups, paper plates and plastic cutlery; (2)
packaging, which includes paper-based folding cartons for food and
pharmaceuticals; and (3) communications papers, which includes uncoated
printing, publishing and office copy papers. In 1997, consumer products,
packaging and communications papers products accounted for 84%, 10%, and 6%,
respectively, of consolidated revenues. These businesses accounted for 91%, 7%
and 2%, respectively, of 1997 income from operations before general corporate
expenses and restructuring and other unusual items. Financial information on
the Company's segments for the three years ended December 28, 1997, is
presented in Note 16 of Notes to Consolidated Financial Statements in the 1997
Annual Report, which information is incorporated herein by reference.
(c) Narrative Description of Business
Principal Products
Fort James processes basic raw material, such as wood, wood pulp,
wastepaper, paperboard and plastic resins, into products which generally are
close to or in their end use form.
Consumer Products Business
Fort James' Consumer Products Business is currently conducted primarily in
North America and Europe. In 1997, the North American Consumer Products
Business had sales of $4.4 billion, representing 59% of consolidated total
sales, and the European Consumer Products Business had sales of $1.8 billion,
representing 25% of consolidated total sales. The North American Consumer
Products Business reported operating profits, before restructuring and other
unusual items, of $845.4 million in 1997, and the European Consumer Products
Business reported operating profits, before restructuring and other unusual
items, of $202.4 million in 1997.
North American Consumer Products Business. Within Fort James' North
American Consumer Products Business, tissue-based products account for
approximately 76% of current annual sales, tabletop products account for
approximately 18% of sales, and sales of virgin and recycled pulp and fiber
account for the remaining 6% of sales. The Company's consumer tissue and
tabletop products are each sold through both retail and away-from-home
distribution channels. Sales into retail channels are supported by both branded
and private label product offerings. In North America, approximately 60% of the
Company's sales of consumer tissue and tabletop products are into retail
distribution channels and the remaining approximately 40% are into
away-from-home distribution channels.
In the U.S. retail channel, Fort James produces both branded and private
label products. The Company's principal U.S. retail tissue brands (rankings are
based on industry statistics for the 52 week period ended December 21, 1997)
include QUILTED NORTHERN bathroom tissue (the number two domestic bathroom
tissue brand), BRAWNY paper towels (the number two domestic paper towel brand),
MARDI GRAS printed napkins (the leading domestic paper napkin brand) and paper
towels, VANITY FAIR premium dinner napkins (the number three domestic paper
napkin brand), NORTHERN paper napkins, SOFT'N GENTLE bath and facial tissue,
SO-DRI paper towels, and GREEN FOREST, the leading domestic line of
environmentally positioned, recycled tissue products. The Company's principal
retail tabletop brand is its number two-ranked DIXIE brand of disposable cups
and plates.
Fort James believes it is also the leading supplier of private label
tissue products, where it estimates its share in excess of 40% of U.S. private
label tissue sales. The Company's private label customers include retailers
such as Wal-Mart, Kroger, Aldi and Federated Stores. Additionally, the Company
believes it is the leading supplier of both tissue and disposable tabletop
products to the warehouse club channel, which includes Price/Costco and Sam's
Clubs.
5
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The U.S. away-from-home channel, in which the Company sells its tissue and
tabletop products to foodservice, janitorial supply and sanitary paper
distributors for use in restaurants, offices, factories, hospitals, schools and
hotels, is also an important distribution channel for the Company. Fort James
believes it is the leading producer of tissue products for the 2.2 million ton
U.S. away-from-home channel, where it estimates its share at approximately 40%
of total industry revenues. Based on internal Company estimates, Fort James
believes it holds the leading position in the sale of away-from-home towels,
bathroom tissue, and napkins and the number two position in away-from-home
wipers and facial tissue. Fort James is also one of the largest producers of
disposable cups, plates and related products for the away-from-home foodservice
industry.
European Consumer Products Business. Within Fort James' European Consumer
Products Business, tissue-based products account for approximately 85% of
current annual sales, feminine hygiene products account for 6% of sales,
ancillary products, such as health care and pharmacy items, account for 5% of
sales, and unconverted tissue parent rolls account for the remaining 4% of
sales. Fort James sells its tissue products through both retail and
away-from-home distribution channels in Europe. Sales into retail channels are
supported by both branded and private label product offerings. In Europe,
approximately 75% of sales of consumer products are into retail distribution
channels and the remaining approximately 25% are into away-from-home channels.
With production facilities in 10 countries, Fort James has a broad,
pan-European base, and is among the category leaders in most European
countries, with the exception of Germany, Austria and Switzerland, where the
Company has no operations. The Company's largest European operations are in
France and the United Kingdom, which account for approximately 40% and 30%,
respectively, of the European Consumer Products Business' sales. Based on its
estimates, the Company believes it holds the leading position in French tissue
sales, with a share greater than 35%, and the number two position in the
British Isles, with a share greater than 30%. Fort James is also
well-represented in the faster-growing southern European and Mediterranean
regions including Spain, Italy, Greece and Turkey, where the Company believes
its shares of tissue sales approximate 14%, 10%, 16% and 60%, respectively.
The Company's principal European brands include LOTUS bathroom tissue and
VANIA feminine hygiene products, both of which hold leading positions in
France, COLHOGAR, a leading Spanish bathroom tissue, TENDERLY bathroom tissue
sold in Italy, and KITTENSOFT and INVERSOFT, bathroom tissue brands sold in the
British Isles.
Packaging Business
The Packaging Business is conducted primarily in North America. In 1997,
the Packaging Business had sales of $783 million, representing 10% of
consolidated sales, and operating profits before restructuring and other
unusual items of $81.3 million. During 1996, the Company downsized this
business through the sale of the plastic-based Flexible Packaging and the
related Inks Divisions, which had combined annual sales of approximately $500
million. Following these divestitures, the Packaging Business is concentrated
primarily on the sale of paper-based folding cartons for packaging food, health
care products and other consumer products. Folding cartons and other converted
packaging account for more than 80% of the business' current annual sales, with
the balance represented by sales of unconverted paperboard.
The Company's carton operations are backward integrated to a 300,000 ton
per year bleached paperboard operation and a 320,000 ton per year coated
recycled paperboard operation. The bleached paperboard mill also provides cup
and plate stock for the Company's DIXIE line of disposable tabletop products.
The Company estimates it is currently ranked number three in sales of folding
cartons in the United States, and it believes it holds leading positions in the
sale of cartons for ice cream, cereal, meats, frozen foods and microwave
packaging.
Communications Papers Business
The Communications Papers Business is conducted primarily in the western
United States. In 1997, the Communications Papers Business had sales of $468
million, representing 6% of total consolidated sales, and operating profits
before restructuring and other unusual items of $19.8 million. In 1995, the
Company spun off Crown Vantage Inc., which represented a large part of the
Company's Communications Papers Business, thus decreasing its exposure to the
cyclical printing and publishing papers market. Following the spin-off, the
Communications Papers Business is concentrated on the sale of printing and
publishing papers used in brochures, catalogs, manuals, direct mail and
advertising inserts, and on cut-size office printing and copying papers used in
high-speed printers, copiers and offset duplicators.
Marketing
The Company's North American Consumer Products Business has organized its
marketing efforts along distribution channels and by product line. Marketing of
the Company's packaging products and communications papers is managed at
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the product group level. Fort James' consumer products are marketed directly to
customers both through national and regional sales organizations. The Company's
retail sales force markets both consumer tissue and tabletop products directly
to grocery stores, drug stores and mass merchandisers. Separate sales forces
market the Company's away-from-home tissue products and its away-from-home
foodservice products. Away-from-home tissue products are largely sold through
outside distributors, who generally focus on specific market segments. Regional
distribution centers located throughout the United States are utilized to
minimize inventories and transportation costs.
Marketing of Fort James' consumer products within Europe is generally
similar to such efforts in the United States. However, national (individual
country) sales organizations are necessary due to customer preferences and
language and cultural differences among countries. Additionally, logistics and
distribution costs remain much higher in Europe than in the United States, and
thus, the majority of products are produced and sold within national or
regional markets.
Raw Materials and Supplies
Fort James utilizes a variety of raw materials in its manufacturing
processes. These include wood, wood pulp, wastepaper, selected base papers and
boards, plastic films, resins and chemicals. Fort James believes there is
generally a sufficient supply of these or substitutable raw materials.
In addition to these materials, pulp and paper production depends on an
adequate supply of water, electric power and various forms of fuel for the
generation of steam and electricity. The Company's major sources of purchased
energy include electricity, natural gas, coal and petroleum coke. The Company
generates approximately 45% of its North American electrical power needs, with
a number of cogeneration facilities at its major facilities.
The Company's paper products are manufactured principally from wood pulp
and wastepaper both of which are produced internally as well as purchased from
external sources. The Company produces secondary fiber pulp through the
recycling of wastepaper and other reclaimable fiber sources. The capacity of
Fort James' pulping facilities, in North America and Europe, is summarized as
follows:
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Capacity
Pulp Type (Tons Per Year)
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Chemical ........... 1,895,000
Mechanical ......... 120,000
Secondary .......... 1,963,000
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Total .............. 3,978,000
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In addition to the Company's internal sources, several types of pulp are
purchased from other suppliers in the United States, Canada and other parts of
the world. Purchased pulp is used to supply partially integrated paper mills,
to obtain types of pulp not produced by the Company, or to minimize
transportation costs. Fort James is a net seller in North America of
approximately 250,000 tons per year of market pulp. These market pulp sales are
reported in the North American Consumer Products Business. The Company's paper
machines in Europe are supplied through a combination of Fort James' North
American pulp production, secondary fiber pulp and purchased chemical pulp.
Substantially all of the pulp acquired within the United States is purchased at
or below prevailing market prices.
The former Fort Howard lead the industry in developing tissue products
from recycled wastepaper. Currently, the Company recycles approximately 2.6
million tons of wastepaper annually. The Company uses wastepaper in making a
large portion of its consumer and away-from-home tissue products in both North
America and Europe, as well as in making its coated recycled paperboard for
folding cartons and in certain communications papers. The Company believes that
its use of wastepaper gives it a cost advantage over other tissue-producing
competitors. The Company has developed a network for obtaining deinking and
other grades of wastepaper. A large portion of the domestic wastepaper
requirements for tissue products is sourced through Harmon Associates, a
wholly-owned subsidiary. The remainder of the Company's wastepaper requirements
are sourced through either independent collection agents or through an in-house
wastepaper purchasing group.
Pulpwood and woodchips used in Fort James' pulp mills are principally
obtained from leased lands, lands covered by long-term cutting rights
agreements, pulpwood and woodchip supply contracts and open market purchases.
All of the timberlands controlled by Fort James or it affiliates are managed on
a sustained-yield basis, and the rate of harvesting is generally equal to or
less than the average growth rate. Fort James presently has controlled access to
the timber supply from a total of approximately 2.8 million acres of timberland.
The majority of this acreage is located in Canada and leased by Fort
James-Marathon, Ltd. and its joint venture affiliate, Dubreuil Forest Products
Limited.
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Fort James also purchases bleached paperboard from outside vendors for use
in folding cartons, plates and cups. Fort James produces approximately
three-quarters of its bleached paperboard needs at its Naheola, Alabama, mill.
The balance of the Company's requirements is purchased from outside bleached
producers, over two-thirds of which is acquired pursuant to long-term contracts
with prices that are at or below prevailing market prices.
Fort James purchases a significant amount of plastic resins, which are
utilized in the production of tabletop products. The North American Consumer
Products Business uses approximately 160 million pounds per year of polystyrene
and polypropylene plastic resins in producing plastic cups and other
containers; lids for plastic and paper containers; and plastic cutlery. The
Company purchases plastic resins pursuant to negotiated arrangements with a
variety of suppliers.
Trademarks and Patents
Fort James has a large number of trademarks and trade names registered
domestically and in certain foreign countries under which it conducts its
business. Trademarks include, among others, QUILTED NORTHERN, BRAWNY, MARDI
GRAS, VANITY FAIR, NICE'N SOFT, SOFT'N GENTLE, VANIA, MARINA, DIXIE, SUPERWARE,
SO-DRI, GREEN FOREST, LOTUS, COLHOGAR, TENDERLY, ENVISION, PREFERENCE,
DIXIE/MARATHON, QUILT-RAP, QWIK-CRISP, EUREKA!, and WORD PRO. The Company
considers its trademarks, in the aggregate, to be material to its business, and
consequently, seeks trademark protection by all available means. The Company
also has a variety of material patents and licenses related to its business.
While, in the aggregate, the foregoing patents and licenses are of material
importance to Fort James' business, the Company believes the loss of any one or
any related group of such intellectual property rights would not have a
material adverse effect on its operations.
Seasonal Business
While seasonal variation in demand is not a major factor in the Company's
business, the first and fourth quarters of the year are generally the lowest in
net sales and operating income. Net sales and profit margins in the Consumer
Products Business are generally higher in the spring and summer (second and
third quarters) compared to the winter (fourth and first quarters) due to the
seasonal volume strength of the retail DIXIE paper cup and plate business
during the summer months. In addition, the away-from-home tissue portion of the
Consumer Products Business generally experiences softer sales volumes in the
fourth quarter, when many industrial customers are on extended holiday
shutdowns. Profit margins for the Company have also historically been lower in
the first and fourth quarters because of holiday, vacation and maintenance
shutdowns and higher seasonal energy costs.
Customers
Sales to Fort James' five largest customers in the aggregate accounted for
approximately 15% of consolidated net sales in 1997. For 1997, sales to the
five largest customers of the Consumer Products Business in North America and
Europe accounted for approximately 25% and 22% of sales, respectively; sales to
the five largest customers of the Packaging Business represented approximately
31% of its sales; and sales to the five largest customers of the Communications
Paper Business accounted for approximately 47% of its sales. There were no
individual customers, however, to which sales exceeded 10% of Fort James'
consolidated net sales. The Company believes the loss of any single customer
would not have a material adverse effect on its financial condition.
Order Backlog
In the Consumer Products and Packaging Businesses, the Company maintains
product inventories to meet delivery requirements of its customers; therefore,
the backlog of customer orders for these segments is not significant. In the
Communications Papers Business, the Company's backlogs were generally 10 to 30
days depending on the product, as of December 28, 1997, and 10 to 25 days as of
December 29, 1996. Order backlog does not vary substantially on a seasonal
basis.
Competition
Fort James experiences intense competition in both North America and
Europe. Fort James' competitors include a number of large diversified paper and
consumer products companies, such as The Procter & Gamble Company,
Kimberly-Clark Corporation and Georgia-Pacific Corporation and large European
companies such as Svenska Cellulosa Aktiebolaget (SCA). Fort James also
competes with smaller low-cost regional producers that seek to displace the
Company's private label products mainly through price competition. The Company
competes on the basis of price, product quality and performance, product
development effectiveness, service and sales and distribution support.
Aggressive competitive pricing actions, which may become more intense due to
changing industry conditions, could reduce revenues and could adversely affect
the Company's operating results or financial condition. Increased marketing
expenditures by manufacturers of competing branded
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products could prompt the Company to increase its advertising or promotional
expenditures for key branded products. Markets for consumer products are
generally regional or national, with limited imports and exports, due to the
high bulk and low density of these products, as well as brand recognition
factors. Markets for communications papers, however, can be impacted by
increased imports from Europe, Asia and Latin America.
Research and Development
Fort James' major research and development facilities are located in
Neenah, Wisconsin and Kunheim, France. During 1997, the Company announced that
research and development facilities previously located in Camas, Washington;
Milford, Ohio and Green Bay, Wisconsin would be consolidated into the facility
in Neenah, Wisconsin. The former Fort Howard laboratories located in Green Bay,
Wisconsin will also be consolidated into the Neenah facility. The Company also
has pilot plants located in Neenah, Wisconsin and Kunheim, France. The pilot
plant facilities previously located in Camas, Washington and Milford, Ohio will
be consolidated into the Neenah facility. The Company has engineering centers
located in Green Bay, Wisconsin; Kalamazoo, Michigan and Kunheim, France. The
former James River engineering center located in Neenah, Wisconsin will be
consolidated into the Green Bay facility.
The primary efforts at these facilities are to improve existing products,
develop new processes and products, improve product quality and process
control, and provide technical assistance in adhering to regulatory standards.
In addition, emphasis is placed upon expanding the Company's capability to
deink a broader range of wastepaper grades and improving environmental
processes. Other information with respect to Fort James' research and
development efforts is set forth in Note 1 of Notes to Consolidated Financial
Statements in the 1997 Annual Report, which information is incorporated herein
by reference.
Environmental Matters
Like its competitors, Fort James is subject to extensive regulation by
various federal, state, provincial, and local agencies concerning compliance
with environmental control statutes and regulations. These regulations impose
limitations on the discharge of materials into the environment, including
effluent and emission limitations, as well as require the Company to obtain and
operate in compliance with the conditions of permits and other governmental
authorizations.
Fort James has made and will continue to make substantial capital
investments and operating expenditures, as well as production adjustments, in
order to comply with increasingly stringent standards for air, water, and solid
and hazardous waste regulations. During 1997, capital expenditures totaling
approximately $15 million were made by Fort James for pollution control
facilities and equipment. Capital expenditures for such purposes on existing
facilities are estimated to be approximately $19 million for 1998. The
estimated 1998 capital expenditures exclude any expenditures which may be
required by the U.S. Environmental Protection Agency's ("EPA") "cluster
rules" as set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental Matters," in the 1997
Annual Report which information is incorporated herein by reference. Estimates
of costs for future environmental compliance are necessarily imprecise due to,
among other things, the continuing emergence of new environmental laws and
regulations and environmental control or process technology developments. While
the Company believes that its environmental control costs are likely to
increase as environmental regulations become broader and more stringent, Fort
James is unable to predict the amount or timing of such increases. Such future
regulations could materially increase the Company's capital requirements in
future years.
Further information pertaining to hazardous substance cleanup, accrued
environmental liabilities and other environmental matters affecting the Company
is set forth in "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Environmental Matters" and Note 15 of Notes to
Consolidated Financial Statements in the 1997 Annual Report, which information
is incorporated herein by reference.
Year 2000 Date Conversion
In 1997, the Company commenced an enterprise-wide Year 2000 date
conversion project to address all necessary code conversion, software
replacement, testing and implementation. The financial impact of making the
required system modifications and replacements to remedy Year 2000 issues prior
to December 31, 1999, has not been and is not expected to be material to the
Company's consolidated financial position or results of operations. The Company
expects its Year 2000 conversion to be completed on a timely basis; however,
due to the interdependent nature of computer systems there can be no assurance
that the systems of other entities on which the Company's systems rely will
also be timely converted or that any such failure to convert by another entity
would not have an adverse effect on the Company's systems.
9
<PAGE>
Personnel
Fort James currently employs approximately 29,000 people. Contracts
covering approximately 1,000 domestic and Canadian employees are scheduled for
renegotiation in 1998.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Financial information regarding the Company's domestic and foreign
operations is included in Note 16 of Notes to Consolidated Financial Statements
in the 1997 Annual Report, which information is incorporated herein by
reference. International operations are generally characterized by the same
conditions discussed in the narrative description of business and may also be
affected by additional elements including changing currency values and
different rates of inflation and economic growth. The effects of these
additional elements are more significant in the Consumer Products segment,
which includes substantially all of the Company's international business.
10
<PAGE>
ITEM 2. PROPERTIES
The pulp and papermaking facilities of Fort James, the number of paper or
paperboard machines, and the principal types of products produced at each
facility are as follows:
<TABLE>
<CAPTION>
Business Unit Facility Locations (A) Machines Principal Products
- ---------------------------------- ----------------------------------------- ---------- ---------------------
<S> <C> <C> <C>
Consumer Products-North America Pennington, Alabama (Naheola)(B) 5 Tissue
Savannah, Georgia(C) 4
Old Town, Maine(B) 2
Muskogee, Oklahoma(C) 5
Halsey, Oregon(C) 2
Clatskanie, Oregon (Wauna)(B) 3
Camas, Washington(B) 6
Green Bay, Wisconsin (East)(C) 6
Green Bay, Wisconsin (West)(C) 11
Marathon, Canada Kraft pulp
Consumer Products-Europe Nokia, Finland(C) 3 Tissue
Gien, France 3
Louviers (Hondouville), France(E) 2
Muntzenheim (Kunheim), France 2
Patras (Achaia), Greece 1
Castelnuovo, Italy 1
Cava dei Tirreni, Italy 1
Potenza (Avigliano), Italy 1
Cuijk, Netherlands(E) 2
Allo, Spain 2
Karamursel, Turkey(C)(F) 2
Ramsbottom, U.K. 3
Mid-Glamorgan (Bridgend), U.K.(C) 3
Larne, U.K.(C) 2
North Sheffield (Oughtibridge), U.K.(C) 2
Packaging Kalamazoo, Michigan(B) 2 Recycled paperboard
Pennington, Alabama (Naheola)(B) 2 Bleached paperboard
Communications Papers Clatskanie, Oregon (Wauna)(B)(D) 2 Uncoated groundwood,
uncoated freesheet
Camas, Washington(B) 6 Uncoated freesheet
--
Total 86
==
</TABLE>
- ---------
(A) The locations listed for Fort James' consolidated subsidiaries are held in
fee by the Company.
(B) Includes one chemical pulp facility.
(C) Includes one secondary fiber facility.
(D) Includes one groundwood pulp facility.
(E) Includes two secondary fiber facilities.
(F) Unconsolidated subsidiary.
11
<PAGE>
Fort James' network of manufacturing facilities provides for an annual
virgin and recycled pulp capacity of approximately 4.0 million tons and an
annual paper and paperboard capacity of approximately 4.3 million tons. The
Company believes that its production facilities are suitable for their purposes
and are adequate to support their businesses. The extent of utilization of
individual facilities varies. During 1997, Fort James' pulp and paper mills
generally had production levels of over 90% of capacity.
Fort James also operates converting plants which perform a variety of
converting operations. These converting plants (excluding converting operations
which may be performed at pulp and papermaking facilities already listed above)
are summarized as follows:
<TABLE>
<CAPTION>
Number of Converting Plants
-------------------------------------
Principal Products Domestic International Total
- ------------------------------------------------ ---------- --------------- ------
<S> <C> <C> <C>
Paper and plastic foodservice products ......... 10 4 14
Folding cartons and other packaging ............ 15 15
Tissue and other converting .................... 12 12
-- -- --
Total ....................................... 25 16 41
== == ==
</TABLE>
Fort James' manufacturing and converting facilities are complemented by an
integrated network of sales offices and distribution terminals. The Company
also operates a warehouse and terminal service that provides tug, barge,
freight interchange and other services on the Columbia, Willamette and Snake
Rivers in the Pacific Northwest.
ITEM 3. LEGAL PROCEEDINGS
During 1994, James River was sued in Connecticut and Alabama by certain
former holders of James River's 10- 3/4% Debentures due on October 1, 2018, all
of which were retired by means of a tender offer to all holders or redeemed on
November 2, 1992. In June 1997, the Alabama court (Circuit Court, Morgan County,
Alabama) granted James River summary judgement, and dismissed the action. The
plaintiffs have appealed to the Alabama Supreme Court. In 1996 and 1997, the
Company settled the claims of an institutional holder and the Connecticut
plaintiffs, representing approximately 55% of the debentures. In May 1997, the
Attorney General of the State of Florida filed a civil action in the Gainesville
Division of the United States District Court for the Northern District of
Florida against the Company and eight other manufacturers of sanitary paper
products alleging violations of federal and state antitrust and unfair
competition laws. Fort James believes these cases are without merit and intends
to defend them vigorously. These legal proceedings are discussed in further
detail in Note 15 of Notes to Consolidated Financial Statements in the Company's
1997 Annual Report, which information is incorporated herein by reference.
In 1997, Fort James received a notice of violation from the Maine
Department of Environmental Protection concerning alleged air emission license
violations between 1991 and 1997 and proposed a penalty of approximately
$130,000. The Company is currently negotiating a settlement.
Other than the cases discussed above and the information set forth in Note
15 of Notes to Consolidated Financial Statements in the Company's 1997 Annual
Report, the Company is not involved in any litigation the outcome of which
management believes would have a materially adverse effect on the Company's
results of operations, financial condition or competitive position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of 1997.
12
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table reflects the name, age, length of service as an
officer of Fort James, and current position for each of the current executive
officers of the Company as of February 23, 1998. Previous positions and areas
of responsibility over the past five years are included in the footnotes that
follow the table. Each officer is elected by the Board of Directors to serve a
one-year term. There is no family relationship between any of these officers or
between any such officer and any director of the Company; nor is there any
arrangement or understanding between any officer and any other person pursuant
to which the officer was selected.
<TABLE>
<CAPTION>
Calendar
Year First
Elected as
Name Age an Officer Current Position
- ------------------------------ ----- ------------ ----------------------------------------------------------
<S> <C> <C> <C>
Miles L. Marsh (1) 50 1995 Chairman of the Board of Directors,
Chief Executive Officer
Michael T. Riordan (2) 47 1997 President and Chief Operating Officer
Clifford A. Cutchins, IV (3) 49 1990 Senior Vice President, General Counsel,
Corporate Secretary
Daniel J. Girvan (4) 49 1993 Senior Vice President, Human Resources and Administration
James K. Goodwin (5) 51 1991 President, North American Consumer Products
Ernst A. Haberli (6) 49 1996 Executive Vice President and Chief Financial Officer
R. Michael Lempke (7) 45 1997 Senior Vice President and Treasurer
John F. Lundgren (8) 46 1995 President, European Consumer Products
Joseph W. McGarr (9) 46 1996 Senior Vice President, Planning and Strategy
Joe R. Neil (10) 59 1996 President, Communications Papers
William A. Paterson (11) 54 1996 Senior Vice President and Controller
Timothy G. Reilly (12) 47 1997 President, North American Commercial Products
John F. Rowley (13) 57 1997 Executive Vice President, Operations and Logistics
B. Gregory Stroh (14) 50 1997 President, Packaging
</TABLE>
- ---------
(1) Mr. Marsh assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He joined
James River in October 1995 as Chief Executive Officer and was appointed
to the position of Chairman of the Board of Directors of James River in
January 1996. From 1991 to 1995, he served as Chairman and Chief Executive
Officer of Pet, Inc. He also served as President and Chief Operating
Officer of Pet's former parent company, Whitman Corporation, from 1989 to
1991. Prior to that, he spent eight years in executive positions with
various divisions of Dart & Kraft Inc., Kraft Inc. and General Foods USA,
all of which are part of Philip Morris Companies, Inc.
(2) Mr. Riordan assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as Chief Executive Officer of Fort Howard since September 1996 and
was elected to the postion of Chairman of the Board of Directors of Fort
Howard in February 1997. He had also served as President and Chief
Operating Officer of Fort Howard since 1992 and as Vice President of Fort
Howard from 1983 to 1992. Prior to that, he held management positions with
International Mineral & Chemical Corporation, Rockwell International, and
Rexnord, Inc.
(3) Mr. Cutchins assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as Senior Vice President, General Counsel, Corporate Secretary, for
James River since he joined the company in 1990. From 1982 to 1990, he
served as Partner with the law firm of McGuire, Woods, Battle & Boothe,
L.L.P., which he joined in 1975.
(4) Mr. Girvan assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as Senior Vice President, Human Resources, for James River since
1993. He joined James River in 1986 as Director, Human Resources,
Communications Papers, in connection with the acquisition of Crown
Zellerbach Corporation, which he joined in 1977.
13
<PAGE>
(5) Mr. Goodwin assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as President, North American Consumer Products, for James River
since 1992. He joined James River in 1991 as Vice President, Corporate
Marketing Strategy. Prior to joining James River, he served as Vice
President, Corporate Sales, for The Procter & Gamble Company, which he
joined in 1968.
(6) Mr. Haberli assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as Senior Vice President, Strategy, for James River, since he
joined the Company in 1996. From 1990 to 1995, he served as President of
Pet International. He also held various executive positions in strategic
planning and development and international business management with Kraft
General Foods, Kraft International and Kraft Inc. since 1985.
(7) Mr. Lempke assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as Vice President and Treasurer of Fort Howard since 1994 and as
Treasurer since 1989. He joined Fort Howard in 1987 as Manager of Treasury
Operations. Prior to that, he had spent 10 years in the financial services
industry.
(8) Mr. Lundgren assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as President, European Consumer Products, for James River since
1995. He joined James River in 1982 as Director of Marketing, Northern
Paper Products, in connection with the acquisition of American Can
Company. He served in various managerial and executive positions from 1982
to 1995.
(9) Mr. McGarr assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as Vice President, Cost and Systems Effectiveness, for James River
since 1996. He joined James River in 1982 as Director of Strategy,
Consumer Products Business, in connection with the acquisition of American
Can Company. He served in various managerial and executive positions from
1982 to 1996.
(10) Mr. Neil assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as President, North American Commercial Products, for James River
since 1996. He joined James River in 1986 as Vice President, General
Manager, White Papers Business, in connection with the Crown Zellerbach
acquisition. He held various managerial and executive positions from 1986
to 1996.
(11) Mr. Paterson assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He joined
James River in 1996 as Vice President, Controller and during that same
year was named Senior Vice President and Controller. Prior to joining
James River, he served as Senior Vice President Finance and
Administration, for General Foods Corporation, and held various executive
positions in finance with Hobart Corporation, Dart Industries and Kraft
Inc.
(12) Mr. Reilly assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as Senior Vice President, Commercial Sales and Marketing, for Fort
Howard since 1996 and as Vice President, Commercial Marketing, from 1987
to 1996. He joined Fort Howard in 1978 and held various managerial and
executive positions from 1978 to 1996.
(13) Mr. Rowley assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He had
served as Executive Vice President, Operations, for Fort Howard since
1988. He joined Fort Howard in 1984 with executive responsibility for the
company's paper manufacturing facility in Muskogee, Oklahoma, and served
as Vice President, Manufacturing, for Fort Howard, from 1985 to 1988.
(14) Mr. Stroh joined Fort James in 1997 as President, Packaging. He had served
as President and Chief Executive Officer of Custom Industries since 1995.
From 1992 to 1995 he served as Executive Vice President, Operations and
Technology, for Pet, Inc. He also held various executive and operating
management positions with Kraft Inc. for over 22 years, including the
position of Vice President and Director of Commercial Operations and
Business Development, from 1989 to 1991.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange.
Information with respect to quarterly high and low sales prices for Fort James'
common stock, quarterly dividends and other quarterly information related to
common shares is contained in Note 18 of Notes to Consolidated Financial
Statements in the 1997 Annual Report, which information is incorporated herein
by reference. The payment of dividends and the amounts thereof will be
dependent upon Fort
14
<PAGE>
James' earnings, financial position, cash requirements and other relevant
factors. Common shares of the Company reserved for issuance are described in
Note 11 of Notes to Consolidated Financial Statements in the 1997 Annual
Report, which information is incorporated herein by reference. In addition,
covenants of certain of the Company's senior note agreements impose
restrictions on the amount of net worth which, in turn, may limit the funds
available for the payment of dividends; these covenants are described under the
heading "Liquidity and Capital Resources -- Financing Activities" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in Note 9 of Notes to Consolidated Financial Statements in the
1997 Annual Report, which information is incorporated herein by reference. On
February 23, 1998, there were approximately 11,800 shareholders of record of
the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
See Selected Financial Data on page 59 of the 1997 Annual Report, which
information for fiscal years 1993 through 1997 is incorporated herein by
reference. The merger with Fort Howard was accounted for as a
pooling-of-interests; accordingly, the Company's consolidated financial data
has been restated for all periods prior to the business combination to include
the combined results of James River and Fort Howard. For all other
acquisitions, the data presented for each period reflects operations acquired
from the respective acquisition dates. Acquisitions, dispositions and other
transactions from 1995 through 1997 are described in Note 2 of Notes to
Consolidated Financial Statements in the 1997 Annual Report, which information
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 21 through 30 of the 1997 Annual Report, which
information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements and selected quarterly financial
information, under the headings "Consolidated Statements of Operations,"
"Consolidated Balance Sheets," "Consolidated Statements of Cash Flows,"
"Consolidated Statements of Changes in Capital Accounts" and "Notes to
Consolidated Financial Statements" on pages 31 through 57 of the 1997 Annual
Report, which information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting and financial disclosures prior to the date of the most recent
financial statements included herein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the Company's Directors, see "Election of
Directors," "Information on Nominees," "Board of Directors and Committees" and
"Compensation of Directors" on pages 1 through 4 and "Section 16(a) Beneficial
Ownership Reporting Compliance" on page 15 of the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on April 23, 1998 (the "1998
Proxy Statement"), which information is incorporated herein by reference.
Information with respect to the Company's Executive Officers is contained under
the heading "Executive Officers of the Registrant" on pages 13 and 14 of Part I
of this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Directors," "Stock Option Plan for Outside Directors"
and "Retirement Plan for Outside Directors" on pages 3 and 4, "Executive
Compensation" on pages 7 through 11, "Performance Graph" on page 11, and
"Report of the Compensation Committee of the Board of Directors on Executive
Compensation" on pages 12 through 14 of the Company's 1998 Proxy Statement,
which information is incorporated herein by reference.
15
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Stock Ownership of Directors and Executive Officers" and "Principal
Shareholders" on pages 5 and 6 of the Company's 1998 Proxy Statement, which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Information on Nominees" on pages 2 and 3 of the Company's 1998 Proxy
Statement, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report:
1) Financial Statements:
The Consolidated Financial Statements of Fort James Corporation and
Subsidiaries, the Notes to Consolidated Financial Statements, and the
Report of Independent Accountants listed below are incorporated herein by
reference from pages 31 through 58 of the Company's 1997 Annual Report.
With the exception of the aforementioned information, and the information
incorporated by reference in numbered Items 1, 3, 5, 6, 7 and 8, no other
data appearing in the 1997 Annual Report is deemed to be "filed" as part of
this Form 10-K Annual Report.
"Consolidated Statements of Operations" for each of the three fiscal years
in the period ended December 28, 1997, (see page 31 of the 1997 Annual
Report)
"Consolidated Balance Sheets" as of December 28, 1997, and December 29,
1996, (see page 32 of the 1997 Annual Report)
"Consolidated Statements of Cash Flows" for each of the three fiscal years
in the period ended December 28, 1997, (see page 33 of the 1997 Annual
Report)
"Consolidated Statements of Changes in Capital Accounts" for each of the
three fiscal years in the period ended December 28, 1997, (see page 34 of
the 1997 Annual Report)
"Notes to Consolidated Financial Statements" (see pages 35 through 57 of
the 1997 Annual Report)
"Report of Independent Accountants" (see page 58 of the 1997 Annual Report)
with respect to the financial statements listed above
2) Financial Statement Schedules:
None required
16
<PAGE>
3) Exhibits:
Each Exhibit is listed according to the number assigned to it in the
Exhibit Table of Item 601 of Regulation S-K. The Exhibits identified with
an asterisk (*) are management contracts or compensatory plans available to
certain key employees or directors.
<TABLE>
<CAPTION>
Exhibit
Number Description Section
- ---------- -------------------------------------------------------------------------------------------------------- --------
<S> <C> <C>
2(a) Agreement and Plan of Merger dated as of May 4, 1997, among the Company, James River
Delaware, Inc. and Fort Howard Corporation (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated May 14, 1997).
3(a) James River Corporation of Virginia Amended and Restated Articles of Incorporation, as amended
effective January 4, 1990 (incorporated by reference to Exhibit 3(a) to the Company's Annual Report
on Form 10-K for the year ended December 26, 1993).
3(b) James River Corporation of Virginia Articles of Amendment to the Amended and Restated Articles of
Incorporation Designating the Series O 8 1/4% Cumulative Preferred Stock ($10.00 par value),
effective October 1, 1992 (incorporated by reference to Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the year ended December 26, 1993).
3(c) Articles of Amendment to the Amended and Restated Articles of Incorporation of James River
Corporation of Virginia Designating the Series P 9% Cumulative Convertible Preferred Stock
($10.00 par value) (incorporated by reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K dated June 29, 1994).
3(d) Articles of Amendment to the Amended and Restated Articles of Incorporation as of August 13, 1997
(incorporated by reference to Exhibit 3(d) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 28, 1997).
3(e) Amended and Restated Bylaws of Fort James Corporation as of August 13, 1997 (incorporated by
reference to Exhibit 3(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 28, 1997).
4(a) Amended and Restated Rights Agreement dated May 12, 1992, between James River Corporation of
Virginia and Nations Bank of Virginia, N.A., as Rights Agent, and Amendment No. 1 to such
Agreement, dated June 8, 1992 (incorporated by reference to Exhibits 2 and 3, respectively, to the
Company's filing of Amendment 1 dated July 28, 1992, to its Form 8-A dated March 3, 1989).
4(b) Amendment No. 2 to Amended and Restated Rights Agreement dated May 12, 1992, as amended by
Amendment No. 1, dated June 8, 1992, between James River Corporation of Virginia and Wachovia
Bank of North Carolina, N.A. dated January 31, 1996 (incorporated by reference to Exhibit 4(b) to
the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
4(c) Fort James Corporation $2,500,000,000 Credit Agreement dated as of August 13, 1997, amended and
restated as of October 31, 1997 (incorporated by reference to Exhibit 10(g) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 28, 1997).
4(d) In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K, various other instruments defining the
rights of holders of long-term debt of the Registrant and its subsidiaries are not being filed because
the total amount of securities authorized and outstanding under each such instrument does not exceed
10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant
hereby agrees to furnish a copy of any such instrument to the Commission upon request.
10(a)* Amended and Restated Employment Agreement, dated as of June 10, 1997 between James River and
Miles L. Marsh (incorporated by reference to Exhibit 10.3 to the Company's filing of Form S-4 dated
June 26, 1997).
10(b)* Amended and Restated Employment Agreement, dated as of June 10, 1997 between James River and
Michael T. Riordan (incorporated by reference to Exhibit 10.4 to the Company's filing of Form S-4
dated June 26, 1997).
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Section
- -------- ----------------------------------------------------------------------------------------------------- --------
<S> <C> <C>
10(c)* Form of Employment Agreement between the Registrant and executive officers of Fort Howard
(incorporated by reference to Exhibit 10.5 to the Company's filing of Form S-4 dated June 26, 1997).
10(d)* Form of Employment between the Registrant and executive officers of the Registrant (incorporated
by reference to Exhibit 10.6 to the Company's filing of Form S-4 dated June 26, 1997).
10(e)* James River Corporation of Virginia Deferred Compensation Plan for Outside Directors, amended
and restated effective as of July 1, 1989 (incorporated by reference to Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year ended April 30, 1989).
10(f)* James River Corporation of Virginia Stock Option Plan for Outside Directors, amended and restated
as of April 11, 1991 (incorporated by reference to Exhibit 10(e) to the Company's Transition Report
on Form 10-K for the transition period from April 30, 1990 to December 30, 1990).
10(g)* James River Corporation of Virginia Retirement Plan for Outside Directors, 1994 Amendment and
Restatement, effective February 18, 1994 (incorporated by reference to Exhibit 10(h) to the
Company's Annual report on Form 10-K for the year ended December 26, 1993).
10(h)* James River Corporation of Virginia Director Stock Ownership Plan, effective April 25, 1996
(incorporated by reference to Exhibit B to the Company's Proxy Statement dated March 13, 1996).
10(i)* James River Corporation of Virginia Amended and Restated Stock Option Plan, dated April 12,
1984, and subsequently amended through October 1, 1990 (incorporated by reference to Exhibit 4 to
the Company's Registration Statement on Form S-8 (Post-Effective Amendment No. 1 to
Registration Statement No. 2-83979), dated December 18, 1984, and Exhibit 10(c) to the Company's
Quarterly Report on Form 10-Q for the quarter ended October 28, 1990).
10(j)* James River Corporation of Virginia 1987 Stock Option Plan, 1993 Amendment and Restatement,
effective as of December 16, 1993 (incorporated by reference to Exhibit 10(j) to the Company's
Annual Report on Form 10-K for the year ended December 26, 1993).
10(k)* James River Corporation of Virginia 1996 Stock Incentive Plan, effective April 25, 1996
(incorporated by reference to Exhibit A to the Company's Proxy Statement dated March 13, 1996).
10(l)* James River Corporation of Virginia Deferred Stock Plan, 1993 Amendment and Restatement,
effective December 16, 1993 (incorporated by reference to Exhibit 10(l) to the Company's Annual
Report on Form 10-K for the year ended December 26, 1993).
10(m)* James River Corporation of Virginia Supplemental Deferral Plan, 1993 Amendment and
Restatement, effective as of January 1, 1994 (incorporated by reference to Exhibit 10(m) to the
Company's Annual Report on Form 10-K for the year ended December 26, 1993).
10(n)* James River Corporation of Virginia Management Incentive Plan, effective as of January 25, 1996
(incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10(o)* James River Corporation of Virginia Supplemental Benefit Plan, amended and restated effective
June 1, 1991 (incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form
10-K for the year ended December 29, 1991).
10(p)* 1994 Amendment to the James River Corporation of Virginia Supplemental Benefit Plan, dated
March 1, 1994 (incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form
10-K for the year ended December 25, 1994).
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Section
- -------- -------------------------------------------------------------------------------------------------- --------
<S> <C> <C>
10(q)* Amended and Restated James River Corporation of Virginia Miles L. Marsh Supplemental
Retirement Plan, effective as of March 1, 1997 (incorporated by reference to Exhibit 10(p) to the
Company's Annual Report on Form 10-K for the year ended December 29, 1996).
12 Computation of Ratio of Earnings to Fixed Charges, filed herewith. E-1
13 Certain sections of the Company's Annual report to Shareholders for the year ended
December 28, 1997, filed herewith. E-2
21 Subsidiaries of the Company as of December 28, 1997, filed herewith. E-3
23 Consent of Independent Accountants, filed herewith. E-4
27 Financial Data Schedules for the year ended December 28, 1997 (filed electronically only).
</TABLE>
(b) Reports on Form 8-K:
During the last quarter of 1997 and subsequent thereto, the Company filed
the following Current Reports on Form 8-K:
<TABLE>
<CAPTION>
Date of Report Event Reported
- -------------------- -----------------------------------------------------------------------------------
<S> <C>
August 13, 1997 The Company filed consolidated financial statements of Fort James Corporation as
of December 29, 1996, December 31, 1995, and June 29, 1997, for each of the years
in the three-year period ended December 29, 1996, and for the quarters and six
months ended June 29, 1997, and June 30, 1996, together with the related schedules
and Management's Discussion and Analysis of Results of Operations and Financial
Condition, in each case as restated for the merger.
October 23, 1997 The Company published a press release announcing its results of operations for the
third quarter and nine months ended September 28, 1997.
February 3, 1998 The Company published a press release announcing its results of operations for the
fourth quarter and year ended December 28, 1997.
March 2, 1998 The Company filed certain information concerning Fort James Corporation that was
filed in a registration statement subsequent to the merger.
March 9, 1998 The Company filed consolidated financial statements of Fort James Corporation as
of December 28, 1997, and December 29, 1996, for each of the three years ended
December 28, 1997, together with Management's Discussion and Analysis of Results
of Operations and Financial Condition.
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
FORT JAMES CORPORATION
-------------------------------------
Registrant
By: /s/ ERNST A. HABERLI
-------------------------------------
Ernst A. Haberli
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
By: /s/ WILLIAM A. PATERSON
-------------------------------------
William A. Paterson
Senior Vice President and Controller
(Principal Accounting Officer)
Date: March 23, 1998
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Signature and Title
-------------------------------------
Date: March 23, 1998
By: /s/ MILES L. MARSH
-------------------------------------
Miles L. Marsh
Chairman and
Chief Executive Officer
By: /s/ ERNST A. HABERLI
-------------------------------------
Ernst A. Haberli
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
By: /s/ WILLIAM A. PATERSON
-------------------------------------
William A. Paterson
Senior Vice President and Controller
(Principal Accounting Officer)
</TABLE>
Pursuant to General Instruction D to Form 10-K, this report has been
signed below by a majority of the Board of Directors:
<TABLE>
<S> <C>
/s/ BARBARA L. BOWLES March 13, 1998
- ----------------------------------------
Barbara L. Bowles
/s/ WILLIAM T. BURGIN March 23, 1998
- ----------------------------------------
William T. Burgin
/s/ DR. JAMES L. BURKE March 23, 1998
- ----------------------------------------
Dr. James L. Burke
/s/ WORLEY H. CLARK, JR. March 23, 1998
- ----------------------------------------
Worley H. Clark, Jr.
/s/ WILLIAM T. COMFORT, JR. March 23, 1998
- ----------------------------------------
William T. Comfort, Jr.
/s/ GARY P. COUGHLAN March 23, 1998
- ----------------------------------------
Gary P. Coughlan
/s/ WILLIAM V. DANIEL March 13, 1998
- ----------------------------------------
William V. Daniel
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
/s/ MILES L. MARSH March 23, 1998
- -------------------------------------
Miles L. Marsh
/s/ ROBERT H. NIEHAUS March 23, 1998
- -------------------------------------
Robert H. Niehaus
/s/ ROBERT M. O'NEIL March 13, 1998
- -------------------------------------
Robert M. O'Neil
/s/ MICHAEL T. RIORDAN March 23, 1998
- -------------------------------------
Michael T. Riordan
/s/ RICHARD L. SHARP March 23, 1998
- -------------------------------------
Richard L. Sharp
/s/ FRANK V. SICA March 23, 1998
- -------------------------------------
Frank V. Sica
/s/ ANNE MARIE WHITTEMORE March 12, 1998
- -------------------------------------
Anne Marie Whittemore
</TABLE>
21
EXHIBIT 12
FORT JAMES CORPORATION and SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (a)
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------
December 28, December 29, December 31, December 25, December 26,
1997 1996 1995 1994 1993
(52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)
------------ ------------ ------------ ------------ ------------
<S> <C>
(c) (b,c)
Pretax income (loss) from continuing operations,
before minority interests,
extraordinary item................................ $ 267.3 $ 499.2 $272.2 $(76.7) $ (2,042.3)
Add:
Interest charged to operations.................... 360.2 433.6 545.9 547.8 525.8
Portion of rental expense representative of
interest factor (assumed to be one-third)...... 27.7 25.8 26.0 26.1 20.8
------------- ----------- ------------ ------------ ------------
Total earnings, as adjusted.................. $ 655.2 $958.6 $844.1 $497.2 $ (1,495.7)
------------- ----------- ------------ ------------ ------------
------------- ----------- ------------ ------------ ------------
Fixed charges:
Interest charged to operations.................... $ 360.2 $433.6 $545.9 $547.8 $ 525.8
Capitalized interest.............................. 11.0 6.6 9.0 7.3 13.7
Portion of rental expense representative of
interest factor (assumed to be one-third)...... 27.7 25.8 26.0 26.1 20.8
------------- ----------- ------------ ------------ ------------
Total fixed charges.......................... $ 398.9 $466.0 $580.9 $581.2 $ 560.3
------------- ----------- ------------ ------------ ------------
------------- ----------- ------------ ------------ ------------
Ratio............................................... 1.64 2.06 1.45 -- --
------------- ----------- ------------ ------------ ------------
------------- ----------- ------------ ------------ ------------
</TABLE>
See Notes to Supplemental Computation of Ratio of Earnings to Fixed Charges.
E-1
<PAGE>
EXHIBIT 12 (continued)
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(a) In computing the ratio of earnings to fixed charges, earnings consist
of income before income taxes, minority interests, extraordinary item,
and fixed charges excluding capitalized interest. Fixed charges consist
of interest expense, capitalized interest, and that portion of rental
expense (one-third) deemed representative of the interest factor.
Earnings and fixed charges also include the Company's proportionate
share of such amounts for unconsolidated affiliates which are owned 50%
or more and distributed income from less than 50% owned affiliates.
(b) During 1993, the Company wrote off $1,980.4 million of goodwill which
has been included in the calculation of the ratio of earnings to fixed
charges for this year.
(c) For the following periods, earnings were inadequate to cover fixed
charges, and the amounts of the deficiencies were: year ended December
26, 1993 -- $2,056.0 million; year ended December 25, 1994 -- $84.0
million.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORT JAMES CORPORATION 21
Management believes that the following commentary and tables appropriately
discuss and analyze the comparative results of operations and the financial
condition of the company for the periods covered. Certain events occurring in
the last three years represent major unusual or non-recurring items. These
events and their effect on the comparability of data presented herein are
discussed below.
The components of the non-recurring items and their effect on reported
results for the past three years are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------
(in millions) Pretax Net Pretax Net Pretax Net
- ----------------------------------------------------------------------------------------------------
<S> <C>
Restructuring and other:
Merger restructuring charge $(523.8) $ (377.5)
Gain on divestitures 69.6 42.5 $ 89.2 $ 49.1
Severance costs (40.6) (25.3) $ (42.7) $ (25.3)
Asset write-downs (59.3) (36.7) (4.2) (2.6)
Crown Vantage spin-off costs (5.0) (4.2)
- ----------------------------------------------------------------------------------------------------
Subtotal (454.2) (335.0) (10.7) (12.9) (51.9) (32.1)
Extraordinary loss on
debt extinguishment (131.5) (8.1) (18.8)
U.S. Tax Court settlement 36.0
French statutory tax rate increase (6.3)
- ----------------------------------------------------------------------------------------------------
Total non-recurring $(454.2) $ (466.5) $ (10.7) $ 15.0 $ (51.9) $ (57.2)
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------
(in millions, except per share data) Reported Recurring Reported Recurring Reported Recurring
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Income from operations $ 602.7 $1,056.9 $ 909.3 $ 920.0 $ 783.4 $835.3
Income before income taxes 272.3 726.5 503.6 514.3 289.1 341.0
Net income (loss) (27.0) 439.5 319.9 304.9 141.1 198.3
Diluted earnings (loss) per share $ (.28) $ 1.97 $ 1.43 $ 1.35 $ .50 $ .85
- -------------------------------------------------------------------------------------------------------------
</TABLE>
1997 Business
Combination, Integration
Plan, Restructure
and Other Unusual Items
and Refinancing Activities
Business Combination
On August 13, 1997, James River Corporation of Virginia ("James River") and Fort
Howard Corporation ("Fort Howard") merged, with Fort Howard shareholders
receiving 1.375 James River common shares for each Fort Howard share, and James
River shareholders retaining their current holdings. A total of 104.8 million
additional shares of common stock were issued in the merger. In connection with
the merger, James River was renamed Fort James Corporation. The merger qualified
as a tax-free reorganization and has been accounted for as a pooling of
interests for financial reporting purposes. Accordingly, the company's
consolidated financial statements have been restated for all years presented to
include the combined results of operations, cash flows and financial positions
of James River and Fort Howard. Similarly, the financial data presented in this
Management's Discussion and Analysis represent the combined James River and Fort
Howard data for all periods presented.
Net sales and earnings data for James River and its subsidiaries and for Fort
Howard and its subsidiaries for the six months ended June 29, 1997, and for the
prior two years are presented in Note 2 of Notes to Consolidated Financial
Statements.
Integration Plan
Fort James believes the merger will enable it to achieve significant cost
reductions not available to either James River or Fort Howard, individually. By
combining complementary technologies, optimizing product manufacturing and
logistics across the combined system, increasing purchasing efficiencies,
eliminating redundant over-
E-2
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
22 FORT JAMES CORPORATION
head costs and consolidating work forces where duplication exists, Fort James
expects to reduce costs and increase productivity. As a result of these
integration efforts, Fort James expects to realize cost savings estimated to be
at a $150 million annual run rate by the end of 1998, increasing to $200 million
per year over time.
Restructure and Other Unusual Items
In conjunction with the merger integration plan, the company recorded a pretax
charge of $523.8 million in 1997. Included in the total is $234.5 million for
facility closures and write-downs of redundant property, plant and equipment;
$103.1 million for employee severance and other employee-related costs; $82.8
million for the cost of terminating contracts and other long-term agreements;
$54.2 million for investment banking, legal, accounting and other transaction
costs; and $49.2 million for other costs. The charge for facility closures
includes amounts related to the company's permanent closure of two tissue mills,
in Ashland, Wisconsin, and Carthage, New York, in the spring of 1998, and
additional rationalization of manufacturing operations planned in North America
and Europe. The integration plan is anticipated to result in a net reduction of
2,500 employees, representing approximately 8 percent of the company's combined
worldwide workforce. Cash costs of the restructure program are estimated to
total approximately $150 million, net of tax benefits. Additional information on
the merger restructure charge is contained in Note 3. Also during 1997, the
company recognized a pretax gain of $69.6 million on the sale of approximately
232,000 acres of timberlands. The merger restructure charge, net of the gain on
the sale of timberlands totaled $454.2 million and was reported as "restructure
and other unusual items" in the statement of operations. The income tax benefit
of the net charge was $119.2 million, or 26 percent of the pretax charge. The
income tax benefit is lower than the statutory income tax rate principally
because certain merger costs and fees are non-deductible. The restructure and
other unusual items reduced 1997 net income by $335.0 million, or $1.62 per
diluted share. An additional estimated $60 million of non-accruable merger
integration costs will be recorded in 1998, as incurred.
Refinancing Activities
In October 1997, the company completed the refinancing of a total of
approximately $2.1 billion principal amount of debt, as further described in
Note 9. An extraordinary charge of $215.0 million ($131.5 million net of taxes,
or $.63 per diluted share) was recorded associated with these refinancings. The
debt refinancings are expected to result in an annual reduction in interest
expense of approximately $50 million.
1996 and 1995
Dispositions,
Restructuring and
Other Items
and Refinancings
During 1996, the company sold its Flexible Packaging and related Inks divisions,
as well as several small domestic North American Consumer Products Business
mills. In 1995, the company spun off Crown Vantage Inc. ("Crown Vantage") to its
common shareholders. Crown Vantage included a large part of what was formerly in
the company's Communications Papers Business, as well as the specialty
paper-based portion of the Packaging Business. Divestitures are further
described in Note 2. Additionally, the company recorded restructuring and other
unusual charges of $10.7 million ($12.9 million net of taxes, or $.07 per
diluted share) in 1996 and $51.9 million ($32.1 million net of taxes, or $.20
per diluted share) in 1995, as described in Note 3. Extraordinary losses of
$13.4 million ($8.1 million net of taxes, or $.04 per diluted share) were
recorded in 1996 and $30.7 million ($18.8 million net of taxes, or $.11 per
diluted share) were recorded in 1995 in connection with the early extinguishment
of debt. In 1996, the company recorded a $36 million tax benefit ($.19 per
diluted share) as a result of a U.S. Tax Court decision allowing the company to
deduct certain expenses relating to Fort Howard's 1988 leveraged buy-out
("LBO"). In 1995, the company recorded a $6.3 million charge ($.04 per diluted
share) to increase deferred taxes for the effect of a French tax rate increase.
Unusual tax items are described in Note 5.
<PAGE>
FORT JAMES CORPORATION 23
Results of Operations
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C>
Net sales:
North American Consumer Products $4,360.0 $4,362.0 $4,440.6
European Consumer Products 1,828.1 1,980.2 1,949.9
Packaging 782.9 1,139.9 1,659.9
Communications Papers 467.7 456.7 1,091.4
Intersegment elimination (179.7) (231.7) (253.9)
- ----------------------------------------------------------------------------------------------------
Consolidated $7,259.0 $7,707.1 $8,887.9
====================================================================================================
Income from operations:(a)
North American Consumer Products $845.4 $ 753.3 $ 583.5
European Consumer Products 202.4 177.1 63.5
Packaging 81.3 91.9 76.1
Communications Papers 19.8 22.2 191.2
General corporate expenses (92.0) (124.5) (79.0)
- ----------------------------------------------------------------------------------------------------
Consolidated $1,056.9 $ 920.0 $ 835.3
====================================================================================================
Income from operations as a percent of net sales(a) 14.6% 11.9% 9.4%
====================================================================================================
</TABLE>
(a) Represents segment results before restructuring and other unusual items. The
allocation of restructuring and other unusual items by business segment is
presented in Note 16.
Results of
Operations--1997
Compared to 1996
North American Consumer Products Business
Net sales remained level between 1996 and 1997, while operating profits, before
restructuring and other unusual items, increased $92.1 million, or 12 percent.
Segment operating margins increased to 19.4 percent in 1997 versus 17.3 percent
in 1996. Excluding the sales of the divested party goods and foam cup
operations, sales increased by 1 percent. Also impacting the sales comparison
was the loss of three days of Fort Howard shipments in fiscal 1997, resulting
from the conversion to the Fort James fiscal year cutoff. Operating results for
1996 included an $18 million charge for revised estimates of costs of certain
environmental matters.
Net sales of retail products increased approximately 1 percent in 1997
compared to 1996, on higher volumes and slightly lower average pricing. Retail
towel and tissue product unit volumes increased by approximately 2 percent over
the prior year, while retail tabletop product volumes increased nearly 5 percent
year-over-year. Average pricing in 1997 was fairly comparable to 1996 levels for
retail tabletop products, but pricing for retail towel and tissue products
declined approximately 2 percent, reflecting the effect of list price reductions
put into effect in the spring of 1996. Additionally, promotional spending for
retail towel and tissue products increased moderately in the second half of
1997, in response to competitive activity. In January 1998, the company
announced list price increases for its retail towel and tissue products,
generally ranging from 4 to 6.5 percent.
Net sales of away-from-home products decreased approximately 1 percent in
1997 compared to 1996, reflecting the combination of improved away-from-home
towel and tissue product volumes, more than offset by reduced away-from-home
foodservice product volumes and slightly lower pricing for tissue products.
Away-from-home towel and tissue product unit volumes increased by approximately
4 percent over the prior year, however, away-from-home foodservice volumes
decreased by approximately 9 percent compared to 1996. Average pricing improved
modestly for away-from-home foodservice products compared to the prior year,
while average away-from-home tissue pricing declined approximately 2 percent.
The company implemented a list price increase for away-from-home towel and
tissue products ranging from 6 to 9 percent late in the year in 1997.
Net sales of other products (comprised of excess market pulp and the Harmon
Associates wastepaper brokerage business) increased 23 percent in 1997 versus
1996. The company's domestic tissue operations are fully integrated to either
kraft or deinked pulp, with excess capacity of approximately 250,000 metric tons
per
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
24 FORT JAMES CORPORATION
year sold as market pulp. The increase in sales reflected higher market pulp
volumes in 1997 compared to 1996, partially offset by lower average pulp selling
prices. Tissue-grade wastepaper prices remained relatively level in 1996 and
1997.
U.S tissue industry operating rates were at approximately 94 to 95 percent of
capacity in 1997. The company believes that tissue capacity growth, net of
capacity closures, will not exceed demand growth, which should allow supply and
demand to remain in approximate balance in 1998 and 1999.
European Consumer Products Business
Net sales declined $152.1 million, or 8 percent, in 1997 compared to 1996. For
the same period, operating profits, before restructuring and other unusual
items, increased $25.3 million, or 14 percent. Segment operating margins
continued to improve, rising to 11.1 percent in 1997 from 8.9 percent in 1996.
Sales and operating profits were both negatively affected by changes in foreign
currency translation associated with the strengthening of the U.S. dollar.
Absent these changes, the company estimates 1997 sales would have been similar
to the prior year levels and operating profits would have increased by 20
percent.
Selling prices for European tissue products averaged between 2 and 3 percent
lower in 1997 compared to 1996; however, pricing trends varied significantly by
country. Finished goods pricing trends were weakest in Italy, where aggressive
industry capacity additions have made the market more price competitive, while
pricing in other countries generally ranged from level with the prior year to a
decline of approximately 5 percent. The company expects pricing in European
tissue markets to remain competitive in the near-term future, as additional
industry capacity is anticipated to come on-line at rates greater than expected
demand growth. Italian producers, who also export tissue into Germany, are
adding a disproportionately large percentage of the new capacity. Therefore, it
is expected that the Italian and German markets, where the company has
relatively less exposure, will remain among the most price competitive in
Europe.
Finished goods unit volumes increased more than 2 percent in 1997 versus
1996, as the company was able to consolidate the strong volume gains achieved in
1996. Unconverted tissue parent roll volumes, which currently account for
approximately 8 percent of the tons sold in Europe, declined by more than 2
percent, reflecting increased sales of converted tissue products.
Operating profits were favorably affected by a continued gradual decline in
the cost of market pulp during 1997. Similar to most of its European tissue
competitors, Fort James' European business is not backward integrated to kraft
pulp. Approximately two-thirds of the business' fiber requirements are met with
purchased market pulp (some of which is provided by excess pulp within the
company's North American Consumer Products Business), while the remaining
one-third is provided by its deinked pulp facilities. European operating results
also benefited from manufacturing and other cost reductions and increased
productivity.
Packaging Business
Net sales declined $357.0 million, or 31 percent, in 1997 compared to 1996. For
the same period, operating profits, before restructuring and other unusual
items, declined $10.6 million, or 12 percent, while segment operating margins
improved to 10.4 percent in 1997 versus 8.1 percent in 1996. The decline in
sales was principally attributable to the 1996 sale of the Flexible Packaging
and related Inks divisions, while the decline in operating profits was primarily
the result of lower average pricing. On a pro forma basis, excluding the
Flexible Packaging division, sales decreased by $72 million, from $855 million
in 1996 to $783 million in 1997 and operating profits decreased by $9 million,
from $90 million to $81 million, respectively.
The decline in pro forma sales and profits was primarily the result of lower
average selling prices for the company's folding cartons and coated recycled
board, partially offset by improved volumes. Average carton and recycled board
prices declined approximately 5 percent versus the prior year, as declines in
raw material costs created a more competitive pricing environment. Folding
carton unit volumes improved approximately 5 percent in 1997 compared to 1996,
while recycled board volumes increased by more than 10 percent, reflecting
<PAGE>
FORT JAMES CORPORATION 25
improvements in productivity and efficiency at the company's Kalamazoo,
Michigan, recycled board mill. Operating profits were also affected by a modest
increase in wastepaper and other raw material costs.
The Packaging Business experienced a transition in its customer base at the
end of 1997, with the loss of one of the business' major customers. The company
is aggressively seeking new customers and has been successful in replacing a
large portion of the lost business. However, the company expects the transition
in customer base will have a negative affect on this business in the first half
of 1998.
Communications Papers Business
Net sales increased $11 million, or 2 percent, in 1997 compared to 1996. For the
same period, operating profits, before restructuring and other unusual items,
declined $2.4 million, or 11 percent, while segment operating margins declined
slightly to 4.2 percent in 1997 versus 4.9 percent in 1996. The change in sales
and operating profits was principally attributable to a decline in average
selling prices for both uncoated free sheet and uncoated groundwood papers,
offset by increased sales volumes and lower wood costs.
Selling prices for most uncoated papers declined steadily during 1996,
reaching their lowest levels in the first quarter of 1997, before modestly
improving during the last three quarters of 1997. Lower average prices for
communications papers were the result of a combination of excess industry
capacity and declining market pulp prices creating a more competitive pricing
environment. Selling prices for uncoated free sheet papers averaged
approximately $60 per ton lower in 1997 compared to 1996, while selling prices
for uncoated groundwood papers averaged more than $100 per ton lower. Unit
volumes improved by approximately 15 percent for uncoated free sheet papers and
4 percent for uncoated groundwood papers, reflecting a higher-than-normal level
of market-related downtime taken in 1996. The change in operating profits was
also affected by a 20 percent decline in average wood chip costs in the Pacific
Northwest. Wood costs average higher in this region than in others because of
environmental restrictions on timber harvesting.
The company believes there is a risk that prices for communications papers
could come under increased pressure in 1998, from weakening pulp markets,
continuing excess industry inventories, new capacity start-ups and risks of
increased imports from Asia.
Other Income and Expense Items
General corporate expenses declined $32.5 million, or 26 percent in 1997
compared to 1996, as a result of reduced spending on new, integrated management
information systems. Corporate costs are expected to increase somewhat in 1998
associated with the establishment of the company's executive offices in Chicago,
Illinois, and merger-related management changes.
The company has developed and is executing plans to address the impact of
Year 2000 on key financial information and operational systems. The financial
impact of making the required system modifications and software replacements to
comply with Year 2000 issues prior to December 31, 1999, has not been and is not
expected to be material to the company's consolidated financial position or
results of operations.
Interest expense decreased $72.6 million, or 17 percent, from $424.4 million
in 1996 to $351.8 million in 1997. The decline resulted from lower average debt
levels, combined with the benefits from the company's refinancing activities.
Total debt declined by $244.3 million during 1997, from $4,434 million at the
beginning of the year to $4,190 million at the end of the year. Fort James plans
to continue to focus on debt reduction, which is expected to be the primary use
of the company's free cash flow in the near-term future.
Other income increased marginally, to $21.4 million in 1997 from $18.7
million in 1996, reflecting an increase in gains on the sale of miscellaneous
assets, partially offset by increased foreign currency exchange losses. See Note
4.
The company's reported effective tax rate increased to 60.2 percent in 1997
versus 33.9 percent in 1996, principally due to non-deductible merger costs.
Excluding restructuring and other unusual items and the 1996 tax deduction of
1988 LBO expenses, the effective tax rate declined to 39 percent in 1997
compared to 39.8 percent in the prior year. This recurring effective tax rate
declined primarily due to the decreased relative size of non-deductible items.
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
26 FORT JAMES CORPORATION
Results of
Operations--1996
Compared to 1995
North American Consumer Products Business
Net sales declined $78.6 million, or 2 percent, in 1996 compared to 1995. For
the same periods, operating profits, before restructuring and other unusual
items, improved $169.8 million, or 29 percent. The business' return on sales
improved to 17.3 percent in 1996 compared to 13.1 percent in the prior year. The
decline in sales was principally attributable to the divestitures of the
company's foam cup and party goods operations, combined with the decline in
average selling prices for the company's excess North American pulp and
wastepaper.
Net sales of retail products were comparable in 1996 and 1995, as unit volume
increases for retail tissue products were offset by lower retail tabletop
volumes. Average pricing was comparable to the prior year for retail tissue
products, but slightly higher for retail tabletop products. List prices for
retail tissue and towel products were increased twice in 1995, but were reduced
in the spring of 1996 by between 5 and 8 percent, following competitive pricing
actions tied to the falling cost of market pulp. Net sales into warehouse club
and private label channels increased over 1995 sales, driven by both stronger
volumes and higher average selling prices.
Net sales of away-from-home products declined from the prior year, reflecting
a combination of unit volume increases for tissue products, more than offset by
unit volume and price decreases for foodservice products. Average pricing for
commercial tissue products improved slightly compared to 1995 levels. High
industry utilization rates contributed to relatively stable commercial tissue
pricing throughout 1996, despite significantly lower average wastepaper costs.
Commercial foodservice products experienced lower average pricing in 1996
compared to the prior year, as competitive price reductions were taken following
raw material cost reductions.
The improvement in operating results was driven by a combination of cost
reduction initiatives, lower raw material costs and lower levels of trade
spending, partially offset by increased advertising and marketing costs and
reduced market pulp profitability.
European Consumer Products Business
Net sales increased by $30.3 million, or 2 percent in 1996 compared to 1995. For
the same periods, operating profits, before restructuring and other unusual
items, increased by $113.6 million, or more than 175 percent. Operating margins
increased to 8.9 percent in 1996 from 3.3 percent in 1995.
Increased sales in 1996 were attributable to market share gains, partially
offset by a small decline in average net selling prices. Converted product unit
volumes increased in 1996, despite a two-month strike at the company's Spanish
tissue facility. Volume gains occurred in all geographic regions and were
attributable, in part, to successful new product innovations, as well as a
recovery of lower than normal volumes experienced in 1995. Average finished
goods pricing declined somewhat compared to 1995, in response to dramatically
lower raw material costs.
In Europe, where the company is not backward integrated to kraft pulp, a
sharp reduction in fiber costs, without a commensurate reduction in average
selling prices, contributed to the higher operating margins reported in 1996. In
addition to higher volumes and lower fiber costs, operating profit improvements
were generated by manufacturing cost reductions, partially offset by the lower
average selling prices and increased expenses for advertising, consumer
promotion and trade spending.
Packaging Business
Net sales decreased by $520.0 million, or 31 percent, in 1996 compared to 1995.
For the same periods, operating profits, before restructuring and other unusual
items, increased $15.8 million, or 21 percent. The majority of the decline in
sales was due to divestitures. On a pro forma basis, excluding the Flexible
Packaging division and the packaging facilities spun off to Crown Vantage, sales
decreased by $120 million, from $975 million in 1995 to $855 million in 1996,
while operating profits decreased $1 million, from $91 million to $90 million,
respectively. The business' pro forma return on sales improved to 10.5 percent
in 1996 from 9.3 percent in 1995.
<PAGE>
FORT JAMES CORPORATION 27
The decline in pro forma sales was principally attributable to lower volumes
for folding cartons, partially offset by increased volumes for coated recycled
board. Selling prices for coated recycled board averaged approximately 10
percent lower in 1996 compared to 1995. Average folding carton prices were
similar in 1996 and 1995, as prices trended higher throughout 1995, before
trending lower during 1996. The improvement in operating profits was
attributable to a combination of lower raw material costs, particularly for
purchased wastepaper, and manufacturing cost reductions, partially offset by the
lower volumes and pricing for certain packaging grades. Operating profits also
improved following the Flexible Packaging sale and the Crown Vantage spin-off,
as these divisions reported operating losses in 1995.
Communications Papers Business
Net sales decreased by $634.7 million, or 58 percent, in 1996 compared to 1995.
For the same periods, operating profits, before restructuring and other unusual
items, declined $169.0 million, or 88 percent. The majority of the decline in
sales was due to the August 1995 spin-off of Crown Vantage. On a pro forma
basis, excluding the communications papers facilities spun off to Crown Vantage,
sales decreased by $189 million, from $646 million in 1995 to $457 million in
1996, and operating profits declined by $105 million, from $127 million to $22
million, respectively. The business' pro forma return on sales declined from
19.7 percent in 1995 to 4.9 percent in 1996.
The decline in pro forma sales and profits was principally due to
significantly lower average selling prices and unit volumes for both uncoated
free sheet and uncoated groundwood papers. After increasing sharply during the
first nine months of 1995, selling prices fell steadily throughout 1996 due to
major customer inventory corrections combined with weaker demand growth and
excess industry capacity. Selling prices for uncoated free sheet papers averaged
approximately $250 per ton lower in 1996 compared to 1995, while selling prices
for uncoated groundwood papers averaged approximately $50 per ton lower. Unit
volumes declined from 1995 levels by 6 to 7 percent. The majority of the volume
declines occurred in the first half of 1996, as substantial market-related
downtime was taken to prevent a build-up of inventory. The decline in pro forma
profits was partially offset by reduced wood chip costs, which decreased between
20 and 25 percent in 1996 compared to 1995.
Other Income and Expense Items
General corporate expenses, before restructuring and other unusual items,
increased 58 percent, to $124.5 million in 1996 from $79.0 million in 1995. The
increase principally resulted from consulting and other costs incurred during
1996 in installing new integrated management information systems to support the
company's cost reduction initiatives.
Interest expense decreased by $111.9 million, or 21 percent, from $536.3
million in 1995 to $424.4 million in 1996 principally due to significant
reductions in outstanding debt. The application of divestiture proceeds (net of
acquisitions), common stock issuance proceeds and free cash flows to pay down
debt resulted in a $1,761 million reduction in debt, from $6,195 million at the
beginning of 1996 to $4,434 million as of the end of 1996.
Other income declined by $23.3 million, from $42.0 million in 1995 to $18.7
million in 1996, largely due to an $18 million reduction in equity earnings of
unconsolidated affiliates and a $3 million reduction in interest income. The
company's share of earnings of Aracruz Celulose S.A., the world's largest
producer of eucalyptus market pulp, was lower in 1996 following the downturn in
worldwide market pulp prices during 1996.
Fort James' reported effective tax rate was 33.9 percent in 1996, compared to
44.2 percent in 1995. Excluding restructuring and other unusual items, the 1996
tax deduction of 1988 LBO expenses and the 1995 French tax rate increase, the
effective tax rate declined to 39.8 percent in 1996 compared to 41.4 percent
1995. This recurring effective tax rate declined primarily due to the decreased
relative size of non-deductible items.
<PAGE>
MANAGEMENT'S DISCUSSION
and analysis of financial condition
and results of operations
28 FORT JAMES CORPORATION
Liquidity and
Capital Resources
Operating Activities
Cash provided by operating activities totaled $764.2 million in 1997 compared to
$1,084.6 million in 1996. Working capital reductions generated $230.3 million of
cash in 1996, while working capital increases used cash of $163.4 million in
1997. A portion of the working capital increase in 1997 related to the
termination of a $60 million Fort Howard accounts receivable securitization
facility and a planned increase in inventories in anticipation of mill closures.
Investing Activities
Net cash used for investing activities totaled $297.7 million in 1997 and
included $505.9 million of capital expenditures, net of $190.1 million of cash
proceeds from asset sales and $18.1 million of other miscellaneous cash
proceeds. During 1996, net cash used for investing activities totaled $192.5
million and included $499.5 million of capital expenditures and $199.9 million
of cash paid for the remaining 14 percent minority interest in the company's
European Consumer Products Business, net of $496.6 million of cash proceeds from
asset sales and $10.3 million of other miscellaneous cash proceeds.
Cash proceeds from assets sales in 1997 totaled $190.1 million, primarily
from the sale of its remaining 232,000 acres of timberlands in the southeastern
U.S. and in Maine, pursuant to an ongoing timberlands divestiture program.
Divestitures are detailed in Note 2.
Capital spending of $505.9 million in 1997 was only slightly higher than the
$499.5 million spent in 1996. Approximately three-quarters of the total 1997
expenditures were within the Consumer Products Businesses, including
approximately $68 million of spending on tissue converting modernizations and
$45 million of spending on a new tissue machine under construction at the
company's Rincon, Georgia mill. The company currently expects 1998 capital
spending to be in the range of $550 million, reflecting the spending to complete
the new Rincon tissue machine in the fall. Contractual capital commitments as of
December 28, 1997, were not material.
Financing Activities
Total indebtedness decreased by $244.3 million in 1997, principally from the use
of free cash flows and divestiture proceeds. During 1997, new borrowings totaled
$2,200.9 million and debt payments totaled $2,378.4 million, principally
associated with the company's refinancings. Additionally, changes in currency
translation rates reduced debt denominated in foreign currencies by $66.8
million.
As of December 28, 1997, Fort James and its subsidiaries had domestic and
foreign revolving credit facilities providing for unsecured borrowings of up to
$2,790 million, of which $2,500 million expire in 2002 and the balance expire
between 1998 and 2000. The company also had domestic and foreign commercial
paper programs, supported by the revolving credit facilities, providing for
issuances of up to $583.5 million. In addition, Fort James had agreements with
several banks under which it may borrow funds on an uncommitted basis at
below-prime rates. On December 28, 1997, the company had outstanding borrowings
of $1,731.5 million that were supported by the revolving credit facilities.
As of the end of 1997, Fort James' weighted-average interest rate was 7.19
percent (including the impact of the interest rate swaps), compared to 8.24
percent as of the end of 1996. The company's total debt portfolio is sensitive
to changes in interest rates. Interest rate changes would result in gains or
losses in the market value of the company's debt portfolio due to differences
between market interest rates and rates at the inception of the debt agreements.
Based on the company's debt portfolio outstanding at December 28, 1997, and
current market perception, a 10 basis point change in interest rates as of
December 28, 1997 would have changed the fair value of the debt portfolio by
approximately $12.3 million, and made an immaterial change to the fair value of
the interest rate swap portfolio discussed below. See Note 9 for additional
information.
Total outstanding debt of $4,190 million on December 28, 1997, included
approximately $2,224 million of fixed rate and $1,966 million of floating rate
obligations. The company manages its ratio of fixed to floating rate debt with
the objective of achieving a mix that management believes is appropriate. To
manage this mix in a cost-effective manner, the company enters into interest
rate swap agreements, in which it agrees to exchange
<PAGE>
FORT JAMES CORPORATION 29
various combinations of fixed and/or variable interest rates based on agreed
upon notional amounts. The company had $1,138 million and $1,286 million in
notional amounts of interest rate swap agreements in effect as of December 28,
1997, and December 29, 1996, respectively. The strategy employed by the company
to manage its exposure to interest rate fluctuations is consistent with that of
prior years. Management does not foresee or expect any significant changes in
its exposure to interest rate fluctuations or in how such exposure is managed in
the near future. Additional information on interest rate management activities
is provided in Note 10.
The company's most restrictive debt covenants contain limitations on
borrowings and require maintenance of a minimum ratio of net tangible assets. As
of December 28, 1997, under the most restrictive provision of the company's debt
agreements, Fort James had additional borrowing capacity of $1.9 billion.
As of December 28, 1997, the company's debt ratings were investment grade and
were as follows:
<TABLE>
<CAPTION>
Preferred Commercial
Outlook Senior Debt Stock Paper
- -------------------------------------------------------------------------------------------
<S> <C>
Moody's Investor Services Stable Baa3 ba2 Prime-3
Standard & Poor's Stable BBB- BB+ A-3
</TABLE>
As of December 28, 1997, Fort James had $352.7 million face value of
outstanding preferred stocks. All of the company's preferred stocks are
redeemable at its option, at any time, at face value. The preferred stocks are
also convertible, at the option of the holder, into common stock at conversion
prices ranging between $36.69 and $37.38 per common share. When the common stock
price is at a sufficient premium to the conversion prices, the company may
consider calling these preferred stocks for redemption. During 1997, the company
converted its Series P 9% preferred stock, having a face value of $287.5
million, into 15.3 million shares of common stock, and redeemed its Series O
8.25% preferred stock, having a face value of $98.1 million, for cash.
Dividends paid increased to $121.6 million in 1997, compared to $97.2 million
in 1996. The increase was due to a combination of increased common dividend
payments, partially offset by reduced preferred dividends. Common dividends
increased due to both timing (four common dividend payment dates occurred in
fiscal 1997 while only three quarterly dividend payments dates occurred in
fiscal 1996) and the payment of common dividends to former Fort Howard
shareholders. Prior to the merger, Fort Howard did not pay a common dividend.
The conversion and redemption of the Series P and Series O preferred stocks will
reduce annual net dividend payments by approximately $25 million.
The company's international operations create exposure to foreign currency
exchange rate risks. To manage these risks, the company utilizes foreign
exchange contracts. As of December 28, 1997, and December 29, 1996, the company
had outstanding foreign exchange contracts of $304 million and $47 million in
notional amount, respectively, to hedge firm and anticipated purchase
commitments and firm sales commitments denominated in foreign currencies. The
use of these derivative financial instruments allows the company to reduce its
overall exposure to exchange rate movements, since the gains and losses on these
contracts substantially offset losses and gains on the assets, liabilities and
transactions being hedged. As of December 28, 1997 and December 29, 1996, Fort
James had unrealized gains (losses) on foreign currency exposures of $.5 million
and $(.1) million, respectively, primarily related to French francs, British
pounds, Spanish pesatas and Dutch guilders. A 10% change from the prevailing
market rates of these foreign currencies would not have a material effect on the
results of operations. Management does not foresee or expect any significant
changes in foreign currency exposure or in the strategies it employs to manage
such exposures in the near future. In the first quarter of 1997, the company
unwound $470 million in notional amount of foreign exchange contracts at a cost
of $31.5 million, net of taxes. These contracts had been designated as hedges of
a portion of the company's net investment in its European Consumer Products
Business, which is no longer hedged.
Environmental Matters
Like its competitors, Fort James is subject to extensive regulation by various
federal, state, provincial, and local agencies concerning compliance with
environmental control statutes and regulations. These regulations
<PAGE>
MANAGEMENT'S DISCUSSION
and analysis of financial condition
and results of operations
30 FORT JAMES CORPORATION
impose limitations on the discharge of materials into the environment, as well
as require the company to obtain and operate in compliance with the conditions
of permits and other governmental authorities.
Fort James has made and will continue to make substantial capital investments
and operating expenditures, as well as production adjustments, to comply with
increasingly stringent standards for air, water, and solid and hazardous waste
regulations. Capital expenditures totaling approximately $15 million in 1997 and
$30 million in 1996 were made by Fort James for pollution control facilities and
equipment.
In 1997, the U.S. Environmental Protection Agency ("EPA") published
regulations, generally referred to as the "Cluster Rules", affecting pulp and
paper industry discharges of wastewater and gaseous emissions. These rules
require changes in the pulping and bleaching processes presently used in some
U.S. pulp mills, including several of Fort James' mills. Based on its evaluation
of the rules, the company believes that capital expenditures totaling
approximately $100 million may be required, the majority of which will be spent
in the next three to four years.
As of December 28, 1997, Fort James had been identified as a "potentially
responsible party," along with others, under federal or state laws with respect
to various sites where hazardous substances or other contaminants are located.
Note 15 provides information on the company's accrued remediation liabilities.
Contingent Liabilities
During 1994, James River was sued in Alabama and in Connecticut by former
holders of James River's 10 3/4% Debentures due October 1, 2018, all of which
were either retired in a tender offer or redeemed in the fall of 1992. In
general, the complaints alleged violations of certain covenants and disclosure
obligations, and sought damages in excess of $50 million plus punitive damages
in excess of $500 million. In June 1997, the Alabama court granted the company's
motion for summary judgement and dismissed the action. The Alabama plaintiffs
have appealed. Fort James believes that these claims are without merit and
intends to defend them vigorously. In 1996 and 1997, the company settled the
claims of all non-Alabama suit holders, representing approximately 55 percent of
the debentures, for a total of $1.4 million plus reimbursement of attorney fees.
During 1997, civil actions were filed in several jurisdictions against Fort
James and various other manufacturers of sanitary paper products alleging
violations of federal and state antitrust and unfair competition laws. This
litigation is in its early stages. The Company believes these cases are without
merit and intends to defend the litigation vigorously. Further information on
Fort James' legal matters is included in Note 15.
Effect of New Accounting Standards
During 1997 and 1998, the Financial Accounting Standards Board issued several
new disclosure-related accounting standards, effective for 1998. These new
standards are described in Note 1.
Information Concerning
Forward-Looking
Statements
Certain sections of this annual report contain forward-looking statements, which
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are made based upon
management's expectations and beliefs concerning future events impacting the
company. Such forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that could cause actual
results and company plans and objectives to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, general
business and economic conditions; competitive pricing pressures for the
company's products; changes in raw material, energy and other costs;
opportunities that may be presented to and pursued by the company;
determinations by regulatory and governmental authorities; the ability to
successfully integrate the James River and Fort Howard businesses; and the
ability to achieve synergistic and other cost reductions and efficiencies.
<PAGE>
CONSOLIDATED
statements of operations
FORT JAMES CORPORATION 31
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
December 28, December 29, December 31,
(in millions, except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C>
Net sales $ 7,259.0 $ 7,707.1 $ 8,887.9
Cost of goods sold 5,077.7 5,564.2 6,835.2
Selling and administrative expenses 1,124.4 1,222.9 1,217.4
Restructure and other unusual items 454.2 10.7 51.9
- ------------------------------------------------------------------------------------
Income from operations 602.7 909.3 783.4
Interest expense 351.8 424.4 536.3
Other income, net 21.4 18.7 42.0
- ------------------------------------------------------------------------------------
Income before income taxes,
minority interests and
extraordinary item 272.3 503.6 289.1
Income tax expense 164.0 171.0 127.8
- ------------------------------------------------------------------------------------
Income before minority
interests and
extraordinary item 108.3 332.6 161.3
Minority interests (3.8) (4.6) (1.4)
- ------------------------------------------------------------------------------------
Income before extraordinary
item 104.5 328.0 159.9
Extraordinary loss on early
extinguishment of debt, net of
taxes of $83.5 million in 1997,
$5.3 million in 1996 and $11.9
million in 1995 (131.5) (8.1) (18.8)
- ------------------------------------------------------------------------------------
Net income (loss) $ (27.0) $ 319.9 $ 141.1
====================================================================================
Preferred dividend requirements (43.4) (58.5) (58.5)
- ------------------------------------------------------------------------------------
Net income (loss)
applicable to
common shares $ (70.4) $ 261.4 $ 82.6
====================================================================================
Net income (loss) per share:
Before extraordinary item $ .31 $ 1.49 $ .62
Extraordinary loss on
early extinguishment
of debt (.67) (.05) (.11)
- ------------------------------------------------------------------------------------
Net income (loss)
per share $ (.36) $ 1.44 $ .51
====================================================================================
Weighted-average number of
common shares 195.5 181.4 163.4
====================================================================================
Net income (loss) per share --
assuming dilution:
Before extraordinary item $ .35 $ 1.47 $ .62
Extraordinary loss on
early extinguishment
of debt (.63) (.04) (.12)
- ------------------------------------------------------------------------------------
Net income (loss)
per share $ (.28) $ 1.43 $ .50
====================================================================================
Weighted-average number of common
shares and common share
equivalents 207.6 183.1 164.1
====================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED
balance sheets
32 FORT JAMES CORPORATION
<TABLE>
<CAPTION>
December 28, December 29,
(in millions) 1997 1996
- ------------------------------------------------------------------------------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 33.6 $ 34.6
Accounts receivable 787.8 781.3
Inventories 854.3 801.6
Deferred income taxes 214.4 138.5
Prepaid expenses and other current assets 26.4 52.6
- ------------------------------------------------------------------------------------
Total current assets 1,916.5 1,808.6
- ------------------------------------------------------------------------------------
Property, plant and equipment 4,565.3 4,999.3
Goodwill 636.9 730.0
Other assets 614.5 619.0
- ------------------------------------------------------------------------------------
Total assets $7,733.2 $8,156.9
====================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 636.5 $ 607.3
Accrued liabilities 913.0 805.8
Current portion of long-term debt 34.4 128.9
- ------------------------------------------------------------------------------------
Total current liabilities 1,583.9 1,542.0
- ------------------------------------------------------------------------------------
Long-term debt 4,155.5 4,305.3
Deferred income taxes 650.8 690.5
Accrued postretirement benefits other than pensions 474.8 475.9
Other long-term liabilities 283.9 291.7
- ------------------------------------------------------------------------------------
Total liabilities 7,148.9 7,305.4
- ------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock 352.7 738.4
Common stock, $.10 par value; shares outstanding
1997--209.3 million and 1996--188.5 million 20.9 18.9
Additional paid-in capital 2,807.9 2,407.0
Retained deficit (2,597.2) (2,312.8)
- ------------------------------------------------------------------------------------
Total shareholders' equity 584.3 851.5
- ------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $7,733.2 $8,156.9
====================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED
statements of cash flows
FORT JAMES CORPORATION 33
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
December 28, December 29, December 31,
(in millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Cash provided by (used for) operating activities:
Net income (loss) $(27.0) $ 319.9 $ 141.1
Depreciation expense and cost of timber harvested 474.7 502.5 560.3
Amortization of goodwill 20.1 21.4 24.4
Deferred income tax provision (benefit) (41.4) 53.7 49.4
Restructure and other unusual items 454.2 10.7 51.9
Loss on early extinguishment of debt, net of tax 131.5 8.1 18.8
Change in current assets and liabilities, net of effects
of acquisitions and dispositions:
Accounts receivable (88.8) 96.1 18.8
Inventories (79.7) 82.5 (80.5)
Other current assets 23.5 (2.1) 3.7
Accounts payable and accrued liabilities (18.4) 53.8 (28.2)
Foreign currency hedge (31.5)
Other, net (53.0) (62.0) 6.5
- -----------------------------------------------------------------------------------------------------------
Cash provided by operating activities 764.2 1,084.6 766.2
- -----------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities:
Expenditures for property, plant and equipment (505.9) (499.5) (488.5)
Cash paid for acquisitions, net (199.9) (52.5)
Cash received from sale of assets 190.1 496.6 10.9
Other, net 18.1 10.3 50.9
- -----------------------------------------------------------------------------------------------------------
Cash used for investing activities (297.7) (192.5) (479.2)
- -----------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities:
Additions to long-term debt 2,200.9 4.2 1,476.9
Payments of long-term debt (2,378.4) (1,049.2) (2,419.4)
Debt premiums and issuance costs (152.3) (1.5) (50.1)
Proceeds from spin-off of Crown Vantage Inc. 480.4
Common stock issued, net of offering costs 203.8 284.1
Preferred stock redeemed (98.1) (1.9)
Common and preferred stock cash dividends paid (121.6) (97.2) (120.4)
Common stock issued on exercise of stock options 82.0 16.1 68.8
Other, net 1.2
- -----------------------------------------------------------------------------------------------------------
Cash used for financing activities (467.5) (924.5) (279.7)
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1.0) (32.4) 7.3
Cash and cash equivalents, beginning of year 34.6 67.0 59.7
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 33.6 $ 34.6 $ 67.0
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED
statements of changes
in capital accounts
34 FORT JAMES CORPORATION
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
December 28, December 29, December 31,
(in millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C>
Preferred stock
Balance, beginning of year $ 738.4 $ 740.3 $ 740.3
Conversion of preferred stock (287.6)
Redemption of preferred stock (98.1) (1.9)
- ------------------------------------------------------------------------------------------------------
Balance, end of year $ 352.7 $ 738.4 $ 740.3
======================================================================================================
Common shareholders' equity (deficit)
Common stock:
Balance, beginning of year $ 18.9 $ 17.2 $ 13.4
Common stock offerings 1.5 3.5
Conversion of preferred stock 1.5
Exercise of stock options and awards .4 .1 .3
Other .1 .1
- ------------------------------------------------------------------------------------------------------
Balance, end of year 20.9 18.9 17.2
- ------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance, beginning of year 2,407.0 2,181.7 1,807.2
Common stock offerings 202.3 280.6
Conversion of preferred stock 286.1
Exercise of stock options and
awards, net of tax effect 103.7 18.8 82.2
Restricted stock compensation earned 13.1 3.0
Other (2.0) 1.2 11.7
- ------------------------------------------------------------------------------------------------------
Balance, end of year 2,807.9 2,407.0 2,181.7
- ------------------------------------------------------------------------------------------------------
Retained deficit:
Balance, beginning of year (2,312.8) (2,523.4) (2,547.7)
Net income (loss) (27.0) 319.9 141.1
Common stock cash dividends declared (88.5) (51.2) (50.0)
Preferred stock cash dividends declared (43.4) (58.5) (58.5)
Spin-off of Crown Vantage Inc. (38.2)
Change in equity component of minimum
pension liability 3.0 11.6 .5
Unrealized gain (loss) on securities 13.9 4.4 (6.1)
Foreign currency translation and other (142.4) (15.6) 35.5
- ------------------------------------------------------------------------------------------------------
Balance, end of year (2,597.2) (2,312.8) (2,523.4)
- ------------------------------------------------------------------------------------------------------
Common shareholders' equity
(deficit), end of year $ 231.6 $ 113.1 $ (324.5)
======================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES
to consolidated
financial statements
FORT JAMES CORPORATION 35
NOTE 1
Summary of
Significant
Accounting
Policies
Basis of Presentation
The consolidated financial statements of Fort James Corporation ("Fort James" or
the "Company") have been prepared to give retroactive effect to the merger of a
wholly-owned subsidiary of James River Corporation of Virginia ("James River")
with and into Fort Howard Corporation ("Fort Howard") on August 13, 1997,
accounted for as a pooling of interests (see Note 2). In connection with the
merger, James River was renamed Fort James Corporation.
Principles of Consolidation
The consolidated financial statements present the operating results and
financial position of Fort James and its majority owned subsidiaries.
Significant intercompany balances and transactions have been eliminated.
Investments in unconsolidated affiliates which are at least 20% owned are
accounted for using the equity method and are stated at cost plus the Company's
share of undistributed earnings and foreign currency translation
adjustments, as applicable, since acquisition.
Fiscal Year
Fort James' fiscal year includes the 52 or 53 weeks ending on the last Sunday
in December. The years ended December 28, 1997, and December 29, 1996, each
included 52 weeks while the year ended December 31, 1995, included 53 weeks. In
1995, the Company changed the fiscal year end of Jamont N.V., part of the
European Consumer Products Business, from November 30 to December 31 to
eliminate the one-month lag in reporting. The one-month lag was eliminated as
an adjustment to retained deficit.
Use of Estimates
Financial statements prepared in conformity with generally accepted
accounting principles require management to make estimates and assumptions
that affect amounts reported therein. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company invests cash in marketable securities, including commercial
paper, government repurchase agreements, and time deposits, with original
maturities of three months or less. The carrying value of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
Inventories
Inventories are stated at the lower of cost or market and include the cost of
materials, labor and manufacturing overhead. The last-in, first-out cost flow
assumption is used for valuing substantially all domestic inventories other
than stores and supplies. Other inventories, including substantially all
inventories held by Fort Howard prior to the merger and foreign subsidiaries,
are valued using first-in, first-out or average cost assumptions.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, less accumulated
depreciation. Expenditures for improvements which increase asset values or
extend useful lives are capitalized. Maintenance and repair costs are
expensed as incurred. For financial reporting purposes, depreciation is
computed using the straight-line method over the estimated useful lives of the
respective assets, which range from 20 to 50 years for buildings and
generally 5 to 25 years for machinery and equipment. For income tax purposes,
depreciation is calculated using accelerated methods. Certain assets are
depreciated using composite depreciation methods; accordingly, no gain or
loss is recognized on partial sales or retirements of these assets.
Timber and Timberlands
Timber and timberlands are stated at cost less accumulated cost of timber
harvested. Cost of timber harvested is recorded as timber is cut at rates
which are determined annually based on the relationship of unamortized
timber cost to the estimated volume of recoverable timber.
<PAGE>
NOTES
to consolidated
financial statements
36 FORT JAMES CORPORATION
Intangible Assets
The excess of the purchase price over the fair value of identifiable net
assets of acquired companies is allocated to goodwill and amortized over 40
years. Goodwill is presented net of accumulated amortization of $128.8 million
as of December 28, 1997, and $108.7 million as of December 29, 1996. Differences
between the Company's carrying value of investments in unconsolidated
affiliates and its share of the underlying net assets of such affiliates are
amortized over periods of up to 40 years. The recoverability of goodwill is
periodically evaluated to determine whether current events or
circumstances warrant adjustments to the carrying value. Such evaluation is
based upon whether the goodwill is fully recoverable from the projected
undiscounted cash flows of the assets and businesses to which the goodwill
relates.
Interest Costs
The Company capitalizes interest costs as part of the cost of constructing
certain facilities and equipment.
(in millions) 1997 1996 1995
- ---------------------------------------------------------------------
Total interest costs $362.8 $431.0 $545.3
Interest capitalized (11.0) (6.6) (9.0)
- ---------------------------------------------------------------------
Net interest expense $351.8 $424.4 $536.3
=====================================================================
Interest paid $379.2 $417.6 $551.8
=====================================================================
Other Operating Expenses
Research and development expenditures are expensed as incurred. Direct and
readily identifiable indirect research and development costs totaled $40.9
million in 1997, $49.8 million in 1996 and $56.1 million in 1995. Advertising
costs are expensed as incurred and amounted to $102.9 million in 1997, $94.4
million in 1996 and $101.6 million in 1995.
Foreign Currency Translation
The accounts of most foreign subsidiaries and affiliates are measured using
local currency as the functional currency. For those entities, assets and
liabilities are translated into U.S. dollars at period-end exchange rates, and
income and expense accounts are translated at average monthly exchange rates.
Net exchange gains or losses resulting from such translation are excluded from
net earnings and accumulated as a separate component of retained deficit.
Gains and losses from foreign currency transactions are included in other
income. The U.S. dollar is used as the functional currency for subsidiaries and
affiliates operating in highly inflationary economies, for which both
translation adjustments and gains and losses on foreign currency transactions
are included in other income.
The change in the cumulative gain (loss) included in the translation
component of retained deficit resulting from the translation of assets and
liabilities of foreign subsidiaries and affiliates, net of the effect of
exchange rate hedges, was as follows:
(in millions) 1997 1996 1995
- ---------------------------------------------------------------------
Balance, beginning of year $ (5.3) $ 10.3 $(33.6)
Translation adjustments (139.4) (11.7) 19.3
Related income tax effect (3.0) (3.9) 24.6
- ---------------------------------------------------------------------
Balance, end of year $(147.7) $ (5.3) $ 10.3
=====================================================================
Derivative Financial Instruments
The Company's debt structure and international operations create exposure to
interest rate and foreign currency exchange rate risks. To manage these
risks, derivative financial instruments are utilized by the Company. They
include interest rate swaps, caps, options and foreign exchange contracts.
<PAGE>
FORT JAMES CORPORATION 37
The Company does not hold or issue financial instruments for trading
purposes. Translation gains and losses on hedges of net foreign investments
are deferred and accumulated in the foreign currency translation component
of retained deficit. Gains and losses on transactional hedges are recognized
in income and offset the foreign exchange gains and losses on related
transactions. Unrealized gains and losses on interest rate swap and option
agreements accounted for as hedges are deferred; related interest income
and expense is recognized as incurred. The cost of interest rate option
agreements is amortized over the respective lives of the agreements.
Occasionally, the Company may terminate a derivative financial
instrument. If an interest rate swap, cap or option is terminated because
related debt no longer exists, any gain or loss is recognized into income
immediately; otherwise, the gain or loss is deferred and amortized to interest
expense over the remaining periods originally covered by the derivative
contract. If a foreign exchange contract hedging a net investment in a foreign
subsidiary is terminated, the gain or loss is recognized in a separate component
of equity, net of tax, consistent with the accounting treatment of the hedged
item. If a transactional hedge is terminated, the gain or loss is
recognized in income.
Net Income (Loss) Per Common Share and Common Share Equivalent
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128, "Earnings Per Share" ("SFAS 128"), which is effective
for periods ending after December 15, 1997, including interim periods. Earnings
per share for the three years ended December 28, 1997, were calculated under
SFAS 128 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------
(in millions) Income Shares Income Shares Income Shares
- -----------------------------------------------------------------------------------------
<S> <C>
Income before extraordinary item $104.5 $328.0 $159.9
Preferred stock dividends (43.4) (58.5) (58.5)
- -----------------------------------------------------------------------------------------
Amounts used to compute basic
earnings per share 61.1 195.5 269.5 181.4 101.4 163.4
- -----------------------------------------------------------------------------------------
Effect of dilutive securities:
Options 2.5 1.7 .7
Convertible preferred stock* 12.9 9.6
- -----------------------------------------------------------------------------------------
Amounts used to compute diluted
earnings per share $ 74.0 207.6 $269.5 183.1 $101.4 164.1
=========================================================================================
</TABLE>
*Series K, L and N preferred stocks were antidilutive for all years
presented; Series P preferred stock was antidilutive in 1996 and 1995.
Adoption of Accounting Pronouncements
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income,"
which will require the Company to report and display comprehensive income
and Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information" which establishes standards for the way public
companies report information about operating segments in both interim and annual
financial statements, including related disclosures about products and
services, geographic areas, and major customers. The Company has not determined
what, if any, impact Statement No. 131 will have on the reported operating
segments and the related disclosures. These standards will be effective
for the Company's 1998 fiscal year.
Reclassifications
Certain amounts in the financial statements and supporting footnote
disclosures have been reclassified to conform to 1997 classifications including
a reclassification of customer freight charges from net sales to cost of sales.
Reportable segments for all periods have been reconfigured to include
bleached board operations (formerly in the North American Consumer Products
segment) in the Packaging segment and to include the foodwrap operations
(formerly in the Packaging segment) in the North American Consumer Products
segment.
<PAGE>
NOTES
to consolidated
financial statements
38 FORT JAMES CORPORATION
NOTE 2
Acquisitions,
Dispositions
and Other
Transactions
1997
Effective August 13, 1997, in connection with the merger, the Company issued
104.8 million shares of its Common Stock in exchange for all the outstanding
common stock of Fort Howard based on a conversion ratio of 1.375 shares (the
merger exchange ratio) of the Company's Common Stock for each share of Fort
Howard common stock, for a total value of $4.6 billion. The merger qualified as
a tax-free reorganization and has been accounted for as a pooling of interests.
Accordingly, the Company's consolidated financial statements have been restated
for all periods prior to the business combination to include the combined
financial results of James River and Fort Howard. Net sales, income before
extraordinary item and net income for the individual companies reported prior to
the merger were as follows:
Six months Year Year
Ended Ended Ended
June 29, December 29, December 31,
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
(Unaudited)
[S] [C]
Net sales:
James River $2,794.3 $5,971.9 $7,141.2
Fort Howard 812.2 1,580.8 1,620.9
Reclassifications 65.6 154.4 125.8
- --------------------------------------------------------------------------------
Total $3,672.1 $7,707.1 $8,887.9
================================================================================
Income before extraordinary item:
James River $ 138.3 $ 157.3 $ 126.4
Fort Howard 108.6 170.7 33.5
- --------------------------------------------------------------------------------
Total $ 246.9 $ 328.0 $ 159.9
================================================================================
Net income:
James River $ 138.3 $ 157.3 $ 126.4
Fort Howard 106.7 162.6 14.7
- --------------------------------------------------------------------------------
Total $ 245.0 $ 319.9 $ 141.1
================================================================================
The consolidated financial information presented above reflects
reclassifications of customer freight expenses and certain trade promotions
to conform the classifications of Fort Howard to those of Fort James. The
conforming of the accounting practices of Fort James and Fort Howard
resulted in no adjustments to net income or shareholders' equity. There
were no significant intercompany transactions between Fort James and Fort
Howard.
Cash proceeds from asset sales in 1997 totaling $190.1 million were
primarily from the sale of timberlands in the southeastern U.S. and in Maine
pursuant to an ongoing timberland divestiture program.
1996
In September 1996, the Company purchased the remaining 14% minority
interest in Jamont N.V., which is included in the European Consumer Products
Business, under an existing put and call agreement for $199.9 million. Fort
James recorded the acquisition of the remaining 14% minority interest, which
had a book value of $151 million, under the purchase method of accounting.
In October 1996, the Company completed the sale of its Inks
division of the Packaging Business, which included seven plants, for gross cash
proceeds of $27 million. This division manufactured and sold high quality
inks for packaging applications with annual net sales of approximately $47
million. In August 1996, the Company completed the sale of its Flexible
Packaging group for gross cash proceeds of $372.7 million. The Flexible
Packaging group had ten manufacturing facilities, annual net sales of $483
million and net assets totaling $336.7 million, which were net of total
liabilities of $8.4 million. In May 1996, the Company completed the sale of its
specialty operations business, which was a part of the North American
Consumer Products Business, for cash proceeds of approximately $30 million
and a combination of subordinated long-term notes and preferred stock. The
specialty operations business had annual net sales of approximately $125
million. Additionally in 1996, the Company sold its Handi-Kup foam cup
operations, formerly part of the North American
<PAGE>
FORT JAMES CORPORATION 39
Consumer Products Business, for approximately $52 million. The Handi-Kup
operations had annual net sales of approximately $96 million.
1995
In August 1995, the Company completed the spin-off to shareholders of Crown
Vantage Inc. ("Crown Vantage") which included a large part of the Company's
Communications Papers Business, along with the specialty paper-based portion
of its Packaging Business. Net proceeds from Crown Vantage's financings
totaling $480 million and pay-in-kind notes valued at $85 million were
received by the Company as a result of the spin-off. These amounts were treated
as a return of the Company's investment. The book value of net assets spun
off to Crown Vantage less proceeds received totaled $38 million which was
recorded as an adjustment to retained deficit. The operating results of the
facilities which now make up Crown Vantage were included in the consolidated
statements of operations and the consolidated statements of cash flows for the
eight months (35 weeks) ended August 27, 1995.
In November 1995, the Company acquired the cutlery division of Benchmark
Holdings, Inc. for $52.5 million. In May 1995, Fort James sold its option to
purchase its partners' 50% interest in the chemical recovery and cogeneration
facility at the Pennington, Alabama, pulp and paper mill for $22.2 million. Fort
James retained ownership of the remaining 50% interest in this facility.
Summary
The purchase prices of acquisitions were allocated to the acquired net assets
based on their respective fair values. Acquisitions and dispositions are
summarized below.
(in millions) 1997 1996 1995
- ---------------------------------------------------------------------------
Acquisitions of consolidated entities:
Fair value of assets acquired $199.9 $55.2
Liabilities assumed or created (2.7)
- ---------------------------------------------------------------------------
Cash paid for acquisitions $199.9 $52.5
- ---------------------------------------------------------------------------
Dispositions (other than Crown Vantage spin-off):
Fair value of assets sold $190.1 $508.9 $13.7
Non-cash consideration received (12.3) (2.8)
- ---------------------------------------------------------------------------
Cash received from sale of assets $190.1 $496.6 $10.9
===========================================================================
NOTE 3
Restructure
and Other
Unusual
Items
In 1997, the Company recorded a $454.2 million net charge for restructure and
other unusual items primarily associated with the merger and integration of the
combined operations. Included in this total are facility closures and
write-downs of redundant property, plant and equipment of $234.5 million,
severance and other employee related costs of $103.1 million, contract
termination costs of $82.8 million, transaction costs of $54.2 million, and
other merger related costs of $49.2 million offset by gains on sales of
timberlands of $69.6 million. As of December 28, 1997, payments of $87.8 million
have been made for these charges. The Company anticipates that substantially all
of the remaining restructure costs will be paid in 1998.
The facility closure costs represent the estimated loss on the closure
of facilities primarily in the North American and European Consumer Products
businesses that were necessary to eliminate redundancies in the combined
company. The charge for property, plant and equipment represents the
write-down to the net realizable value of less efficient and duplicate
machinery and equipment not needed in the combined restructured manufacturing
operations. The severance and other employee related costs provide for a
reduction of approximately 3,100 employees related to the facility closures
duplicate position eliminations and streamlining of operations related to cost
reduction initiatives. However, approximately 600 new jobs will be created from
the upgrade of remaining manufacturing facilities and expanded marketing and
product development capabilities. The costs of contract terminations
are comprised primarily of supply and sales distributor contracts.
<PAGE>
NOTES
to consolidated
financial statements
40 FORT JAMES CORPORATION
Transaction costs include investment bankers fees, legal fees, and other costs
paid for the consummation of the merger. An additional estimated $60 million of
nonaccruable merger-related costs will be recorded in 1998 as incurred.
Additionally, the Company had recorded restructuring and other items
charges of $10.7 million and $51.9 million in 1996 and 1995, respectively.
These charges included $83.3 million of severance charges, $63.5 million of
asset write-offs, and $5.0 million of transaction costs associated with the
Crown Vantage spinoff, offset by $89.2 million in net gains on business
dispositions (see Note 2). Severance charges related to approximately 1,250,
580 and 460 employees at the Company's European Consumer Products Business,
North American Consumer Products Business, and other domestic manufacturing
and corporate facilities, respectively. Asset write-downs related to asset
consolidations in Europe and the phase-out of certain packaging equipment. As
of December 28, 1997, the amount remaining in the accruals for the 1996 and
1995 charges was immaterial and is expected to be fully utilized in 1998.
NOTE 4
Other
Income
(in millions) 1997 1996 1995
- -------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates $ 7.4 $ 7.7 $25.7
Interest income 8.6 8.1 11.4
Gain on sale of assets 9.6 3.4 4.7
Foreign currency exchange gains (losses) (4.8) .6 (.4)
Other, net .6 (1.1) .6
- -------------------------------------------------------------------------------
Total other income $21.4 $18.7 $42.0
===============================================================================
NOTE 5
Income
Taxes
The components of income before income taxes, minority interests and
extraordinary item were as follows:
(in millions) 1997 1996 1995
- -------------------------------------------------------------------------------
Domestic $192.9 $405.9 $236.3
Foreign 79.4 97.7 52.8
- -------------------------------------------------------------------------------
Income before income taxes, minority interests
and extraordinary item $272.3 $503.6 $289.1
===============================================================================
Income tax expense (benefit) excluding income taxes on extraordinary item,
consisted of the following:
(in millions) 1997 1996 1995
- -------------------------------------------------------------------------------
Current:
Federal $135.4 $ 67.9 $ 66.2
State 29.2 13.3 7.1
Foreign 40.8 36.1 5.1
- -------------------------------------------------------------------------------
Total current income tax provision 205.4 117.3 78.4
- -------------------------------------------------------------------------------
Deferred:
Federal (19.4) 42.0 18.5
State (15.6) 3.8 5.4
Foreign (6.4) 7.9 25.5
- -------------------------------------------------------------------------------
Total deferred income tax
provision (benefit) (41.4) 53.7 49.4
- -------------------------------------------------------------------------------
Income tax expense $164.0 $171.0 $127.8
===============================================================================
<PAGE>
FORT JAMES CORPORATION 41
During 1997, 1996 and 1995, tax benefits credited to shareholders' equity, which
primarily related to the redemption of stock options, were $35.1 million, $3.0
million and $12.4 million, respectively. Cash payments for income taxes totaled
$125.9 million in 1997, $108.0 million in 1996 and $73.0 million in 1995. No
provision for income taxes has been made for $54.7 million of undistributed
earnings of certain of the Company's foreign subsidiaries and affiliates which
have been indefinitely reinvested. It is not practicable to determine the amount
of U.S. income tax which would be payable if such undistributed foreign earnings
were repatriated because any U.S. taxes payable on such repatriation would be
offset, at least in part, by foreign tax credits.
The difference between the federal statutory income tax rate on income
before income taxes, minority interests, and extraordinary item and the
Company's effective income tax rate relates to the following:
<TABLE>
<CAPTION>
Percent of Pretax Income
------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax effect 3.2 2.5 3.6
Restructured operations 9.2
Nondeductible transaction expenses 4.9
Federal audit settlement (7.2)
Foreign losses not benefited 3.6
Goodwill 4.1 2.3 2.7
Other items, net 3.8 1.3 (3.2)
- -------------------------------------------------------------------------------------
Effective income tax rate on current income 60.2% 33.9% 41.7%
- -------------------------------------------------------------------------------------
Effect of increase in income tax rate 2.5
- -------------------------------------------------------------------------------------
Effective income tax rate 60.2% 33.9% 44.2%
=====================================================================================
</TABLE>
In August 1995, the French Parliament passed a law imposing a 10% tax surcharge
on the normal corporate tax rate. The Company recorded a $7.4 million charge
($6.3 million, net of minority interests) to increase the deferred tax liability
for the effect of this increase in tax rate.
In December 1996, following a retroactive amendment to the Internal Revenue
Code, the United States Tax Court issued a favorable decision allowing certain
deductions claimed by Fort Howard in the years 1988 through 1995. As a result of
this decision, Fort James realized a $36 million tax benefit representing the
reversal of taxes previously accrued for these years. The Internal Revenue
Service is currently reviewing Fort James' federal income tax returns for the
years 1989 through 1995. In the opinion of management, potential adjustments
resulting from these examinations will not have a material effect on the
Company's results of operations or financial condition.
The income tax effects of temporary differences that gave rise to the net
deferred tax liability as of December 28, 1997, and December 29, 1996, were
related to the following:
(in millions) 1997 1996
- --------------------------------------------------------------------------------
Property, plant and equipment $ 904.4 $ 928.3
Pension benefits 88.5 75.3
Other items 91.8 64.1
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,084.7 1,067.7
- --------------------------------------------------------------------------------
Accrued liabilities (290.2) (148.5)
Postretirement benefits other than pensions (187.0) (181.3)
Alternative minimum tax credit carryforwards (87.7) (99.5)
Intangibles (77.4) (59.6)
Tax loss carryforwards (26.3) (62.7)
Other items (66.1) (43.4)
- --------------------------------------------------------------------------------
Total deferred tax assets (734.7) (595.0)
- --------------------------------------------------------------------------------
Valuation allowance 86.4 79.3
- --------------------------------------------------------------------------------
Net deferred tax liability $ 436.4 $ 552.0
================================================================================
<PAGE>
NOTES
to consolidated
financial statements
FORT JAMES CORPORATION 42
The change in the valuation allowance from December 29, 1996, to December 28,
1997, is primarily related to the effects of a French law change offset by the
usage of foreign net operating losses not previously recognized. If recognized
in the future, $39.0 million of these tax benefits will be allocated to reduce
goodwill of certain acquired subsidiaries.
As of December 28, 1997, the Company had $64.5 million of foreign net
operating loss carryforwards which expire primarily from 1998 through 2004 and
$1.8 million of foreign tax credit carryforwards which expire from 1998 through
2002. The Company also had alternative minimum tax ("AMT") credit carryforwards
of $87.7 million which have been reflected as a reduction of deferred taxes. AMT
credits may generally be carried forward indefinitely and used in future years
to the extent the Company's regular tax liability exceeds the AMT liability for
such future years.
NOTE 6
PENSION
PLANS
Pursuant to pre-existing James River plans, the Company sponsors various
noncontributory pension plans which cover substantially all of the James River
employees, and also participates in several multiemployer retirement plans which
provide defined benefits to those James River employees covered under certain
collective bargaining agreements. Fort Howard did not sponsor any defined
benefit plans for its employees. Benefits under the majority of plans for hourly
employees are primarily based on stated benefits per year of credited service.
Benefits for salaried employees are primarily related to compensation and years
of credited service. The Company makes contributions to its plans sufficient to
meet the minimum funding requirements of applicable laws and regulations plus
additional amounts, if any, as the Company, in consultation with its actuaries,
deems to be appropriate. Contributions to multiemployer plans are generally
based on negotiated labor contracts. The Company's contributions totaled $17.2
million, $19.5 million and $32.6 million in 1997, 1996 and 1995, respectively.
Plan assets consist principally of equity securities and corporate and
government obligations.
The components of net pension (income) cost were as follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C>
Service cost $ 16.8 $ 16.7 $ 16.2
Interest accrued on projected benefit obligation 86.1 84.8 95.5
Net investment (income) loss on plan assets:
Actual (303.1) (162.9) (246.0)
Deferral of difference between actual and expected
investment income 186.9 59.1 137.0
Net amortization 5.3 11.9 8.8
Contributions to multiemployer pension plans 4.5 4.6 5.1
- ----------------------------------------------------------------------------------------
Net pension (income) cost $ (3.5) $ 14.2 $ 16.6
========================================================================================
</TABLE>
Net amortization included amortization of the net transition assets, net
experience gains and losses, and prior service costs over 15 to 20 years. The
Company incurred termination benefit and curtailment costs associated with
enhanced benefits in the 1997, 1996 and 1995 restructure programs and business
dispositions. Charges of $3.8 million, $18.3 million and $8.0 million are
included with restructure and other unusual items for the years ended December
28, 1997, December 29, 1996, and December 31, 1995, respectively.
The actuarial assumptions used in determining net pension (income) cost
were as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate 7.75% 7.5% 8.6%
Assumed rate of increase in compensation levels 5.0% 5.0% 5.0%
Expected long-term rate of return on plan assets 10.0% 10.0% 10.0%
- --------------------------------------------------------------------------------
<PAGE>
FORT JAMES CORPORATION 43
The following table sets forth the funded status of the Company's plans:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
(in millions) Benefits Assets Benefits Assets
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Actuarial present value of:
Vested benefits $1,044.2 $102.8 $902.2 $164.0
Nonvested benefits 36.9 9.1 31.6 17.6
- -----------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 1,081.1 111.9 933.8 181.6
Effect of projected future salary increases 29.7 1.9 22.8 .8
- -----------------------------------------------------------------------------------------------------------------
Projected benefit obligation 1,110.8 113.8 956.6 182.4
- -----------------------------------------------------------------------------------------------------------------
Plan assets at fair value 1,478.1 103.2 1,200.4 158.0
- -----------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 367.3 (10.6) 243.8 (24.4)
Unrecognized net (gain) loss (190.0) 5.7 (82.6) 11.9
Unrecognized prior service cost 38.8 20.1 33.3 30.9
Unrecognized net transition asset (6.8) (1.5) (7.7) (3.0)
Minimum pension liability (22.5) (39.0)
- -----------------------------------------------------------------------------------------------------------------
Net pension asset (liability) $ 209.3 $ (8.8) $ 186.8 $ (23.6)
=================================================================================================================
</TABLE>
As of December 28, 1997, benefit obligations were determined using a discount
rate of 7.25% and an assumed rate of increase in compensation levels of 5.0%.
The effect of the change in the discount rate and other actuarial
assumptions was an increase in the projected benefit obligation of $74.4
million.
Other assets included net noncurrent pension assets of $223.0 million
as of December 28, 1997, and $202.2 million as of December 29, 1996, exclusive
of the additional minimum pension liabilities. As of December 28, 1997,
$22.5 million of additional minimum pension liabilities for underfunded
plans were included in other long-term liabilities, offset by an intangible
asset of $18.9 million and a charge of $2.1 million to retained deficit, net
of deferred taxes of $1.5 million. As of December 29, 1996, the additional
minimum pension liability of $39.0 million was offset by an intangible asset of
$30.5 million and a charge to retained deficit of $5.1 million, net of
deferred taxes of $3.4 million.
In 1995, the Company spun off plans to Crown Vantage. Under certain
conditions, including the inability of Crown Vantage to fund required
contributions, the Company has agreed to assume the liability for any
underfunded benefits for the plans spun off. In the opinion of the Company's
management, it is unlikely that these conditions will occur.
NOTE 7
POSTRETIREMENT
BENEFITS
OTHER THAN
PENSIONS
Fort James provides certain medical and life insurance benefits to eligible
retired employees under the pre-existing James River and Fort Howard
postretirement benefit plans. The related postretirement benefit obligations are
valued as separate plans. All of the Company's retiree medical plans are
unfunded.
James River Plans
Under the James River plans, domestic salaried employees hired before
January 1, 1993, generally become eligible for retiree medical benefits after
reaching age 55 with 15 years of service or after reaching age 65. Under
the salaried plan, post-age 65 eligible retirees are reimbursed for a
portion of the cost of premiums of Medicare supplement insurance
policies, based upon vested years of service. Post-age 65 salaried retirees
are also reimbursed for certain prescription drug costs, less
deductibles. Pre-age 65 eligible retirees are paid a stated percentage of
covered medical expenses, less deductibles. Salaried employees hired after
January 1, 1993, are not eligible for retiree medical benefits. Benefits,
eligibility and cost-sharing provisions for domestic hourly employees vary by
location and collective bargaining unit.
<PAGE>
NOTES
to consolidated
financial statements
44 FORT JAMES CORPORATION
The discount rate used in determining the net periodic postretirement
benefit cost was 7.6% for 1997, 7.4% for 1996 and 8.5% for 1995. The discount
rate used in determining the accumulated postretirement benefit obligation
was 7.1% and 7.6% as of December 28, 1997, and December 29, 1996, respectively.
The effect of the decrease in the discount rate was an increase in the
accumulated benefit obligation of $19.4 million. In addition, other
actuarial assumptions were changed to reflect current trends. The effect of
these changes was a decrease in the accumulated benefit obligation of $9.5
million.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation begins at 7.25% in 1998, declining by .25% per
year through 2002, .5% per year for 2003 through 2005 and .25% for 2006 to an
ultimate rate of 4.5%. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 28, 1997, would have increased by $39.3 million. The effect of this
change on the sum of the service cost and interest cost components of net
periodic postretirement benefit cost for 1997 would have been an increase of
$3.9 million.
Fort Howard Plans
Under the Fort Howard plans, domestic salaried and hourly employees generally
become eligible for retiree medical benefits after reaching age 55 with 10
years of service. Those employees retiring prior to February 1, 1990, who had
met certain eligibility requirements are entitled to postretirement health
care benefit coverage. These benefits, including a percentage of medical
expenses and prescription drugs, are subject to deductibles, copayment
provisions, a lifetime maximum benefit and other limitations. In addition,
those employees who retire after January 31, 1990, and meet certain age and
years of service requirements may purchase health care benefit coverage
from Fort James up to age 65.
The discount rate used in determining the net periodic postretirement
benefit cost was 7.5% in 1997, 1996 and 1995. The discount rate used in
determining the accumulated post-retirement benefit obligation was 7.1% in
1997 and 7.5% in both 1996 and 1995. The effect of the decrease in the discount
rate was an increase in the accumulated benefit obligation of $.2 million.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation begins at 8.5% in 1998, declining by 1% per
year through 2000 to an ultimate rate of 6.5%. If the health care cost trend
rate assumptions were increased by 1%, there would have been no material
effect on the accumulated postretirement benefit obligation as of December 28,
1997, or the net periodic postretirement benefit cost for 1997.
The components of net periodic postretirement benefit cost for Fort James
were as follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C>
Service cost $ 6.6 $ 8.1 $10.5
Interest cost on accumulated postretirement benefit obligation 26.9 29.0 40.6
Net amortization (9.8) (7.7) (9.1)
- ----------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $23.7 $29.4 $42.0
========================================================================================
</TABLE>
Net amortization included amortization of prior service gains and
unrecognized net gains over approximately 12 to 15 years. In 1997 and 1996, the
Company incurred curtailment gains of $11.4 million and $12.2 million,
respectively, related to its restructure programs and business
dispositions. In 1995, the Company incurred a curtailment gain of $3.4
million related to revisions in eligibility requirements and monthly benefits
received under the Fort Howard plans. In addition to the curtailment gain,
the accumulated postretirement benefit obligation as of December 31, 1995,
was reduced by $10.6 million which is being amortized over 12 years, the
average remaining service period of Fort Howard active employees.
<PAGE>
FORT JAMES CORPORATION 45
Summary information on Fort James' plans was as follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996
- -----------------------------------------------------------------------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $207.8 $191.0
Fully eligible active participants 48.5 42.1
Other active participants 115.2 120.6
- -----------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 371.5 353.7
Unrecognized net gain 52.3 63.5
Unrecognized prior service gain 73.5 81.1
- -----------------------------------------------------------------------------
Accrued postretirement benefit obligation $497.3 $498.3
=============================================================================
</TABLE>
As of December 28, 1997, and December 29, 1996, the Company has included
$22.5 million and $22.4 million of accrued postretirement benefit costs
in accrued liabilities, respectively, representing the estimated current
portion of this liability.
NOTE 8
BALANCE
SHEET
INFORMATION
Inventories
<TABLE>
<CAPTION>
(in millions) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C>
Raw materials $184.3 $177.0
Finished goods and work in process 550.2 498.8
Stores and supplies 159.4 160.9
- ---------------------------------------------------------------------------------------
893.9 836.7
Subtraction to state certain inventories at last-in, first-out cost (39.6) (35.1)
- ---------------------------------------------------------------------------------------
Total inventories $854.3 $801.6
=======================================================================================
Valued at lower of cost or market:
Last-in, first-out $507.2 $365.7
First-in, first-out or average 347.1 435.9
- ---------------------------------------------------------------------------------------
Total inventories $854.3 $801.6
=======================================================================================
</TABLE>
Property, Plant and Equipment
<TABLE>
<CAPTION>
(in millions) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C>
Land and improvements $ 216.2 $ 214.6
Buildings 1,142.5 1,154.3
Machinery and equipment 6,081.5 6,202.6
Construction in progress 327.4 263.0
- ---------------------------------------------------------------------------------------
7,767.6 7,834.5
Accumulated depreciation (3,218.8) (2,925.4)
- ---------------------------------------------------------------------------------------
4,548.8 4,909.1
Timber and timberlands, net 16.5 90.2
- ---------------------------------------------------------------------------------------
Net property, plant and equipment $ 4,565.3 $ 4,999.3
=======================================================================================
</TABLE>
<PAGE>
NOTES
to consolidated
financial statements
46 FORT JAMES CORPORATION
Accrued Liabilities
<TABLE>
<CAPTION>
(in millions) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C>
Restructure reserve $263.2 $ 60.0
Taxes payable, other than income taxes 75.7 102.6
Interest payable 64.6 92.0
Employee insurance benefits 76.8 76.1
Compensated absences 75.5 74.1
Other items 357.2 401.0
- ----------------------------------------------------------------------------------------
Total accrued liabilities $913.0 $805.8
========================================================================================
</TABLE>
NOTE 9
INDEBTEDNESS
<TABLE>
<CAPTION>
Weighted
Average
(in millions) Interest Rate Maturities 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C>
Revolving credit facilities 6.02% 2000-2002 $1,642.0 $ 368.3
Commercial paper/credit agreements 4.67 2000-2002 89.5 57.9
5.57% - 6.88% notes 6.67 1999-2007 1,232.1 463.1
7.75% - 8.38% notes 8.06 2001-2023 454.1 555.4
9.25% notes 9.25 2001-2021 255.0 850.0
Subordinated notes 9.52 2003-2006 123.1 916.6
Medium-term notes 7.84 2000-2004 106.0 200.0
Revenue bonds 7.29 2005-2023 107.7 109.3
Capital lease obligations 10.21 2004-2017 180.4 170.6
Term loans 743.0
- ---------------------------------------------------------------------------------------
Total 4,189.9 4,434.2
Less current portion 34.4 128.9
- ---------------------------------------------------------------------------------------
Long-term debt $4,155.5 $4,305.3
=======================================================================================
</TABLE>
Minimum Principal Payments
Minimum principal payments on long-term debt, excluding commercial paper, credit
agreements and revolving credit borrowings, for the next five years are as
follows:
(in millions) 1998 1999 2000 2001 2002
- --------------------------------------------------------------------------------
Scheduled maturities $34.4 $228.2 $53.5 $284.8 $186.8
================================================================================
If the current level of commercial paper/credit agreements and revolving
credit agreements remains outstanding until the expiration of the underlying
or supporting agreements, additional payments of $47 million and $1,684
million would be required in 2000 and 2002, respectively. It is the Company's
current intention to refinance or renew such agreements prior to their
expiration.
In connection with the merger, Fort James undertook a plan (the "Debt
Refinancing Plan") designed to refinance an aggregate of approximately $2
billion principal amount of debt of Fort James and Fort Howard. In connection
with the Debt Refinancing Plan, the Company incurred a $131.5 million, net
of taxes, extraordinary loss for prepayment penalties and the write-off of
deferred loan costs.
At the time of the merger, as the first step in the Debt Refinancing Plan,
Fort James and Fort Howard entered into a new $2.5 billion bank credit
facility (the "New Credit Facility") and borrowed $666 million thereunder to
replace certain of the pre-merger bank credit facilities. Additionally, on
August 13, 1997, prior to the effectiveness of the merger, Fort James
repurchased and retired $200 million in aggregate principal amount of its
9.77% Senior Notes due 2014 with proceeds from previous divestitures and excess
cash from operations. As the second step in the Debt Refinancing Plan, on
September 8, 1997, Fort Howard commenced cash tender offers for approximately
$1.47 billion of its outstanding public debt securities and, upon expiration of
the
<PAGE>
FORT JAMES CORPORATION 47
tender offers in the fourth quarter, purchased a total of $1.28 billion of such
debt securities as follows: (i) $89.9 million of 8 1/4% Senior Notes due
2002, (ii) $395.0 million of 9 1/4% Senior Notes due 2001, (iii) $559.3 million
of 9% Senior Subordinated Notes due 2006 and (iv) $234.2 million of 10%
Subordinated Notes due 2003. The tender offers were funded through a
combination of borrowings under the New Credit Facility and the issuance of $720
million aggregate principal amount of notes. These notes were issued on
September 29, 1997, as follows: (i) $100 million 6 1/2% Senior Notes due
2002, (ii) $320 million 6 5/8% Senior Notes due 2004 and (iii) $300 million
6 7/8% Senior Notes due 2007.
In January 1998, the Company gave notice that it will exercise its call
option on its 10% Subordinated Notes due March 15, 2003, in March of 1998 at
a premium of 105% of the notes' face value of $64.3 million. Costs associated
with the early extinguishment of debt are expected to be $4.2 million (or
$2.6 million, net of taxes). The call will be financed with borrowings
under the New Credit Facility.
Revolving Credit Facilities
As of December 28, 1997, Fort James and its consolidated subsidiaries had
revolving credit agreements with various domestic and foreign banks
providing for unsecured borrowings of up to approximately $2,790 million. The
interest rates associated with the revolving credit agreements are primarily
based, at the option of the Company, on the prime rate, the London Interbank
Offered Rate ("LIBOR"), the Paris Interbank Offered Rate, certificate of
deposit rates, or bankers' acceptance rates. Annual commitment fees of up to
15 basis points on the unused portion of the commitments may be incurred during
the revolving loan periods; additionally, certain agreements provide for
facility fees which may range from 6 to 10 basis points of the committed
amounts. The majority of the Company's domestic and foreign revolving credit
agreements, totaling $2,500 million, expire in August 2002; the remaining
agreements expire from 1998 through 2000.
Commercial Paper and Credit Agreements
As of December 28, 1997, the Company had domestic and foreign commercial paper
programs providing for commercial paper issuances of up to $583.5 million. In
addition, the Company had agreements with several banks providing for other
borrowings, dependent upon bank availability. These obligations generally
bear interest at below-prime rates. As of December 29, 1996, the outstanding
commercial paper and borrowings under credit agreements had average interest
rates of 6.35%. Because of the availability of long-term financing through
the Company's global revolving credit capacity and the Company's intention
to refinance commercial paper and credit agreements borrowings, these
borrowings have been classified as long-term debt.
Term Loans, Notes and Debentures
Fort James' most restrictive agreements contain limitations on borrowings and
require maintenance of a minimum ratio of net tangible assets. As of December
28, 1997, under the most restrictive provisions of Fort James' debt
agreements, Fort James had additional borrowing capacity of $1.9 billion.
Certain of Fort James' notes and revenue bonds are collateralized by
assets consisting of property, plant and equipment, accounts receivable and
inventories. Such assets are immaterial in relation to total assets.
NOTE 10
FINANCIAL
INSTRUMENTS
The Company employs derivative financial instruments primarily to reduce its
exposure to adverse fluctuations in interest rates and foreign exchange rates.
These financial instruments, when entered into, are designated as hedges of
underlying exposures. Because of the high correlation between the hedging
instrument and the underlying exposure being hedged, fluctuations in the value
of the instruments are generally offset by changes in the value of the
underlying exposures. Fort James effectively monitors the use of these
derivative financial instruments through the use of objective measurement
systems, well-defined market and credit risk limits and timely reports
<PAGE>
NOTES
to consolidated
financial statements
48 FORT JAMES CORPORATION
to senior management according to prescribed guidelines. Virtually all of the
Company's derivatives are "over-the-counter" instruments.
The estimated fair values of derivatives used to hedge or modify the
Company's risks fluctuate over time. These fair value amounts should not
be viewed in isolation, but rather in relation to the fair values of the
underlying hedged transactions and investments, and the overall reduction
in exposure to adverse fluctuations in interest rates, foreign exchange
rates, and other market risks.
The notional amounts of the derivative financial instruments do not
necessarily represent amounts exchanged by the parties and, therefore, are
not a direct measure of Fort James' exposure through its use of derivatives.
The amounts exchanged are calculated by reference to the notional amounts
and by other terms of the derivatives, such as interest rates, exchange rates
or other financial indices.
Credit Risk
Fort James has established strict counterparty credit guidelines and only enters
into transactions with financial institutions that are investment grade.
Counterparty exposures are monitored and any downgrade in credit rating
receives immediate review. To minimize the concentration of credit risk, the
Company enters into derivative transactions with a portfolio of financial
institutions. As a result, the Company considers the risk of counterparty
default to be minimal.
Interest Rate Management
Fort James has implemented a policy to maintain the percentage of fixed and
variable rate debt within certain parameters. The Company enters into interest
rate swap agreements that maintain the fixed/variable mix within these defined
parameters. These contracts had maturities ranging from one to two years on
December 28, 1997. Variable rates are predominantly linked to LIBOR.
Additionally, the Company enters into interest rate cap agreements that
entitle it to receive from a financial institution the amount, if any, by
which the interest payments on variable rate debt exceed pre-specified interest
rates through 1999. During 1997, the Company unwound $648 million in notional
amount of interest rate swaps at a cost of $8 million which is being amortized
through January 1999.
The fair value of the Company's financial instruments related to its
indebtedness were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------
Carrying Value Carrying Value
or Gross or Gross
Notional Fair Notional Fair
(in millions) Amount(1) Value Amount(1) Value
- -------------------------------------------------------------------------------------------------------
<S> <C>
Long-term debt, including current maturities $(4,190) $(4,291) $(4,434) $(4,586)
Interest rate swaps 1,138 (8) 1,286 (15)
Interest rate caps 500 500 1
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Long-term debt amount is carrying value; interest rate swap and cap amounts
are notional amounts.
The estimates of fair values of the Company's financial instruments related to
indebtedness are based on quoted market prices of comparable instruments
or on current rates available to the Company for financial instruments
with similar terms and remaining maturities. Based on the Company's total
indebtedness at December 28, 1997, a 10 basis point interest charge would
impact the fair value of the total debt portfolio by approximately $12.3
million. This exposure would be offset by a $.2 million change to the fair value
of the interest rate swap portfolio. The weighted-average pay rate
exceeded the weighted-average receive rate under the interest rate contracts by
.6% and .3%, respectively, for the years ended December 28, 1997, and December
29, 1996.
<PAGE>
FORT JAMES CORPORATION 49
Foreign Currency Management
Most of Fort James foreign currency exposures are managed on a consolidated
basis, which allow for the netting of certian exposures and thus, take advantage
of any natural offsets. The Company enters into forward exchange contracts and
purchase currency options which mature in one year or less (principally
European currencies) to hedge firm and anticipated purchase committments and
firm sales commitments denominated in foreign currencies. As of December 28,
1997, and December 29, 1996, the Company had net unrealized gains (losses) of
$.5 million and $(.1) million, respectively, on a national amount of $304
million and $47 million, respectively, for these hedge instruments.
In January and February 1997, the Company unwound $470 million in notional
amount of foreign exchange contracts, along with related interest rate
agreements, at a cost of $31.5 million, net of tax benefits that was recorded
as a charge to equity. These foreign exchange contracts were designated as
hedges of a portion of the Company's net investment to its European Consumer
Products Business and were terminated prior to their original expiration in
September 1998.
NOTE 11
COMMON
STOCK
Fort James has 500 million authorized shares of common stock, $.10 par value
("Common Stock"), of which 209,306,016 shares were outstanding as of December
28, 1997. Common shares reserved for issuance as of December 28, 1997, were as
follows:
1997
- --------------------------------------------------------------------------------
Stock option plans 7,585,221
Incentive stock plan 9,901,347
Deferred stock plan 261,456
Director stock ownership plan 95,589
Conversion of Series K preferred stock 2,674,953
Conversion of Series L preferred stock 5,449,305
Conversion of Series N preferred stock 1,439,313
- --------------------------------------------------------------------------------
Total common shares reserved for issuance 27,407,184
================================================================================
During 1996 and 1995, the Company issued 14.5 million shares of Common Stock at
$14.73 per share and 34.7 million shares of Common Stock at $8.73 per share,
respectively. The net proceeds to the Company were primarily used to prepay or
redeem a portion of its indebtedness.
Shareholder Rights Plan
Under a shareholder rights plan, preferred stock purchase rights ("Rights") are
issued at the rate of one Right for each share of Common Stock. Each Right
entitles its holder to purchase one one-thousandth of a share of Series M
Cumulative Participating Preferred Stock ("Series M") at an exercise price of
$150, subject to adjustment. The Rights will only be exercisable if a person or
group acquires, has the right to acquire, or has commenced a tender offer for
15% or more of the outstanding Common Stock. The Rights are nonvoting, pay no
dividends, expire on March 1, 1999, and may be redeemed by the Company for $.01
per Right at any time before the tenth day (subject to adjustment) after a 15%
position is acquired. The Rights have no effect on earnings per share until they
become exercisable.
After the Rights are exercisable, if the Company is acquired in a merger or
other business combination, or if 50% or more of the Company's assets are sold,
each Right will entitle its holder (other than the acquiring person or group) to
purchase, at the then-current exercise price, common stock of the acquiring
person having a value of twice the exercise price. In addition, in the event
a 15% or greater shareholder (i) acquires the Company through a merger where
Fort James is the surviving corporation, (ii) engages in certain self-dealing
transactions, or (iii) increases his ownership other than through a cash tender
offer providing fair value to all holders of Common Stock, each Right will
entitle its holder (other than the acquiring person or group) to purchase, at
the then-current exercise price, Common Stock having a value of twice the
exercise price.
<PAGE>
NOTES
to consolidated
financial statements
50 FORT JAMES CORPORATION
NOTE 12
PREFERRED
STOCK
The Company is authorized to issue up to five million shares of preferred stock,
$10 par value. The preferred shares are issuable in series, each with varying
dividend rates, redemption rights, conversion terms, liquidation values and
voting rights. Outstanding series of preferred stock were as follows:
<TABLE>
<CAPTION>
Depositary Shares
------------------------------------------- Preferred Annual Liquidation Value
Liquidation Shares Annual Shares Dividend ------------------
Value Outstanding Dividend Outstanding Requirement (in millions)
Per Share 1997 Per Share 1997 (in millions) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Series K* $50 $3.3750 1,999,795 $6.7 $100.0 $100.0
Series L 50 3,998,700 3.5000 999,675 14.0 199.9 200.0
Series N 50 1,056,168 3.5000 264,042 3.7 52.8 52.8
Series O 98.1
Series P 287.5
- ------------------------------------------------------------------------------------------------------------
Total 3,263,512 $24.4 $352.7 $738.4
============================================================================================================
</TABLE>
*Amounts listed for Series K are for preferred shares.
As of December 28, 1997, the Company has reserved 250,000 preferred shares for
the issuance of Series M preferred stock under the Shareholder Rights Plan. In
1997, the Series O 8 1/4% Cumulative Preferred Stock ("Series O") was
redeemed for $98.1 million and the Series P 9% Cumulative Convertible
Preferred Stock ("Series P") was converted to 15.3 million shares of Common
Stock in a non-cash financing transaction of $287.5 million.
The Series K $3.375 Cumulative Convertible Exchangeable Preferred
Stock ("Series K") is convertible at the option of the holder into Common
Stock at $37.38 per common share (or 1.3376 shares of Common Stock for each
preferred share). The Series K is redeemable by the Company at $50 per
share plus accrued dividends. The Series K is exchangeable at the option
of the Company for 6.75% Convertible Subordinated Debentures due November 1,
2016, at $50 principal amount per share of Series K. If issued, these
debentures will be convertible into Common Stock on the same terms as the
Series K.
The Series L $14.00 Cumulative Convertible Exchangeable Preferred Stock
("Series L") and the Series N $14.00 Cumulative Convertible Exchangeable
Preferred Stock ("Series N") are each held in the form of depositary
shares, with each depositary share representing a one-quarter interest in
a preferred share. The Series L and the Series N depositary shares are
convertible at the option of the holder into Common Stock at $36.69 per
common share (or 1.3626 shares of Common Stock per depositary share). The Series
L and Series N depositary shares are each redeemable by the Company at $50 per
depositary share plus accrued dividends. The Series L and Series N depositary
shares are each exchangeable at the option of the Company for 7% Convertible
Subordinated Debentures due October 1, 2017, at $50 principal amount per
depositary share. If issued, these debentures will be convertible into Common
Stock on the same terms as the depositary shares.
NOTE 13
EMPLOYEE
BENEFIT PLANS
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its stock-based compensation plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
FASB Statement 123, "Accounting for Stock-Based Compensation," pro forma net
income (loss) and earnings per share would have been as follows:
(in millions, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------
Net income (loss) $(37.4) $315.2 $139.3
Earnings per share--basic $ (.41) $ 1.42 $ .49
Earnings per share--diluted $ (.33) $ 1.40 $ .49
- --------------------------------------------------------------------------------
Pursuant to the merger, all of Fort Howard's options became fully vested,
thereby increasing the impact of pro forma compensation cost in 1997. Fort
James' stock option plans provide for the granting of options to pur-
<PAGE>
FORT JAMES CORPORATION 51
chase common stock to certain directors, officers and key employees. Options
are granted at exercise prices equal to the fair market value of such stock as
of the date of grant and have terms of ten years. Fort James' options vest in
two or three equal annual installments. Effective with the merger, Fort Howard's
options were automatically converted into Fort James options at the merger
exchange ratio. As of December 28, 1997, there were 655 employees and directors
holding options.
Stock option activity, including the retroactive effect of converting
Fort Howard's options into Fort James' options, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(in thousands, except per share amounts) Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Balance, beginning of year 10,543 $18.34 9,437 $16.86 11,039 $17.52
Granted 354 40.27 2,416 23.90 2,225 22.82
Forfeited (117) 27.41 (150) 23.61 (176) 20.62
Exercised (4,373) 14.53 (951) 14.95 (3,477) 21.99
Expired (109) 20.53 (209) 27.77 (174) 28.62
- --------------------------------------------------------------------------------------------------------------
Balance, end of year 6,298 $21.83 10,543 $18.34 9,437 $16.86
==============================================================================================================
Exercisable 5,026 6,679 6,698
Available for grant 2,692 2,707
Weighted-average fair value of
options granted during the year $13.22 $7.26 $6.96
==============================================================================================================
</TABLE>
The fair value of each option grant, including the retroactive effect of
converting Fort Howard's options into Fort James' options, was estimated on
the grant date using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
Fort James Fort Howard
---------------------------------- ------------------
1997 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C>
Dividend yield 1.50% 2.00% 2.00% 0.00% 0.00%
Volatility rate 27.56% 27.26% 26.02% 19.26% 24.32%
Risk-free interest rate 6.27% 6.18% 6.37% 6.07% 5.51%
Expected option life 5 years 5 years 5 years 5 years 5 years
==========================================================================================
</TABLE>
The following table summarizes information about fixed stock options
outstanding, as of December 28, 1997:
<TABLE>
<CAPTION>
(in thousands, except year and per share amounts)
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Range of Weighted-Average
Exercise Number Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------
<S> <C>
$11.19 - $14.36 2,153 4.3 years $13.21 2,153 $13.21
$15.63 - $22.97 1,469 7.4 years 19.64 1,464 19.63
$23.07 - $31.87 1,720 7.1 years 26.44 971 26.36
$32.25 - $40.66 956 8.2 years 36.31 438 33.66
- -------------------------------------------------------------------------------------------------------
Total 6,298 5,026
=======================================================================================================
</TABLE>
Restricted and Incentive Stock
Pursuant to the 1996 Stock Incentive Plan and the Director Stock Ownership Plan,
the Company may also grant restricted stock and incentive stock awards to
certain directors, officers and key employees. Restricted stock awards of
925,901 and 715,650 shares of Common Stock were granted in 1997 and 1996 (of
which 2,994 and 2,825 shares were deferred) at a weighted-average grant date
fair value of $43.57 and $26.79 per share, respectively. Awards granted to
officers and key employees will vest in three to eight years, with the potential
for earlier vesting of certain awards based on the Company's performance, and
awards granted to
<PAGE>
NOTES
to consolidated
financial statements
52 FORT JAMES CORPORATION
directors will vest one year from the date of grant. Incentive stock awards of
114,112 and 150,000 shares of Common Stock were granted in 1997 and 1996 at a
weighted-average grant date fair value of $43.05 and $26.44 per share,
respectively. Vesting of these shares is based on the Company's financial
performance. The Company recognized compensation expense related to restricted
and incentive stock awards of $13.1 million in 1997 and $3.0 million in 1996. As
of December 28, 1997, there were 8,497,000 shares available for grant pursuant
to the 1996 Stock Incentive Plan which may be granted as options, restricted
stock or incentive stock. Effective with the merger, the Company authorized an
additional 8 million shares available for grant pursuant to the 1996 Stock
Incentive Plan. The Director Stock Ownership Plan has 90,000 shares available
for grant as of December 28, 1997.
Stock Plans for Employees
The Company's StockPlus Investment Plan is available to substantially
all of James River's domestic employees. Several alternative investment
funds are available, including an investment fund consisting of Common Stock.
Participating employees may contribute, through periodic payroll deductions,
up to 10% of their compensation. Participant contributions of up to 6% of
compensation are matched by the Company at a 60% rate. Additionally the
Company may make discretionary contributions of up to 1% of all eligible
employees' base salary to the plan. As of December 28, 1997, there were 15,000
participants in the plan, and the plan held 9 million shares of Common Stock
and $140 million of other investments. Company contributions to this plan
totaled $12.1 million in 1997, $16.8 million in 1996 and $15.2 million in 1995.
A substantial majority of Fort Howard's employees are covered by defined
contribution plans. The Company makes annual discretionary contributions
under these plans. Participants may also contribute a percentage of their
compensation to the plans. As of December 28, 1997, there were approximately
6,000 participants in these plans, and the plans held .9 million shares of
Common Stock. Company contributions to these plans totaled $16.3 million in
1997 and 1996 and $13.2 million in 1995.
In addition, the Company maintains a stock purchase plan for the benefit of
certain Canadian employees. As of December 28, 1997, 59,000 shares of Common
Stock were held in this plan.
NOTE 14
Related
Party
Transactions
As of December 28, 1997, Morgan Stanley, Dean Witter Discover & Co. (the
surviving Corporation in the June 1, 1997, merger of Morgan Stanley Group Inc.
("Morgan Stanley Group") with and into Dean Witter Discover & Co.) ("Morgan
Stanley, Dean Witter") and certain of its affiliates owned 3% of Common Stock.
As of December 29, 1996, Morgan Stanley Group and certain of its affiliates
controlled 26% of Fort Howard's common stock.
Morgan Stanley & Co. Incorporated ("MS&Co"), an affiliate of Morgan
Stanley, Dean Witter, has served as lead underwriter with respect to Fort
James' and Fort Howard's common stock and public debt offerings and has
received underwriting fees of $5 million in 1997, $3 million in 1996 and $7
million in 1995 in connection with such public offerings. MS&Co is also a
market maker with respect to Fort Howard's public debt securities. MS&Co
also periodically provided financial advisory services for Fort Howard for
which it received customary fees. Additionally, in connection with the
merger, Fort Howard paid MS&Co approximately $20 million in fees for its
services as an investment advisor.
<PAGE>
FORT JAMES CORPORATION 53
NOTE 15
Commitments
and Contingent
Liabilities
Operating Leases
The Company leases certain facilities, vehicles and equipment over varying
periods. None of the agreements contain unusual renewal or purchase options. As
of December 28, 1997, future minimum rental payments under noncancelable
operating leases were as follows:
Minimum
(in millions) Rentals
- --------------------------------------------
1998 $ 29.3
1999 25.4
2000 23.4
2001 19.2
2002 12.7
2003 and thereafter 48.2
- --------------------------------------------
Total future minimum rentals $158.2
============================================
Rent expense totaled $83.2 million in 1997, $88.6 million in 1996 and $87.6
million in 1995.
Litigation and Environmental Matters
The Company is party to various legal proceedings generally incidental
to its business and is subject to a variety of environmental and
pollution control laws and regulations. As is the case with other companies in
similar industries, Fort James faces exposure from actual or potential claims
and legal proceedings.
During 1994, James River was sued in Morgan County, Alabama, in a class
action and in Bridgeport, Connecticut, by certain former holders of James
River's 10 3/4% Debentures due October 1, 2018, all of which were retired by
means of a tender offer to all holders or redeemed on November 2, 1992. In
general, the complaints alleged violations of a covenant prohibiting use of
lower cost borrowed funds to redeem the Debentures before October 1, 1998,
and of various disclosure obligations, and sought damages in excess of $50
million plus punitive damages in excess of $500 million. In June 1997, the
Alabama court granted James River summary judgement on the remaining claims,
and dismissed the action. The plaintiffs have appealed to the Alabama Supreme
Court. The Company believes the Alabama case is without merit and intends
to defend it vigorously. Most of the holders electing out of the class are
plaintiffs in the Connecticut case. In 1996 and 1997, the Company settled the
claims of an institutional holder and the Connecticut plaintiffs,
representing approximately 55 percent of the debentures, for a total of $1.4
million plus reimbursement of attorney's fees.
In May 1997, the Attorney General of the State of Florida filed a civil
action in the Gainesville Division of the United States District Court for the
Northern District of Florida against the Company and eight other
manufacturers of sanitary paper products alleging violations of federal and
state antitrust and unfair competition laws. The complaint seeks civil
penalty under Florida law of $1 million for each alleged violation against each
defendant, an unspecified amount of treble damages and injunctive relief. Over
the following weeks, additional civil class actions were filed in various
federal and state courts against the same defendants alleging violations of
federal and state antitrust statutes and seeking treble damages and
injunctive relief. Pursuant to the order of the Judicial Panel on
Multidistrict Litigation, the federal cases were consolidated in the U.S.
District Court for the Northern District of Florida at Gainesville. Similar
state actions are proceeding in California and Tennessee. The litigation is in
its early stages. The Company believes these cases are without merit and is
vigorously defending both federal and state actions.
Although the ultimate disposition of legal proceedings cannot be predicted
with certainty, it is the present opinion of the Company's management that the
outcome of any claim which is pending or threatened, either individually or on
a combined basis, will not have a materially adverse effect on the consolidated
financial condition of Fort James but could materially affect consolidated
results of operations in a given year.
<PAGE>
NOTES
to consolidated
financial statements
54 FORT JAMES CORPORTATION
In addition, Fort James has been identified as a potentially responsible
party ("PRP"), along with others, at various U.S. Environmental Protection
Agency ("EPA") designated superfund sites and is involved in remedial
investigations and actions under federal and state laws. Among these sites, the
Company, along with six other current and former operators of pulp and paper
facilities, has been identified as a PRP by the U.S. Fish and Wildlife Service
and other state and federal agencies, including the EPA, and tribal
entities, regarding contamination of the lower Fox River by hazardous
substances. The agencies and tribes seek primary restoration of the river, and
natural resources damages. At this time, the Company, in conjunction with
other PRPs, has agreed to participate with the State of Wisconsin in the
funding of primary restoration studies and a natural resources damages
assessment and is engaged in negotiations with federal and state agencies
and tribes to resolve outstanding claims.
In 1997, the Company adopted the American Institute of Certified Public
Accountants Statement of Position 96-1, "Environmental Remediation Liability"
which had no material effect on the Company's consolidated financial position or
results of operations. It is the Company's policy to accrue remediation costs on
an undiscounted basis when it is probable that such costs will be incurred and
when a range of loss can be reasonably estimated. Fort James' accrued
environmental liabilities, including remediation and landfill closure costs,
totaled $55.4 million and $57.0 million as of December 28, 1997, and December
29, 1996, respectively. The Company periodically reviews the status of all
significant existing or potential environmental issues and adjusts its accruals
as necessary. The accruals do not reflect any possible future insurance
recoveries. Estimates of costs for future remediation are necessarily imprecise
due to, among other things, the identification of presently unknown remediation
sites and the allocation of costs among potentially responsible parties. The
Company believes that its share of the costs of cleanup for its current
remediation sites will not have a material adverse impact on its consolidated
financial position but could have a material effect on consolidated results of
operations in a given year. As is the case with most manufacturing and many
other entities, there can be no assurance that the Company will not be named as
a PRP at additional sites in the future or that the costs associated with such
additional sites would not be material.
In 1997, the EPA published rules which contain regulations affecting pulp
and paper industry discharges of wastewater and gaseous emissions, commonly
referred to as the "cluster rules." These rules require changes in the pulping
and bleaching processes presently used in some U.S. pulp mills, including
several of Fort James' mills. Based on its evaluation of the rules, the Company
believes that capital expenditures of approximately $100 million may be
required, the majority of which will be spent during the next three to four
years.
NOTE 16
Segment
Information
The Company operates in the following industry segments: (i) the Consumer
Products segment, which consists of the manufacture and marketing of personal
care products including tissue and towels and disposable tabletop products
including napkins, plates and cutlery organized along retail and away-from-home
market channels; (ii) the Packaging segment manufactures folding cartons and
paperboard principally for food and other consumer products manufacturers; and
(iii) the Communications Papers segment manufactures and markets uncoated
business and printing papers serving the commercial printing and office markets.
The Company's operations are principally domestic other than the Consumer
Products segment, which includes the European Consumer Products Business.
<PAGE>
FORT JAMES CORPORATION 55
<TABLE>
<CAPTION>
Consumer Products
--------------------------- Intersegment
North Communications elimination/
(in millions) America Europe Packaging Papers Corporate Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
1997
Net Sales $4,360.0 $1,828.1 $782.9 $467.7 $(179.7) $7,259.0
Segments results before restructure
and other unusual items 845.4 202.4 81.3 19.8 (92.0) 1,056.9
Restructure and other unusual items (138.3) (90.4) (25.2) (3.9) (196.4) (454.2)
- -----------------------------------------------------------------------------------------------------------------
Income from operations 707.1 112.0 56.1 15.9 (288.4) 602.7
Depreciation and amortization 274.3 114.5 52.9 48.4 7.2 497.3
Capital expenditures 313.0 69.0 55.0 36.4 32.5 505.9
Total assets 3,520.7 2,191.1 612.3 570.8 838.3 7,733.2
=================================================================================================================
1996
Net sales $4,362.0 $1,980.2 $1,139.9 $ 456.7 $(231.7) $7,707.1
Segment results before restructure
and other unusual items 753.3 177.1 91.9 22.2 (124.5) 920.0
Restructure and other unusual items (13.1) (42.0) 49.0 (4.6) (10.7)
- -----------------------------------------------------------------------------------------------------------------
Income from operations 740.2 135.1 140.9 22.2 (129.1) 909.3
Depreciation and amortization 269.4 128.4 72.1 48.6 7.1 525.6
Capital expenditures 272.2 96.3 78.6 34.1 18.3 499.5
Total assets 3,527.5 2,607.5 585.2 603.4 833.3 8,156.9
=================================================================================================================
1995
Net sales $4,440.6 $1,949.9 $1,659.9 $1,091.4 $(253.9) $8,887.9
Segment results before restructure
and other unusual items 583.5 63.5 76.1 191.2 (79.0) 835.3
Restructure and other unusual items (5.1) (22.3) (7.1) (2.2) (15.2) (51.9)
- -----------------------------------------------------------------------------------------------------------------
Income from operations 578.4 41.2 69.0 189.0 (94.2) 783.4
Depreciation and amortization 255.8 137.5 83.7 103.1 6.6 586.7
Capital expenditures 231.2 94.5 113.0 45.7 4.1 488.5
Total assets 3,661.4 2,793.1 949.7 672.4 834.7 8,911.3
=================================================================================================================
</TABLE>
Intersegment sales are recorded at market prices and are eliminated in
consolidation. Corporate assets consist primarily of cash and cash equivalents,
current deferred income taxes, investments in uncolsolidated affiliates, and the
net pension asset. During each of the three years in the period ended December
28, 1997, export sales to foreign markets from the Company's domestic operations
represented less than 10% of total sales to unaffili- ated customers; no single
customer accounted for more than 10% of total sales in any year.
NOTES
to consolidated
financial statements
56 FORT JAMES CORPORTATION
NOTE 17
Fort James
Operating
Company
The Consolidated Financial statements for Fort James Operating Company ("FJOC"),
which includes the merged operations of Fort Howard, have been omitted because
certain securities registered under the Securities Act of 1933, of which FJOC is
an obligor (thus subjecting them to reporting requirements under Section 13 or
15(d) of the Securities Exchange Act of 1934), are fully and unconditionally
guaranteed by Fort James. Financial information relating to FJOC is presented
herein in accordance with Staff Accounting Bulletin 53 as an addition to the
notes to the financial statements of Fort James. Summarized financial
information for Fort James Operating Company is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C>
Condensed income statement information:
Net sales $4,851.6 $5,179.1 $6,324.3
Gross profit 1,435.5 1,384.5 1,331.0
Income (loss) before extraordinary item (65.5) 175.3 12.2
Net income (loss) (167.1) 167.2 (6.6)
Condensed balance sheet information:
Current assets 928.4 843.2
Noncurrent assets 3,292.8 3,458.2
Current liabilities 861.1 715.8
Noncurrent liabilities 5,850.4 5,064.4
Deficit (1,629.2) (1,478.8)
================================================================================
</TABLE>
<PAGE>
FORT JAMES CORPORATION 57
NOTE 18
Selected
Quarterly
Financial
Data
(Unaudited)
<TABLE>
<CAPTION> Per Diluted Common Share
-----------------------------------------
Income Income
(Loss) (Loss)
Before Before
Extra- Net Extra- Stock Price
(in millions, except Gross ordinary Income ordinary Dividends -------------------
per share amounts) Net Sales Profit Item (Loss) Item Declared High Low
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
December 1997:(a,b,c,d)
1st Quarter $1,817.8 $539.7 $ 97.2 $ 95.9 $ .43 $.15 $36 1/4 $29 1/4
2nd Quarter 1,854.3 568.2 149.7 149.1 .68 .15 38 7/8 27 1/4
3rd Quarter 1,825.4 555.0 68.7 23.5 .29 .15 45 1/16 36 5/8
4th Quarter 1,761.5 518.4 (211.1) (295.5) (1.05) .15 47 1/8 36 1/16
- ------------------------------------------------------------------------------------------------------------------------------
December 1996:(e,f,g,h)
1st Quarter $1,981.0 $532.9 $ 47.4 $ 47.4 $ .19 $.15 $ 28 1/8 $22 3/8
2nd Quarter 2,014.6 563.1 66.9 63.6 .29 .15 27 3/8 24 3/4
3rd Quarter 1,925.9 567.1 114.0 114.0 .51 .15 27 1/4 24 5/8
4th Quarter 1,785.6 479.8 99.7 94.9 .45 .15 34 1/4 27 5/8
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Results for the fourth quarter of 1997 included a restructure charge of
$458.0 million ($317.6 million net of taxes, or $1.53 per share).
(b) Results for the third quarter of 1997 included a nonrecurring charge
related to transaction costs of $53.9 million (or $.25 per share).
(c) Results for the second quarter of 1997 included a nonrecurring gain on the
sale of timberlands of $57.7 million ($35.2 million net of taxes, or $.16
per share).
(d) Results for the first, second, third and fourth quarters of 1997
included net extraordinary charges for the early extinguishment of debt of
$1.3 million, $.6 million, $45.2 million (or $.22 per share) and $84.4
million (or $.41 per share), respectively.
(e) Results for the fourth quarter of 1996 included nonrecurring charges of
$10.6 million ($8.2 million net of taxes, or $.04 per share) for
severance costs, asset write-downs and net gains on asset
dispositions.
(f) Results for the third quarter of 1996 included a nonrecurring gain of $46.9
million ($24.2 million net of taxes, or $.12 per share) for the Flexible
Packaging disposition and nonrecurring charges of $16.6 million ($10.4
million net of taxes, or $.05 per share) for severance costs.
(g) Results for the second quarter and first quarter of 1996 included
nonrecurring charges of $7.0 million ($4.2 million net of taxes, or $.02
per share) and $23.4 million ($14.3 million net of taxes, or $.09 per
share), respectively, for severance costs and net losses on asset
dispositions.
(h) Results for the second and fourth quarters of 1996 included net
extraordinary charges for the early extinguishment of debt of $3.3 million
(or $.02 per share) and $4.8 million (or $.02 per share), respectively.
<PAGE>
MANAGEMENT
responsibility
statement
58 FORT JAMES CORPORATION
The management of Fort James Corporation is responsible for the preparation,
integrity and fair presentation of the consolidated financial statements and
other information contained in this Annual Report. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles, and include, where necessary, amounts which are based on
management's best estimates and judgments.
The Company maintains a system of internal accounting controls designed
to provide reasonable assurance that assets are safeguarded, transactions
are executed and recorded in accordance with proper authorizations, and
financial records are maintained so as to permit the preparation of reliable
financial statements. The system of internal controls is enhanced by
written policies and procedures, an organizational structure which
provides appropriate division of responsibilities, careful selection and
training of qualified people, and a program of periodic audits by both internal
auditors and independent accountants. The control environment is further
enhanced by the Company's "Standards of Business Conduct Policy" which sets
standards of professionalism and integrity for employees worldwide.
The Audit Committee of the Board of Directors, composed entirely of
non-employee directors, meets periodically with management, the internal
auditors, and the independent accountants to review the adequacy of internal
accounting controls, reported financial results, and the nature, extent and
results of internal and external audits. The independent accountants and
internal auditors have direct and independent access to the Audit Committee.
/s/ Miles L. Marsh
Miles L. Marsh
Chairman of the Board
and Chief Executive Officer
/s/ Ernst A. Haberli
Ernst A. Haberli
Executive Vice President and
Chief Financial Officer
REPORT
of independent
accountants
The Board of Directors and Shareholders of Fort James Corporation:
We have audited the accompanying consolidated balance sheets of Fort James
Corporation as of December 28, 1997, and December 29, 1996, and the related
consolidated statements of operations, cash flows, and changes in capital
accounts for each of the three fiscal years in the period ended December 28,
1997. These financial statements are the responsibility of the management of
Fort James Corporation. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Fort
James Corporation as of December 28, 1997, and December 29, 1996, and the
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended December 28, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Richmond, Virginia
February 3, 1998
<PAGE>
SELECTED
financial data(a)
FORT JAMES CORPORATION 59
<TABLE>
<CAPTION>
(in millions, except ratios and per share amounts) 1997 1996 1995 1994 1993(b)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Operations
Net sales $7,259.0 $7,707.1 $8,887.9 $7,103.7 $6,166.6
Costs and expenses 6,202.1 6,787.1 8,052.6 6,670.3 5,788.8
Restructure and other unusual items 454.2 10.7 51.9 9.6 1,980.4
Interest expense 351.8 424.4 536.3 523.3 480.4
Income (loss) before income taxes,
minority interests
and extraordinary item 272.3 503.6 289.1 (70.7) (2,039.7)
Extraordinary item, net of taxes (131.5) (8.1) (18.8) (28.2) (12.0)
Net income (loss) (27.0) 319.9 141.1 (83.3) (2,052.4)
Net income (loss) applicable to
common shares (70.4) 261.4 82.6 (129.1) (2,085.2)
====================================================================================================================
Financial Position, End of Year
Total current assets $1,916.5 $1,808.6 $2,161.9 $2,255.1 $1,530.1
Property, plant and equipment 4,565.3 4,999.3 5,339.3 6,000.9 4,899.7
Other assets 614.5 619.0 638.4 573.2 918.0
Goodwill 636.9 730.0 771.7 776.0 153.3
Total assets 7,733.2 8,156.9 8,911.3 9,605.2 7,501.1
Total current liabilities 1,583.9 1,542.0 1,425.1 1,946.0 1,120.6
Current debt 34.4 128.9 107.5 562.7 210.0
Long-term debt 4,155.5 4,305.3 5,406.3 5,857.6 5,052.6
Minority interests 10.4 11.3 165.3 154.9 7.0
Preferred stock 352.7 738.4 740.3 740.3 454.1
Common shareholders' equity (deficit) 231.6 113.1 (324.5) (727.1) (566.8)
====================================================================================================================
Common Stock Information
Per Share of Common Stock (diluted)
Net income (loss) before
extraordinary item $ .35 $ 1.47 $ 62 $ (.75) $ (15.47)
Extraordinary item (.63) (.04) (.12) (.21) (.09)
Net income (loss) (.28) 1.43 .50 (.96) (15.56)
Annual rate of dividends
declared .60 .60 .60 .60 .60
Book value 1.11 .60 (1.89) (5.42) (4.23)
Common Stock Market Price
High $ 47.13 $ 34.25 $ 37.38 $24.75 $ 23.38
Low 27.25 22.38 20.00 15.63 16.25
Year-end 37.50 34.00 24.13 21.00 18.50
Weighted-average number of common shares
and equivalents 207.6 183.1 164.1 134.1 134.0
====================================================================================================================
Other Data
Capital expenditures
(excluding acquisitions) $ 505.9 $ 499.5 $ 488.5 $435.3 $ 496.6
Depreciation and amortization expense 497.3 525.6 586.7 509.8 493.8
Return on average capital employed 16.6% 13.0% 11.1% 6.4% 5.5%
Return on net sales 6.1% 4.4% 2.2% (.7)% (1.0)%
Ratio of total debt to total capitalization 87.6% 83.7% 90.5% 97.5% 102.1%
Current ratio 1.21 1.17 1.52 1.16 1.37
Cash dividend payout ratio +100% 34.3% 76.9% +100% +100%
Ratio of earnings to interest 3.0 2.2 1.6 .9 .9
====================================================================================================================
</TABLE>
(a) Reflects effect of a 6.5-for-one Fort Howard stock split in 1995.
(b) Includes a charge of $1.98 billion related to the write-off of goodwill.
Book value per common share:
Common shareholders' equity (deficit) divided by outstanding shares of common
stock.
Return on average capital employed:
Income (loss) before restructure charges, extraordinary item, interest expense
and income taxes, divided by average capital employed. Capital employed is
calculated as total assets, excluding assets held for sale, minus non-interest
bearing current liabilities.
Return on net sales:
Income (loss) before after-tax restructure charges and extraordinary item,
divided by net sales.
Ratio of total debt to total capitalization:
Total debt divided by the sum of total debt, minority interests, preferred stock
and common shareholders' equity (deficit).
Current Ratio:
Total current assets divided by total current liabilities.
Cash dividend payout ratio:
The sum of common and preferred stock cash dividends, divided by net income
(loss).
Ratio of earnings to interest:
Income (loss) before restructure charges, extraordinary items, interest expense
and income taxes, divided by total interest cost. Total interest cost is
interest expense plus capitalized interest.
<PAGE>
Exhibit 13 - Appendix A
Earnings per share, diluted bar chart as defined by the following data points:
(in dollars) 1995 1996 1997
As reported $0.50 $1.43 $(0.28)
Excluding nonrecurring charges (net of tax) 0.81 1.35 1.97
Net sales bar chart as defined by the following data points:
(in billions) 1995 1996 1997
As reported $8.89 $7.71 $7.26
Operating income bar chart as defined by the following data points:
(in millions) 1995 1996 1997
As reported $783.4 $909.3 $ 602.7
Excluding nonrecurring charges (net of tax) 835.3 920.0 1,056.9
Net sales by segment ratio bar chart as defined by the following data points:
1997
North American Consumer Products 59%
European Consumer Products 25%
Packaging 10%
Communications Papers 6%
Operating Income - North American Consumer Products bar chart as defined by the
following data points:
(in millions) 1996 1997
1st Quarter $177.6 $204.6
2nd Quarter 184.2 231.1
3rd Quarter 217.8 219.9
4th Quarter 173.7 189.8
<PAGE>
Operating Income - European Consumer Products bar chart as defined by the
following data points:
(in millions) 1996 1997
1st Quarter $31.1 $52.4
2nd Quarter 48.8 52.9
3rd Quarter 54.5 48.3
4th Quarter 42.7 48.8
Operating Income - Packaging bar chart as defined by the following data points:
(in millions) 1996 1997
1st Quarter $29.8 $21.2
2nd Quarter 24.0 23.8
3rd Quarter 22.9 22.7
4th Quarter 15.2 13.6
Operating Income - Communications Papers bar chart as defined by the following
data points:
(in millions) 1996 1997
1st Quarter $4.2 $(3.6)
2nd Quarter 3.2 0.4
3rd Quarter 4.8 11.0
4th Quarter 10.0 12.0
Interest Expense bar chart as defined by the following data points:
(in millions) 1995 1996 1997
Interest expense $536 $424 $352
Capital Expenditures and Cash Flow from Operations bar chart as defined by the
following data points:
(in millions) 1995 1996 1997
Capital expenditures $489 $ 500 $506
Cash flow from operations 766 1,085 764
<PAGE>
Total Debt bar chart as defined by the following data points:
(in billions) 1995 1996 1997
Total debt $5.51 $4.43 $4.19
Working Capital bar chart as defined by the following data points:
(in millions) 1995 1996 1997
Working capital $737 $267 $333
Total Capitalization bar chart as defined by the following data points:
(in billions) 1995 1996 1997
Total debt $5.51 $4.43 $4.19
Minority interests .17 .01 .01
Total preferred stock .74 .74 .35
Common shareholders' equity (0.32) 0.11 0.23
Annual Rate of Cash Dividends Per Common Share bar chart as defined by the
following data points:
(in dollars) 1995 1996 1997
Annual rate of cash dividends $.60 $.60 $.60
Total Assets bar chart as defined by the following data points:
(in billions) 1995 1996 1997
Current assets $2.16 $1.81 $1.92
Net fixed and other assets 6.75 6.35 5.82
Exhibit 21
FORT JAMES CORPORATION
SUBSIDIARIES (a)(b)
as of December 28, 1997
Fort James Corporation, a corporation organized under the laws of
Virginia, has the following majority-owned subsidiaries:
Name Organized Under the Laws of
---- ---------------------------
Brusara Participacoes, Ltda. Brazil
Crown Zellerbach AG Zug Switzerland
Crown Zellerbach International, Inc. Delaware
Ecosource Corporation Delaware
Fort Howard Communications Corporation Delaware
Fort Howard Corporation Delaware
Fort James Canada Inc. Canada
Fort James de Mexico, S.A. de C.V. Mexico
Fort James Europe Limited United Kingdom
Fort James Export, Ltd. U.S. Virgin Islands
Fort James Fiber Company Virginia
Fort James France S.A.S. France
Fort James Hellas S.A. Greece
Fort James Immobiliere S.A. Belgium
Fort James International Holdings, Ltd. Virginia
Fort James Maine, Inc. Maine
Fort James-Marathon, Ltd. Ontario
Fort James Nederland B.V. Netherlands
Fort James N.V. Netherlands
Fort James Operating Company Virginia
Fort James-Pennington, Inc. Alabama
Fort James Services S.N.C. Belgium
Fort James S.P.R.L. Belgium
Fort James S.P.R.L.S. Com. p.A. Spain
Fort James Suomi Oy Finland
Fort James Tredegar, Inc. Virginia
HAC Holding Corporation Delaware
HARCO Trucking Corporation New York
Harmon Associates Corporation New York
Harmon Associates Ltd. Ontario
James River s.c.a. France
Jamont Ireland Ltd. Ireland
Jamont UK Limited United Kingdom
Jarapar Participacoes, Ltda. Brazil
Sterling International Limited England
St. Francis Insurance Company Ltd. Bermuda
Sodipan S.A. France
Unikay S.r.L. Italy
West Mason, Inc. Delaware
(a) Certain subsidiaries which, if considered in the aggregate, would not
constitute a significant subsidiary are not listed.
(b) Unconsolidated affiliates for which the Company owns, directly or
indirectly, 50% or less of the outstanding voting stock and which are not
controlled by the Company have been excluded from this listing.
E-3
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference:
(i) in Registration Statement No. 33-54491 on Form S-8 pertaining to
the James River Corporation of Virginia StockPlus Investment Plan;
(ii) in Registration Statement No. 33-57153 on Form S-8 pertaining to
the Fort James Corporation Canadian Employees Stock Purchase Plan;
(iii) in Registration Statement No. 33-43894 on Form S-8 pertaining to
the James River Corporation of Virginia Stock Option Plan for Outside
Directors;
(iv) in Post-Effective Amendment No. 1 to Registration Statement No.
2-83979 on Form S-8, serving as Post-Effective Amendment No. 5 to
Registration Statement No. 2-64057, and as Post-Effective Amendment No. 2
to Registration Statement No. 2-76900, each pertaining to the James River
Corporation of Virginia Stock Option Plan;
(v) in Registration Statement No. 33-56657 on Form S-8 pertaining to
the James River Corporation of Virginia 1987 Stock Option Plan;
(vi) in Registration Statement No. 333-02217 on Form S-8 pertaining to
the James River Corporation of Virginia Stock Incentive Plan;
(vii) in Registration Statement No. 333-02213 on Form S-8 pertaining
to the James River Corporation of Virginia Director Stock Ownership Plan;
(viii) in Registration Statement No. 333-33435 on Form S-8 pertaining
to the Fort Howard Corporation Profit Sharing Retirement Plan and the
Harmon Assoc., Corp. Profit Sharing Plan;
(ix) in Registration Statement No. 333-33431 on Form S-8 pertaining to
the Fort Howard Corporation Management Equity Participation Agreement, the
Fort Howard Corporation Management Equity Plan, and the Fort Howard
Corporation 1995 Stock Incentive Plan; and
(x) in Registration Statement No. 333-47287 on Form S-3 pertaining to
the shelf registration of $800,000,000 of debt securities of Fort James
Corporation of our report, dated February 3, 1998, on our audits of the
consolidated financial statements of Fort James Corporation as of December
28, 1997 and December 29, 1996, and for each of the three fiscal years in
the period ended December 28, 1997, which report is included in this Annual
Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Richmond, Virginia
March 23, 1998
E-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORT JAMES CORPORATION DECEMBER 28, 1997 FORM 10-K FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000053117
<NAME> FORT JAMES CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 34
<SECURITIES> 0
<RECEIVABLES> 788
<ALLOWANCES> 0
<INVENTORY> 854
<CURRENT-ASSETS> 1,917
<PP&E> 7,784
<DEPRECIATION> 3,219
<TOTAL-ASSETS> 7,733
<CURRENT-LIABILITIES> 1,584
<BONDS> 4,156
0
353
<COMMON> 21
<OTHER-SE> 211
<TOTAL-LIABILITY-AND-EQUITY> 7,733
<SALES> 7,259
<TOTAL-REVENUES> 7,259
<CGS> 5,078
<TOTAL-COSTS> 5,078
<OTHER-EXPENSES> 454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 352
<INCOME-PRETAX> 272
<INCOME-TAX> 164
<INCOME-CONTINUING> 105
<DISCONTINUED> 0
<EXTRAORDINARY> (132)
<CHANGES> 0
<NET-INCOME> (27)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.28)
</TABLE>
