SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: March 2, 1998
FORT JAMES CORPORATION
(Exact name of Registrant as Specified in its Charter)
Virginia 1-7911 54-0848173
(State or Other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
Incorporation)
75 Tri-State International Office Center,
Suites 100 and 175, Lincolnshire, Illinois 60069
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 317-5000
<PAGE>
Item 5. Other Events.
Attached is certain information concerning Fort James Corporation
("Fort James" or the "Company") that was filed in a registration statement
subsequent to the merger of James River Delaware, Inc., a Delaware corporation
and a wholly owned subsidiary of the Company, with and into Fort Howard
Corporation, a Delaware corporation.
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
(c) Exhibits.
99 Certain information concerning the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FORT JAMES CORPORATION
By: /s/ Clifford A. Cutchins IV
Clifford A. Cutchins IV
Senior Vice President and
General Counsel
Date: March 3, 1998
<PAGE>
Index to Exhibits
Exhibit Description
99 Certain information concerning the Company.
Exhibit 99
THE COMPANY
Fort James 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. 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 also
produces and markets paper-based packaging for food and pharmaceuticals and
communications papers. Consumer products, packaging and communications papers
products accounted for 84%, 10% and 6%, respectively, of consolidated revenues
in 1997. In 1997, the Company reported net sales of $7,259.0 million, income
from operations of $602.7 million and a net loss of $27.0 million. Fort James
reported income from operations before restructuring and other unusual items in
1997 of $1,057 million; and net income before restructuring and other unusual
items and extraordinary items of $439 million, or $1.97 per diluted share.
Fort James is the result of the Merger of a subsidiary of James River
Corporation of Virginia ("James River") into Fort Howard Corporation ("Fort
Howard") in August 1997. In connection with the Merger, James River was renamed
"Fort James Corporation."
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.
The Company's consumer tissue and tabletop products are sold through both
retail (at-home) and commercial (away-from-home) distribution channels. 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 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 table top
brand is its number two-ranked DIXIE brand of disposable cups and plates. Fort
James also believes it is the leading supplier of private label tissue products
and the leading supplier of both tissue and disposable tabletop products to the
growing warehouse club channel.
<PAGE>
The U.S. away-from-home channel, where the Company sells its 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
top 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. The Company is also one of the largest producers of disposable cups,
plates and related products for the away-from-home foodservice industry.
In Europe, approximately 75% of Fort James' sales of consumer products are
into retail distribution channels and the remaining approximately 25% are into
away-from-home distribution channels. Sales into retail channels are supported
by both branded and private label product offerings. With production facilities
located in 10 countries, Fort James has a broad, pan-European base, and is among
the category leaders in most western European countries, with the exception of
Germany, Austria and Switzerland, where the Company has no operations. European
branded products 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.
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 the benefits it
realizes from the Fort Howard proprietary deinking technology.
BUSINESS INITIATIVES
Fort James' near-term business initiatives focus on three areas:
leveraging revenue growth opportunities, pursuing aggressive cost reduction and
achieving financing cost savings through both refinancing activities and debt
reduction.
LEVERAGING REVENUE GROWTH OPPORTUNITIES
The Company believes it has revenue growth opportunities in all of its
primary target markets. 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
-2-
<PAGE>
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
are located across the U.S., its away-from-home tissue sales are 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 mid-western 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 mid-west, and value and economy product
offerings can be more fully developed in the west.
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.
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 James River
and the former Fort Howard 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
-3-
<PAGE>
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 waste paper, 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
$2.1 billion principal amount of its $4 billion of total debt.
At the time of the Merger, the Company entered into a new $2.5 billion
bank credit facility (the "New Bank Credit Facility") and borrowed $666 million
thereunder to replace certain pre-Merger bank credit facilities, which were
canceled. On the same date, the Company repurchased and retired $200 million
principal amount of James River 9.77% Senior Notes due 2014 (the "9.77% Senior
Notes"), principally using cash on hand. As a second step in its refinancing
activities, on September 8, 1997, Fort Howard commenced cash tender offers (the
"Tender Offers") for approximately $1.47 billion aggregate principal amount of
Fort Howard outstanding public debt securities. A total of $1.28 billion
aggregate principal amount of debt securities was tendered in these offers and
was retired. These repurchases and retirements pursuant to the Tender Offers
were funded principally with borrowings under the New Bank Credit Facility and
proceeds received from the issuance of $720 million of Fort James senior notes
on September 29, 1997 (the "Senior Notes Offering"). On a combined basis, these
debt refinancing activities are expected to result in an annual reduction in
interest expense in excess of $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.
Following the Merger, the Company also simplified its capital structure
and reduced cash dividend requirements by (1) converting its Series P 9%
Cumulative Convertible Preferred Stock, with a face value of $287.5 million,
into 15.3 million shares of Common Stock (the "Series P Conversion") and (2)
redeeming its Series O Preferred Stock for $98.1 million in cash (the "Series O
Redemption"). On a combined basis, this conversion and redemption reduced the
Company's annual dividend requirements by approximately $25
-4-
<PAGE>
million while increasing interest expense by only $7 million.
BUSINESS
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.
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 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 believes that its well-known brand
names have contributed to its products achieving leading competitive positions.
The following data is based on information provided by Information Resources
Inc. for the 52-week period ending December 21, 1997, based on revenues derived
from sales to grocery stores, drug stores and mass merchandisers. Of $3.5
billion in U.S. industry bathroom tissue sales, Fort James' brands held a 19.5%
share, representing the overall number three ranking. The Company's bathroom
tissue brands include QUILTED NORTHERN (the number two ranked individual brand),
SOFT'N GENTLE and GREEN FOREST. Of $2.3 billion in U.S. industry paper towel
sales, Fort James' brands held an 18.2% share, representing the overall number
two ranking. The Company's paper towel brands include BRAWNY (the number two
ranked individual brand), MARDI GRAS, SO-DRI and GREEN FOREST. Of
-5-
<PAGE>
$570 million in U.S. industry paper napkin sales, Fort James' brands held a
35.9% share, representing the overall number one ranking. The Company's paper
napkins brands include MARDI GRAS (the number one ranked individual brand),
VANITY FAIR (the number three ranked individual brand), NORTHERN, ZEE, and GREEN
FOREST. Of $400 million in U.S. industry disposable cup sales, Fort James'
brands held a 23.2% share, representing the overall number two ranking. Of $910
million in U.S. industry disposable plate sales, Fort James' brands held a 16.5%
share, representing the overall number two ranking. The Company's disposable
cups and plates are both sold under the DIXIE brand name.
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.
The U.S. away-from-home channel, where 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 top 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 13%, 10%, 16% and 57%, respectively.
-6-
<PAGE>
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.
PRODUCTION FACILITIES. 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 the benefits it realizes from the Fort Howard proprietary deinking
technology. In North America, Fort James currently produces tissue products at
eleven mills located across the United States. In the spring of 1998, the
Company will permanently close its two smallest domestic tissue facilities, in
Ashland, Wisconsin, and Carthage, New York. Production from these two mills will
be transferred to other, more modern Fort James tissue mills, which the Company
believes will further reduce operating costs. The Company's three largest
domestic tissue mills, located in Green Bay, Wisconsin, Muskogee, Oklahoma, and
Rincon, Georgia, each have tissue capacity in excess of 300,000 tons, and the
Company's fourth largest domestic tissue mill in Pennington, Alabama, has tissue
capacity of approximately 225,000 tons. Together these four mills account for
approximately two-thirds of the Company's total U.S. capacity. Ten of the
world's eleven largest tissue machines (270 inch wide) are located in the
Company's U.S. mills, and more than 600,000 tons of its domestic tissue-making
capacity have been built in the last 13 years. Fort James produces disposable
tabletop and foodservice products at 10 converting plants located across the
United States and three converting plants in Canada. Approximately
three-quarters of the paperboard utilized in the Company's cup and plate-making
operations is supplied by Fort James' 300,000 ton per year bleached paperboard
operation in Alabama, which also supplies paperboard to the Company's Packaging
Business. The North American Consumer Products Business currently employs
approximately 17,100 workers.
The Company's European Consumer Products Business currently has 26
operating facilities, employing approximately 7,000 workers. In 1997 the Company
opened a tissue converting plant in Russia, and in 1995 the Company formed a
joint venture for a tissue converting operation in Shanghai, China.
Following the Merger, Fort James' raw material base is fairly evenly split
between virgin pulp and recycled pulp. The Company believes this combination
reduces the cyclical impact that raw material price changes can have on
profitability. In North America, the Company's tissue operations are largely
on-site integrated to either virgin or deinked pulp. In Europe, where Fort James
has no virgin pulping capacity, approximately one-third of the Company's fiber
requirements are provided by integrated deinked pulp, with the balance provided
by purchased market pulp.
MARKETING. The Company's North American Consumer Products Business has
organized its marketing efforts along distribution channels and by product line.
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
-7-
<PAGE>
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' 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.
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 account for more than 80% of the business'
current annual sales, with the balance represented by sales of unconverted
paperboard.
Fort James produces its folding cartons at 15 carton manufacturing and
supporting plants located across the United States, employing approximately
3,400 workers. The Company's carton operations are backward integrated to a
300,000 ton per year bleached paperboard operation in Alabama and a 320,000 ton
per year coated recycled paperboard operation in Michigan. The Alabama 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. Transition issues associated with a
significant change in its customer base negatively impacted this business' sales
and profits in the fourth quarter of 1997 and are expected to create challenges
for this business in the near term.
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. ("Crown Vantage"), 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
-8-
<PAGE>
and advertising inserts, and on cut-size office printing and copying papers used
in high-speed printers, copiers and offset duplicators. Stabilized pricing and
an improved balance between demand and capacity growth expected in 1998 could be
impacted by any future weakening in the pulp markets or wood cost increases. See
"Risk Factors -- Industry Conditions."
Fort James produces business and printing papers at two manufacturing
sites, located in Oregon and Washington, employing approximately 1,100 workers.
The Company has the capacity to produce approximately 520,000 tons per year of
uncoated free-sheet papers and 150,000 tons per year of uncoated ground
woodpapers.
-9-
<PAGE>
RECENT DEVELOPMENTS
Fourth Quarter Results
Excluding non-recurring items, Fort James reported earnings for the fourth
quarter of 1997 of $.48 per diluted share, compared to $.30 per diluted share in
1996, an improvement of 60%. Including a restructuring charge of $1.53 per
diluted share and an extraordinary charge on the early extinguishment of debt of
$.41 per diluted share, the Company reported a net loss of $1.46 per diluted
share for the fourth quarter of 1997. The restructuring and debt extinguishment
charges were both related to the Merger.
Compared with the fourth quarter of 1996, income from operations in the
fourth quarter of 1997 increased 15% to $242.3 million from $210.9 million and
net income increased 48% to $106.5 million from $71.9 million, excluding
restructure and debt extinguishment charges and a 1996 tax benefit. Net sales
for the quarter declined approximately 1% to $1,761.5 million from $1,785.6
million, primarily due to the impact of foreign currency translation. Excluding
this impact, sales increased approximately 1%. Operating margins for the fourth
quarter of 1997 increased to 13.8%, from 11.8% in the fourth quarter of 1996,
excluding restructuring charges.
Non-Recurring Items
Results for the fourth quarter of 1997 reflect a pretax charge of $458.0
million ($317.6 million net of taxes, or $1.53 per diluted share) for
restructuring and other unusual items and an extraordinary charge on the early
extinguishment of debt of $138.2 million ($84.4 million net of taxes, or $.41
per diluted share). In the fourth quarter of 1996, Fort James reported a
non-recurring charge of $10.6 million ($8.2 million net of taxes, or $.04 per
diluted share). The Company also recorded a $36 million tax benefit ($.19 per
diluted share) in 1996 as a result of a U.S. Tax Court decision allowing the
Company to deduct certain expenses relating to the former Fort Howard's 1988
leveraged buy-out. Additionally, the fourth quarter of 1996 included a loss on
the early extinguishment of debt of $7.9 million ($4.8 million net of taxes, or
$.03 per diluted share).
Full Year Results
For the full year, excluding non-recurring items, net income increased 44%
to $439.5 million, or $1.97 per diluted share, in 1997 from $304.9 million, or
$1.35 per diluted share, in 1996. Including the non-recurring items, Fort James
reported a net loss of $27.0 million, or a loss of $.28 per diluted share, in
1997, compared to net income of $319.9 million, or $1.43 per diluted share, in
1996. Net sales of $7,259.0 million in 1997 were 5.8% below the $7,707.1 million
reported in 1996, due to divestitures and foreign currency translation. Net
sales increased approximately 1% excluding these items.
Fourth Quarter Results by Business Segment
The following fourth quarter operating results by business segment exclude
non-recurring items.
The North American Consumer Products Business posted operating profits of
$189.8 million in the fourth quarter of 1997, compared to the $173.7 million
reported in the fourth
-10-
<PAGE>
quarter of 1996, while sales increased slightly to $1,046.2 million in 1997
versus $1,039.5 million in 1996. Results for the prior year's quarter included
an $18 million charge for revised estimates of costs for certain environmental
matters. The fourth quarter 1997 performance of this business was impacted by a
number of transition issues related to the Merger. The former Fort Howard
operations were converted to the James River 52/53-week fiscal year cut-off,
resulting in a loss of three days of shipments in the quarter. Additionally,
discretionary downtime was taken at selected tissue mills to adjust inventory
levels and to perform maintenance originally scheduled for 1998. Volumes in both
the retail tissue and retail DIXIE tabletop businesses improved over the prior
year levels and aggregate market shares have strengthened. Volumes declined in
the away-from-home tissue business, principally as a result of the early
year-end cut-off for the Fort Howard operations. Volumes also declined in the
away-from-home DIXIE food service business. Pricing in Fort James' retail tissue
and DIXIE businesses was generally unchanged from the prior year's quarter,
before the effect of modestly higher promotional spending in response to
competitive activity. Away-from-home tissue prices were moderately higher
reflecting a fourth quarter 1997 price increase.
The European Consumer Products Business reported operating profits of
$48.8 million in the fourth quarter of 1997, a 14% improvement over the $42.7
million reported in the prior year, while sales declined 6.2%, from $481.5
million in 1996 to $451.6 million in 1997. Changes in foreign currency
translation associated with the strengthening of the dollar caused the decline
in sales and also impacted operating profits. Absent these changes, fourth
quarter 1997 sales would have increased 2.5% and operating profits would have
increased 22% compared to the prior year's quarter. The improvement in profits
resulted from a 2.3% increase in finished goods volumes, partially offset by
slightly lower pricing and higher raw material costs. In addition, the fourth
quarter of 1996 was adversely impacted by a two-month strike at the Company's
Spanish tissue facility.
The Packaging Business reported fourth quarter 1997 operating profits of
$13.6 million on sales of $187.9 million, down from the $15.2 million of profits
on $198.8 million of sales in the prior year's fourth quarter. Transition issues
associated with a significant change in its customer base negatively impacted
the Packaging Business' sales and profits.
Operating profits for the Communications Papers Business increased
modestly to $12.0 million in the fourth quarter of 1997, compared to $10.0
million in the fourth quarter of 1996. Sales increased by 3.6%, to $118.6
million in 1997 compared to $114.5 million in 1996. Increased sales and profits
were principally the result of a small increase in volumes and average pricing
for uncoated free sheet papers.
General corporate expenses declined to $21.9 million compared to $30.7
million in 1996, primarily as a result of reduced spending on new, integrated
management information systems.
Full Year Results by Business Segment
The following full-year operating results by business segment exclude
non-recurring items.
-11-
<PAGE>
Compared to 1996, operating profits for the North American Consumer
Products Business improved 12.2% to $845.4 million in 1997. Operating profits
for the European Consumer Products Business increased to $202.4 million in 1997,
a 22% increase over the prior year, excluding the effects of changes in foreign
currency translation. The Packaging Business posted operating profits of $81.3
million in 1997, a decrease of 5% from the prior year, excluding divested
operations. The Communications Papers Business reported 1997 operating profits
of $19.8 million, an 11% decline over 1996 profits, despite a steady improvement
in results during 1997.
Restructuring Charge
In conjunction with the Merger integration, Fort James recorded a $458
million pretax restructuring charge in the fourth quarter of 1997. This charge
covers activities which will integrate the operations of James River and Fort
Howard and enable the Company to realize Merger-related savings estimated to
ultimately total $200 million annually. The restructuring charge includes
approximately $235 million of costs associated with planned plant closures and
the write-off of redundant assets. On January 20, 1998, the Company announced it
will permanently close its two smallest U.S. tissue facilities, in Ashland,
Wisconsin, and Carthage, New York, in the spring of 1998. Production from these
two mills, which produce approximately 84,000 tons per year of away-from-home
tissue products, will be transferred to other, more modern Fort James tissue
mills. Also included in the reserve are amounts for additional rationalization
of Fort James' manufacturing operations planned in North America and Europe. The
restructuring charge includes severance and other employee-related costs in
excess of $100 million associated with a planned net headcount reduction of
approximately 2,500 employees, representing 8% of Fort James' current worldwide
workforce. Cash costs of the restructure program are estimated to total
approximately $150 million, net of tax benefits. An additional estimated $60
million of Merger-related costs, which could not be recognized in 1997 under
applicable accounting regulations, will be recorded in 1998 as incurred.
Cash Flow and Refinancing Activities
Cash provided by operations totaled $764.2 million for the year in 1997.
Total debt was reduced by $244.3 million during the year. In addition, $98.1
million of cash was used to redeem the Company's Series O 8 1/4% Cumulative
Preferred Stock ("Series O Preferred Stock") and $152.3 million of cash premiums
were paid on the early extinguishment of debt. Lower average debt levels,
combined with the benefits from the Company's refinancing activities allowed
Fort James to reduce interest expense by 17%, from $424.4 million in 1996 to
$351.8 million in 1997. In early October, the Company completed the refinancing
of a total of approximately $2.1 billion of debt. The Company estimates these
debt refinancings will reduce annual interest expense by more than $50 million.
An extraordinary charge of $215.0 million ($131.5 million net of taxes, or $.63
per diluted share) was recorded in the third and fourth quarters of 1997
associated with the refinancings.
-12-
<PAGE>
RISK FACTORS
RISKS ASSOCIATED WITH INTEGRATION
The Merger was completed in August 1997 and Fort James is in the process
of combining the operations of James River and Fort Howard. As a result of its
integration efforts, Fort James expects to realize cost savings estimated to
beat a $150 million annual run rate by the end of 1998, increasing to $200
million per year over time. While the Company's rationalization plans are
proceeding as planned, there can be no assurance that Fort James will not
encounter difficulties in the integration process or that the benefits expected
from such integration will be realized. Any material delays or unexpected costs
incurred in connection with such integration could have an adverse effect on the
Company's ability to achieve the expected benefits of integration. See "The
Company -- Business Initiatives."
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. 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 (see " -- 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 products could prompt the Company to increase its advertising
expenditures for key branded products.
INDUSTRY CONDITIONS
Finished product prices in all of the Company's segments are significantly
affected by the relationships among, and changes in, industry conditions in
North America and Europe, including industry capacity and operating rates,
prices for raw materials and levels of demand. Based upon historical demand
growth in the U.S. tissue industry (which generally averages between 2% and 2.5%
per annum) and upon the Company's current expectations for industry-wide
capacity and operating rates during 1998 and 1999 (which are in part derived
from information published by the American Forest and Paper Association and
public announcements by competitors and in part from internal estimates), the
Company believes that supply and demand for tissue products in the United States
should be in approximate balance during 1998 and 1999. In Europe, where
increases in demand for tissue products are expected to average slightly higher
than in the United States, the Company believes that supply could modestly
outpace demand in 1998 and 1999. Capacity expansion
13
<PAGE>
or increased run rates on existing machines within the tissue industry in the
United States or Europe, or lower than expected demand growth in either the
United States or Europe, could prompt intensified price competition and could
adversely affect the Company's operating results.
Changes in the cost of wastepaper and pulp, the Company's primary raw
materials, also affect the Company's finished goods pricing. Significant
reductions in the cost of these raw materials from the middle of 1995 through
the middle of 1996 and higher industry operating rates contributed to the
Company's positive operating results during that period. Although wastepaper and
pulp prices have remained relatively stable since the middle of 1996, decreasing
wastepaper or pulp prices under different industry conditions could result in
lower product prices. There can be no assurance that any future reductions in
the cost of raw materials would have a positive impact on the Company's
operating results. Historically, sales price increases for finished products
generally have lagged increases in raw material costs. There can be no assurance
that any future increases in the cost of wastepaper or pulp would be recovered
through product price increases, and any such increased raw materials costs
could adversely impact the Company's operating results.
-14-
