- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 (Date of earliest event reported) August 13, 1997
Fort James Corporation
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporation)
1-7911 54-0848173
(Commission File Number) (IRS Employer Identification Number)
120 Tredegar Street, Richmond, Virginia 23219
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (804) 644-5411
James River Corporation of Virginia
(Former name, if changed since last report.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 5. Other Events.
The consolidated financial statements of Fort James Corporation and
Subsidiaries 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 of a
wholly-owned subsidiary of James River Corporation of Virginia with and into
Fort Howard Corporation (which was consummated on August 13, 1997) which has
been accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16, are filed as an exhibit hereto and incorporated by reference
herein. In connection with the merger, James River Corporation of Virginia was
renamed Fort James Corporation ("Fort James" or the "Company").
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
c. Exhibits.
<TABLE>
<S> <C>
11 Computation of Earnings Per Share
12 Computation of Ratio of Earnings to Fixed Charges
23 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedules for the year ended December 29, 1996, (filed electronically only).
27.2 Financial Data Schedules for the year ended December 31, 1995, (filed electronically only).
27.3 Financial Data Schedules for the year ended December 25, 1994, (filed electronically only).
27.4 Financial Data Schedules for the six months ended June 29, 1997, (filed electronically only).
27.5 Financial Data Schedules for the six months ended June 30, 1996, (filed electronically only).
99.1 Consolidated financial statements of Fort James Corporation and Subsidiaries as of December 29, 1996, and
December 31, 1995, and for each of the years in the three-year period ended December 29, 1996, together with the
related Management's Discussion and Analysis of Results of Operations and Financial Condition, in each case as
restated for the merger of James River Corporation of Virginia and Fort Howard Corporation (which was consummated
on August 13, 1997) which has been accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16.
99.2 Consolidated financial statements of Fort James Corporation and Subsidiaries as of June 29, 1997, and for the
quarters and six months ended June 29, 1997, and June 30, 1996, together with the related Management's Discussion
and Analysis of Results of Operations and Financial Condition, in each case as restated for the merger of James
River Corporation of Virginia and Fort Howard Corporation (which was consummated on August 13, 1997) which has
been accounted for as a pooling of interests under Accounting Principles Board Opinion No. 16.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and 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/ William A. Paterson
----------------------
William A. Paterson
Senior Vice President and
Controller
Date: January 29, 1998
EXHIBIT 11
FORT JAMES CORPORATION and SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Years Ended December 29, 1996,
December 31, 1995 and December 25, 1994
(in millions, except per share amounts)
<TABLE>
<CAPTION>
PRIMARY: 1996 1995 1994
- --------- ------ ------ -------
<S> <C>
Net earnings applicable to common shares........................................................ $261.4 $ 82.6 $(129.1)
------ ------ -------
------ ------ -------
Weighted-average number of common shares and common share equivalents:
Common shares outstanding..................................................................... 181.8 163.0 134.1
Issuable upon exercise of outstanding stock options and pursuant to a deferred stock award
plan....................................................................................... 7.8 3.7
Less assumed acquisition of common shares, using proceeds from
stock options and the impact of a deferred stock award plan,
under the treasury stock method............................................................ (6.2) (2.6)
------ ------ -------
183.4 164.1 134.1
------ ------ -------
------ ------ -------
Primary earnings per common share............................................................... $ 1.43 $ .50 $ (.96)
------ ------ -------
------ ------ -------
FULLY DILUTED:
- --------------
Net earnings applicable to common shares........................................................ $261.4 $ 82.6 $(129.1)
------ ------ -------
------ ------ -------
Weighted-average number of common shares and common share equivalents:
Common shares outstanding..................................................................... 181.8 163.0 134.1
Issuable upon exercise of outstanding stock options and pursuant to a deferred stock award
plan....................................................................................... 7.8 3.7
Less assumed acquisition of common shares, using proceeds from
stock options and the impact of a deferred stock award plan,
under the treasury stock method............................................................ (5.8) (2.6)
------ ------ -------
183.8 164.1 134.1
------ ------ -------
------ ------ -------
Fully diluted earnings per common share......................................................... $ 1.42 $ .50 $ (.96)
------ ------ -------
------ ------ -------
</TABLE>
See Notes to Computation of Earnings Per Share.
1
<PAGE>
EXHIBIT 11 (continued)
FORT JAMES CORPORATION and SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Quarters (13 Weeks) and Six Months (26 Weeks) Ended
June 29, 1997 and June 30, 1996
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Second Quarter Six Months
---------------- ----------------
PRIMARY: 1997 1996 1997 1996
- -------- ------ ------ ------ ------
<S> <C>
Net earnings applicable to common shares............................................... $141.0 $ 49.0 $228.7 $ 81.7
------ ------ ------ ------
------ ------ ------ ------
Weighted-average number of common shares and common share equivalents:
Common shares outstanding............................................................ 189.9 179.5 189.4 175.8
Assumed conversion of convertible preferred stock.................................... 15.3 15.3
Issuable upon exercise of outstanding stock options and pursuant to a deferred stock
award plan........................................................................ 7.6 8.1 7.7 8.1
Less assumed acquisition of common shares, using proceeds from
stock options and the impact of a deferred stock award plan,
under the treasury stock method................................................... (5.3) (6.8) (5.6) (6.8)
------ ------ ------ ------
207.5 180.8 206.8 177.1
------ ------ ------ ------
------ ------ ------ ------
Primary earnings per common share...................................................... $ .68 $ .27 $ 1.11 $ .46
------ ------ ------ ------
------ ------ ------ ------
FULLY DILUTED:
- --------------
Net earnings applicable to common shares............................................... $147.0 $ 49.0 $228.7 $ 81.7
------ ------ ------ ------
------ ------ ------ ------
Weighted-average number of common shares and common share equivalents:
Common shares outstanding............................................................ 189.9 179.5 189.4 175.8
Assumed conversion of convertible preferred stocks................................... 27.5 17.9
Issuable upon exercise of outstanding stock options and pursuant to a deferred stock
award plan........................................................................ 8.1 8.2 8.2 8.2
Less assumed acquisition of common shares, using proceeds from
stock options and the impact of a deferred stock award plan,
under the treasury stock method................................................... (5.2) (7.2) (5.3) (7.2)
------ ------ ------ ------
220.3 180.5 210.2 176.8
------ ------ ------ ------
------ ------ ------ ------
Fully diluted earnings per common share................................................ $ .67 $ .27 $ 1.09 $ .46
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
See Notes to Computation of Earnings Per Share.
2
<PAGE>
EXHIBIT 11 (continued)
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO COMPUTATIONS OF EARNINGS PER SHARE
Primary earnings per common share is computed by dividing net income, after
deducting dividends on outstanding preferred shares, by the weighted-average
number of common shares and dilutive common share equivalents outstanding during
the period. Common share equivalents consist of shares issuable pursuant to
stock options and a deferred stock award plan, and are calculated using an
average market price for the period. Common share equivalents also include the
assumed conversion of the Company's Series P 9% Cumulative Convertible Preferred
Stock, if dilutive.
Fully diluted earnings per common share is computed using the same method
as for the primary computation except that (i) common share equivalents are
computed using the higher of the market price at the end of the period or the
average market price for the period, and (ii) the average number of common
shares and dilutive common share equivalents outstanding is increased by the
assumed conversion, if dilutive, of the Company's Series K $3.375 Cumulative
Convertible Exchangeable Preferred Stock, its Series L $14.00 Cumulative
Convertible Exchangeable Preferred Stock, its Series N $14.00 Cumulative
Convertible Exchangeable Preferred Stock, and its Series P 9% Cumulative
Convertible Preferred Stock.
3
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 29, December 31, December 25, December 26, December 27,
1996 1995 1994 1993 1992
(52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
------------ ------------ ------------ ------------ ------------
<S> <C>
(d) (c,d) (b,d)
Pretax income (loss) from continuing operations,
before minority interests,
extraordinary item and cumulative effect of
changes in accounting principles.................. $498.6 $272.2 $(76.7) $ (2,042.3) $ (252.6)
Add:
Interest charged to operations.................... 433.6 545.9 547.8 525.8 531.3
Portion of rental expense representative of
interest factor (assumed to be one-third)...... 25.8 26.0 26.1 20.8 21.1
------------ ------------ ------------ ------------ ------------
Total earnings, as adjusted.................. $958.0 $844.1 $497.2 $ (1,495.7) $ 299.8
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Fixed charges:
Interest charged to operations.................... $433.6 $545.9 $547.8 $ 525.8 $ 531.3
Capitalized interest.............................. 6.6 9.0 7.3 13.7 23.8
Portion of rental expense representative of
interest factor (assumed to be one-third)...... 25.8 26.0 26.1 20.8 21.1
------------ ------------ ------------ ------------ ------------
Total fixed charges.......................... $466.0 $580.9 $581.2 $ 560.3 $ 576.2
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Ratio............................................... 2.06 1.45 -- -- --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See Notes to Computation of Ratio of Earnings to Fixed Charges.
1
<PAGE>
EXHIBIT 12 (continued)
FORT JAMES CORPORATION and SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (a)
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Period Ended
------------------------------
June 29, 1997 June 30, 1996
(26 Weeks) (26 Weeks)
------------- -------------
<S> <C>
Pretax income from continuing operations, before minority interests
and extraordinary item........................................................................ $ 411.6 $ 197.9
Add:
Interest charged to operations................................................................ 194.7 229.7
Portion of rental expense representative of interest factor (assumed to be one-third)......... 13.2 13.1
------------- -------------
Total earnings, as adjusted.............................................................. $ 619.5 $ 440.7
------------- -------------
------------- -------------
Fixed charges:
Interest charged to operations................................................................ $ 194.7 $ 229.7
Capitalized interest.......................................................................... 4.2 2.7
Portion of rental expense representative of interest factor (assumed to be one-third)......... 13.2 13.1
------------- -------------
Total fixed charges...................................................................... $ 212.1 $ 245.5
------------- -------------
------------- -------------
Ratio........................................................................................... 2.92 1.80
------------- -------------
------------- -------------
</TABLE>
See Notes to Computation of Ratio of Earnings to Fixed Charges.
2
<PAGE>
EXHIBIT 12 (continued)
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO 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,
cumulative effect of changes in accounting principles, 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 1992, the Company initiated a productivity enhancement program
and recorded a $112 million pretax charge which has been included in
the calculation of the ratio of earnings to fixed charges for this
year.
(c) 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.
(d) For the following periods, earnings were inadequate to cover fixed
charges, and the amounts of the deficiencies were: year ended December
27, 1992 -- $276.4 million; year ended December 26, 1993 -- $2,056.0
million; year ended December 25, 1994 -- $84.0 million.
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 James River Corporation of Virginia 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 1996 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; and,
(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 of our report, dated August 13, 1997,
on our audits of the consolidated financial statements of Fort James
Corporation and Subsidiaries as of December 29, 1996 and December 31, 1995,
and for each of the three fiscal years in the period ended December 29,
1996, which report is included in this Current Report on Form 8-K.
/s/ COOPERS & LYBRAND L.L.P.
Richmond, Virginia
January 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT
JAMES CORPORATION'S DECEMBER 29, 1996 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> 12-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> DEC-29-1996
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 781
<ALLOWANCES> 0
<INVENTORY> 802
<CURRENT-ASSETS> 1,809
<PP&E> 7,925
<DEPRECIATION> 2,926
<TOTAL-ASSETS> 8,157
<CURRENT-LIABILITIES> 1,542
<BONDS> 4,305
0
738
<COMMON> 19
<OTHER-SE> 94
<TOTAL-LIABILITY-AND-EQUITY> 8,157
<SALES> 7,707
<TOTAL-REVENUES> 7,707
<CGS> 5,564
<TOTAL-COSTS> 5,564
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 424
<INCOME-PRETAX> 504
<INCOME-TAX> 171
<INCOME-CONTINUING> 328
<DISCONTINUED> 0
<EXTRAORDINARY> (8)
<CHANGES> 0
<NET-INCOME> 320
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT JAMES
CORPORATION'S DECEMBER 31, 1995 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 67
<SECURITIES> 0
<RECEIVABLES> 945
<ALLOWANCES> 0
<INVENTORY> 985
<CURRENT-ASSETS> 2,162
<PP&E> 8,153
<DEPRECIATION> 2,813
<TOTAL-ASSETS> 8,911
<CURRENT-LIABILITIES> 1,425
<BONDS> 5,406
0
740
<COMMON> 17
<OTHER-SE> (342)
<TOTAL-LIABILITY-AND-EQUITY> 8,911
<SALES> 8,888
<TOTAL-REVENUES> 8,888
<CGS> 6,835
<TOTAL-COSTS> 6,835
<OTHER-EXPENSES> 52
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 536
<INCOME-PRETAX> 289
<INCOME-TAX> 128
<INCOME-CONTINUING> 160
<DISCONTINUED> 0
<EXTRAORDINARY> (19)
<CHANGES> 0
<NET-INCOME> 141
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT JAMES
CORPORATION'S DECEMBER 25, 1994 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> 12-MOS
<FISCAL-YEAR-END> DEC-25-1994
<PERIOD-END> DEC-25-1994
<CASH> 60
<SECURITIES> 0
<RECEIVABLES> 1,037
<ALLOWANCES> 0
<INVENTORY> 975
<CURRENT-ASSETS> 2,255
<PP&E> 8,858
<DEPRECIATION> 2,857
<TOTAL-ASSETS> 9,605
<CURRENT-LIABILITIES> 1,946
<BONDS> 5,858
0
740
<COMMON> 13
<OTHER-SE> (741)
<TOTAL-LIABILITY-AND-EQUITY> 9,605
<SALES> 7,104
<TOTAL-REVENUES> 7,104
<CGS> 5,727
<TOTAL-COSTS> 5,727
<OTHER-EXPENSES> 10
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 523
<INCOME-PRETAX> (71)
<INCOME-TAX> (15)
<INCOME-CONTINUING> (56)
<DISCONTINUED> 0
<EXTRAORDINARY> 1
<CHANGES> 0
<NET-INCOME> (55)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT JAMES
CORPORATION'S JUNE 29, 1997 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> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> JUN-29-1997
<CASH> 217
<SECURITIES> 0
<RECEIVABLES> 774
<ALLOWANCES> 0
<INVENTORY> 833
<CURRENT-ASSETS> 1,991
<PP&E> 7,874
<DEPRECIATION> 3,106
<TOTAL-ASSETS> 8,083
<CURRENT-LIABILITIES> 1,455
<BONDS> 4,156
0
738
<COMMON> 19
<OTHER-SE> 236
<TOTAL-LIABILITY-AND-EQUITY> 8,083
<SALES> 3,672
<TOTAL-REVENUES> 3,672
<CGS> 2,564
<TOTAL-COSTS> 2,564
<OTHER-EXPENSES> (58)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190
<INCOME-PRETAX> 415
<INCOME-TAX> 168
<INCOME-CONTINUING> 247
<DISCONTINUED> 0
<EXTRAORDINARY> (2)
<CHANGES> 0
<NET-INCOME> 245
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT JAMES
CORPORATION'S JUNE 30, 1996 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> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> JUN-30-1996
<CASH> 65
<SECURITIES> 0
<RECEIVABLES> 930
<ALLOWANCES> 0
<INVENTORY> 850
<CURRENT-ASSETS> 2,017
<PP&E> 8,175
<DEPRECIATION> 2,971
<TOTAL-ASSETS> 8,585
<CURRENT-LIABILITIES> 1,364
<BONDS> 4,894
0
740
<COMMON> 19
<OTHER-SE> (104)
<TOTAL-LIABILITY-AND-EQUITY> 8,585
<SALES> 3,996
<TOTAL-REVENUES> 3,996
<CGS> 2,900
<TOTAL-COSTS> 2,900
<OTHER-EXPENSES> 30
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> 196
<INCOME-TAX> 80
<INCOME-CONTINUING> 114
<DISCONTINUED> 0
<EXTRAORDINARY> (3)
<CHANGES> 0
<NET-INCOME> 111
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
Exhibit 99.1
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 and Subsidiaries as of December 29, 1996, and December 31, 1995, 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
29, 1996. 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 and Subsidiaries as of December 29, 1996, and December 31, 1995, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended December 29, 1996, in conformity with
generally accepted accounting principles.
/S/ COOPERS & LYBRAND L.L.P.
Richmond, Virginia
August 13, 1997
F-1
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 29, December 31, December 25,
1996 1995 1994
------------ ------------ ------------
<S> <C>
(in millions, except per share amounts)
Net sales......................................................................... $7,707.1 $8,887.9 $7,103.7
Cost of goods sold................................................................ 5,564.2 6,835.2 5,727.1
Selling and administrative expenses............................................... 1,222.9 1,217.4 943.2
Severance and other items......................................................... 10.7 51.9 9.6
------------ ------------ ------------
Income from operations.......................................................... 909.3 783.4 423.8
Interest expense.................................................................. 424.4 536.3 523.3
Other income, net................................................................. 18.7 42.0 28.8
------------ ------------ ------------
Income (loss) before income taxes, minority interests and
extraordinary item........................................................... 503.6 289.1 (70.7)
Income tax expense (benefit):
Tax on current income or loss................................................... 171.0 120.4 (14.5)
Effect of tax rate change....................................................... 7.4
------------ ------------ ------------
Total income tax expense (benefit)........................................... 171.0 127.8 (14.5)
------------ ------------ ------------
Income (loss) before minority interests and extraordinary item.................. 332.6 161.3 (56.2)
Minority interests................................................................ (4.6) (1.4) 1.1
------------ ------------ ------------
Income (loss) before extraordinary item...................................... 328.0 159.9 (55.1)
Extraordinary loss on debt repurchases, net of taxes of $5.3 in 1996, $11.9 in
1995 and $14.7 in 1994.......................................................... (8.1) (18.8) (28.2)
------------ ------------ ------------
Net income (loss)............................................................ $ 319.9 $ 141.1 $ (83.3)
------------ ------------ ------------
------------ ------------ ------------
Preferred dividend requirements................................................... (58.5) (58.5) (45.8)
------------ ------------ ------------
Net income (loss) applicable to common shares................................ $ 261.4 $ 82.6 $ (129.1)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share:
Before extraordinary item....................................................... $ 1.47 $ .62 $ (.75)
Extraordinary loss on debt repurchases.......................................... (.04) (.12) (.21)
------------ ------------ ------------
Net income (loss) per share.................................................. $ 1.43 $ .50 $ (.96)
------------ ------------ ------------
------------ ------------ ------------
Weighted-average number of common shares and common share equivalents............. 183.4 164.1 134.1
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------------ ------------
<S> <C>
(in millions)
Assets
Current Assets:
Cash and cash equivalents...................................................................... $ 34.6 $ 67.0
Accounts receivable............................................................................ 781.3 945.0
Inventories.................................................................................... 801.6 984.5
Prepaid expenses and other current assets...................................................... 52.6 53.0
Deferred income taxes.......................................................................... 138.5 112.4
------------ ------------
Total current assets........................................................................ 1,808.6 2,161.9
------------ ------------
Net property, plant and equipment................................................................ 4,999.3 5,339.3
Investments in affiliates........................................................................ 154.6 146.8
Other assets..................................................................................... 464.4 491.6
Goodwill......................................................................................... 730.0 771.7
------------ ------------
Total assets................................................................................ $ 8,156.9 $ 8,911.3
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable............................................................................... $ 607.3 $ 672.9
Accrued liabilities............................................................................ 805.8 644.7
Current portion of long-term debt.............................................................. 128.9 107.5
------------ ------------
Total current liabilities................................................................... 1,542.0 1,425.1
------------ ------------
Long-term debt................................................................................... 4,305.3 5,406.3
Accrued postretirement benefits other than pensions.............................................. 475.9 483.1
Deferred income taxes............................................................................ 690.5 714.3
Other long-term liabilities...................................................................... 291.7 466.7
------------ ------------
Total liabilities........................................................................... 7,305.4 8,495.5
------------ ------------
Shareholders' Equity:
Preferred stock................................................................................ 738.4 740.3
Common stock, $.10 par value; shares outstanding, 1996 -- 188.5 million and 1995 -- 172.0
million..................................................................................... 18.9 17.2
Additional paid-in capital..................................................................... 2,407.0 2,181.7
Retained deficit............................................................................... (2,312.8) (2,523.4)
------------ ------------
Total shareholders' equity.................................................................. 851.5 415.8
------------ ------------
Total liabilities and shareholders' equity.................................................. $ 8,156.9 $ 8,911.3
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 29, December 31, December 25,
1996 1995 1994
------------ ------------ ------------
<S> <C>
(in millions)
Cash Provided by (used for) Operating Activities:
Net income (loss)............................................................... $ 319.9 $ 141.1 $ (83.3)
Depreciation expense and cost of timber harvested............................... 502.5 560.3 494.1
Amortization of goodwill........................................................ 21.4 24.4 12.1
Deferred income tax provision (benefit)......................................... 53.7 49.4 (23.7)
Amortization of deferred loan costs............................................. 13.9 12.9 74.2
Severance and other items....................................................... 10.7 51.9 9.6
Loss on debt repurchases, net of tax............................................ 8.1 18.8 28.2
Change in current assets and liabilities, net of effects of acquisitions
and dispositions:
Accounts receivable............................................................. 96.1 18.8 (42.8)
Inventories..................................................................... 82.5 (80.5) 33.7
Other current assets............................................................ (2.1) 3.7 (13.3)
Accounts payable and accrued liabilities........................................ 53.8 (28.2) 14.8
Other, net........................................................................ (75.9) (6.4) 32.7
------------ ------------ ------------
Cash provided by operating activities........................................ 1,084.6 766.2 536.3
------------ ------------ ------------
Cash Provided by (used for) Investing Activities:
Expenditures for property, plant and equipment.................................. (499.5) (488.5) (435.3)
Cash paid for acquisitions, net................................................. (199.9) (52.5) (538.0)
Cash received from sale of assets............................................... 496.6 10.9 34.6
Other, net...................................................................... 10.3 50.9 (4.1)
------------ ------------ ------------
Cash used for investing activities........................................... (192.5) (479.2) (942.8)
------------ ------------ ------------
Cash Provided by (used for) Financing Activities:
Additions to long-term debt..................................................... 4.2 1,476.9 1,189.5
Payments of long-term debt...................................................... (1,049.2) (2,419.4) (904.4)
Proceeds from spin-off of Crown Vantage Inc..................................... 480.4
Common stock issued, net of offering costs...................................... 203.8 284.1 (.1)
Preferred stock issued, net of issuance costs................................... 278.8
Common and preferred stock cash dividends paid.................................. (97.2) (120.4) (88.4)
Common stock issued on exercise of stock options................................ 16.1 68.8 .4
Debt issuance costs............................................................. (1.5) (50.1) (32.1)
Other, net...................................................................... (.7) (1.3)
------------ ------------ ------------
Cash provided by (used for) financing activities............................. (924.5) (279.7) 442.4
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents................................ (32.4) 7.3 35.9
Cash and cash equivalents, beginning of year.................................... 67.0 59.7 23.8
------------ ------------ ------------
Cash and cash equivalents, end of year....................................... $ 34.6 $ 67.0 $ 59.7
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL ACCOUNTS
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 29, December 31, December 25,
1996 1995 1994
------------ ------------ ------------
<S> <C>
(in millions)
Preferred stock
Balance, beginning of year...................................................... $ 740.3 $ 740.3 $ 454.1
Issuance of Series P preferred stock............................................ 287.5
Other........................................................................... (1.9) (1.3)
------------ ------------ ------------
Balance, end of year......................................................... $ 738.4 $ 740.3 $ 740.3
------------ ------------ ------------
------------ ------------ ------------
Common shareholders' equity (deficit)
Common stock:
Balance, beginning of year...................................................... $ 17.2 $ 13.4 $ 13.4
Common stock offerings.......................................................... 1.5 3.5
Exercise of stock options and awards............................................ .1 .3
Restricted stock awards......................................................... .1
------------ ------------ ------------
Balance, end of year......................................................... 18.9 17.2 13.4
------------ ------------ ------------
Additional paid-in capital:
Balance, beginning of year...................................................... 2,181.7 1,807.2 1,814.3
Common stock offerings.......................................................... 202.3 280.6
Exercise of stock options and awards, net of tax effect......................... 18.8 82.2 1.6
Restricted stock compensation earned............................................ 3.0
Other........................................................................... 1.2 11.7 (8.7)
------------ ------------ ------------
Balance, end of year........................................................ 2,407.0 2,181.7 1,807.2
------------ ------------ ------------
Retained deficit:
Balance, beginning of year...................................................... (2,523.4) (2,547.7) (2,394.5)
Net income (loss)............................................................... 319.9 141.1 (83.3)
Common stock cash dividends declared............................................ (51.2) (50.0) (49.0)
Preferred stock cash dividends declared......................................... (58.5) (58.5) (45.8)
Spin-off of Crown Vantage Inc................................................... (38.2)
Change in equity component of minimum pension liability......................... 11.6 .5 14.9
Foreign currency translation and other.......................................... (11.2) 29.4 10.0
------------ ------------ ------------
Balance, end of year......................................................... (2,312.8) (2,523.4) (2,547.7)
------------ ------------ ------------
Common shareholders' equity (deficit), end of year......................... $ 113.1 $ (324.5) $ (727.1)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (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 29, 1996, and December 25, 1994,
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 (See Note 2), 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 earnings.
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 for the James River facilities. Other inventories, including
substantially all inventories held by Fort Howard 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. Assets under capital leases principally arose
in connection with sale and leaseback transactions as described in Note 15 and
are stated at the present value of future minimum lease payments. These assets
are depreciated over the respective periods of the leases which range from 15 to
25 years. 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.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 $108.7 million
as of December 29, 1996, and $92.2 million as of December 31, 1995. 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. On December 29, 1996, and December 31, 1995, the Company
believes that no impairment of goodwill was indicated.
Interest Costs
The Company capitalizes interest costs as part of the cost of constructing
certain facilities and equipment.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C>
(in millions)
Total interest costs..................................................... $431.0 $545.3 $530.6
Interest capitalized..................................................... (6.6) (9.0) (7.3)
------ ------ ------
Net interest expense................................................... $424.4 $536.3 $523.3
------ ------ ------
------ ------ ------
Interest paid............................................................ $417.6 $551.8 $406.0
------ ------ ------
------ ------ ------
</TABLE>
Other Operating Expenses
Research and development expenditures are expensed as incurred. Direct and
readily identifiable indirect research and development costs totaled $49.8
million in 1996, $56.1 million in 1995 and $49.3 million in 1994. Advertising
costs are expensed as incurred and amounted to $94.4 million in 1996, $101.6
million in 1995 and $83.3 million in 1994.
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 earnings.
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 earnings resulting from the translation of assets and
liabilities of foreign subsidiaries and affiliates, net of the effect of
exchange rate hedges, was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C>
(in millions)
Balance, beginning of year.............................................. $ 10.3 $ (33.6) $ (43.6)
Translation adjustments................................................. (11.7) 19.3 (3.7)
Related income tax effect............................................... (3.9) 24.6 13.7
------- ------- -------
Balance, end of year............................................... $ (5.3) $ 10.3 $ (33.6)
------- ------- -------
------- ------- -------
</TABLE>
Derivative Financial Instruments
The Company's debt structure and international operations give rise to
exposure to market risks from changes in interest rates and foreign currency
exchange rates. To manage these risks, derivative financial instruments may be
utilized by the Company including interest rate swaps, caps and options on its
long-term debt and foreign exchange contracts on certain of
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
its net investments in foreign operations. 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 earnings. 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 are 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 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.
Net Income (Loss) Per Common Share and Common Share Equivalent
Net income (loss) per common share is computed based on the
weighted-average number of common shares and dilutive common share equivalents
outstanding during the period. Net income (loss) used in these computations is
reduced by preferred dividend requirements. Fully diluted earnings per share are
considered to be equal to primary earnings per share in all periods presented
because the assumed conversion of potentially dilutive securities which are not
common share equivalents was not dilutive.
Per share earnings and the accompanying notes to consolidated financial
statements reflect the retroactive effect of a 6.5-for-one Fort Howard stock
split which occurred on January 31, 1995.
Adoption of Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") which is effective for
periods beginning after December 15, 1997, including interim periods. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements, either in the
statement of operations or in a separate statement. Additionally, SFAS 130
requires the display of the accumulated balance of other comprehensive income.
On a pro forma basis, for the years ended December 29, 1996, December 31, 1995,
and December 25, 1994, comprehensive income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C>
(in millions)
Net income (loss)........................................................ $319.9 $141.1 $(83.3)
Other comprehensive income (loss), net of tax:
Foreign currency translation........................................... (15.6) 43.9 10.0
Elimination of one-month lag in reporting for Jamont N.V............... (8.4)
Change in equity component of minimum pension liability................ 11.6 .5 14.9
Unrealized gain (loss) on securities................................... 4.4 (6.1)
------ ------ ------
Other comprehensive income.......................................... .4 29.9 24.9
------ ------ ------
Comprehensive income (loss).............................................. $320.3 $171.0 $(58.4)
------ ------ ------
------ ------ ------
</TABLE>
In June 1997, the Financial Accounting Standards Board also issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") which is effective for years beginning after
December 15, 1997, including interim periods after the year of initial adoption.
SFAS 131 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 SFAS 131
will have on the operating segments reported, nor the impact SFAS 131 will have
on the related disclosures.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is effective for periods
ending after December 15, 1997, including interim periods. SFAS 128 establishes
standards for computing and presenting earnings per share ("EPS") by replacing
primary EPS with the presentation of basic EPS and requiring dual presentation
of basic and diluted EPS on the face of the income statement. On a pro forma
basis, for the years ended December 29, 1996, December 31, 1995, and December
25, 1994, EPS as reported would have been:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- -----
<S> <C>
Basic earnings per share...................................................... $1.44 $.51 $(.96)
Diluted earnings per share.................................................... 1.43 .50 (.96)
</TABLE>
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.
NOTE 2 -- ACQUISITIONS, DISPOSITIONS AND OTHER TRANSACTIONS
Business Combination
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 (loss) before extraordinary item and net income (loss)
for the individual companies reported prior to the merger are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C>
(in millions)
Net sales
James River.............................................................................. $5,971.9 $7,141.2 $5,706.4
Fort Howard.............................................................................. 1,580.8 1,620.9 1,274.4
Reclassifications........................................................................ 154.4 125.8 122.9
-------- -------- --------
Total................................................................................. $7,707.1 $8,887.9 $7,103.7
-------- -------- --------
-------- -------- --------
Income (loss) before extraordinary item
James River.............................................................................. $ 157.3 $ 126.4 $ (13.0)
Fort Howard.............................................................................. 170.7 33.5 (42.1)
-------- -------- --------
Total................................................................................. $ 328.0 $ 159.9 $ (55.1)
-------- -------- --------
-------- -------- --------
Net income (loss)
James River.............................................................................. $ 157.3 $ 126.4 $ (13.0)
Fort Howard.............................................................................. 162.6 14.7 (70.3)
-------- -------- --------
Total................................................................................. $ 319.9 $ 141.1 $ (83.3)
-------- -------- --------
-------- -------- --------
</TABLE>
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 James River. The
conforming of the accounting practices of James River and Fort Howard resulted
in no adjustments to net income (loss) or shareholders' equity. There were no
significant intercompany transactions between James River and Fort Howard.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 -- ACQUISITIONS, DISPOSITIONS AND OTHER TRANSACTIONS -- Continued
The Company estimates that transaction costs associated with the merger
will be approximately $50 million to $60 million. All fees and transaction
expenses related to the merger and the restructuring of the combined companies
will be expensed as required under the pooling-of-interests accounting method.
These expenses have not been reflected in these consolidated statements of
operations, but will be reflected in the consolidated statements of operations
of the Company in the third and fourth quarters of 1997. The range of
restructuring charges cannot be reasonably estimated until an analysis of the
newly combined operations is complete and a detailed restructuring plan is
developed.
1996
On September 3, 1996, the Company purchased the remaining 14% minority
interest in Jamont N.V., which is included in its European Consumer Products
Business, under an existing put and call agreement, from EuroPaper Inc.
("EuroPaper") for $199.9 million. Prior to the settlement, Fort James'
consolidation of Jamont N.V. included the EuroPaper minority interest at a book
value of $151 million. Concurrent with the receipt of the put exercise notice
from EuroPaper on June 29, 1996, Fort James recorded the acquisition of the
remaining 14% minority interest under the purchase method of accounting.
On August 22, 1996, the Company completed the sale of its Flexible
Packaging group for gross cash proceeds of $372.7 million. The Flexible
Packaging group included ten manufacturing facilities with 2,200 employees.
These facilities included four lamination and coating plants, five film and
converting plants, and a rigid plastics container plant. Net assets sold totaled
$336.7 million, net of total liabilities of $8.4 million. The Flexible Packaging
group had annual net sales of $483 million. Proceeds from this transaction were
used to settle the EuroPaper put and reduce long-term debt.
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 sales of approximately $47 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, with annual sales of
approximately $125 million, consisted of a party goods facility, a specialty
mill, and a foodservice specialties plant. In January 1996, the Company
contributed its Handi-Kup foam cup operations, formerly part of the North
American Consumer Products Business, to a joint venture for $26 million of cash,
approximately $10 million face value of subordinated long-term notes, and a 45%
minority interest in the joint venture. The Handi-Kup operations contributed to
the joint venture included four foam cup plants, with annual sales of
approximately $96 million. The Company's interest in the joint venture was
subsequently sold in December 1996 for cash proceeds of $26 million, including
the collection of the subordinated long-term notes.
1995
On August 25, 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 earnings. 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. The
net proceeds were recognized as a deferred gain and are being amortized over 18
years. Fort James retained ownership of the remaining 50% interest in this
facility.
1994
Prior to July 5, 1994, Fort James and Rayne Holdings Inc. ("Rayne") each
owned 50% of Jamont Holdings N.V. ("Jamont Holdings") which, in turn, owned
86.4% of Jamont N.V., which is included in the European Consumer Products
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 -- ACQUISITIONS, DISPOSITIONS AND OTHER TRANSACTIONS -- Continued
Business. The European Consumer Products Business produces branded and private
label tissue, feminine hygiene and foodservice products for the retail and
away-from-home markets in Europe. On July 5, 1994, Fort James completed the
acquisition of Rayne's 50% ownership interest in Jamont Holdings for
approximately $575 million in cash. Jamont N.V. was included as a consolidated
subsidiary beginning in July 1994; prior to that time, it was accounted for
using the equity method.
In March 1994, the Company sold its 50% interest in Coastal Paper Company,
a Mississippi-based producer of lightweight papers. The Company also completed
the sale of certain assets of its inactive Fitchburg, Massachusetts, facility in
September 1994, and the sale of its Sandston, Virginia, specialty tabletop
facility in November 1994. During 1994, the Company also completed the sale of
47,000 acres of timberlands.
Summary
The purchase prices of acquisitions were allocated to the acquired net
assets based on their respective fair values as summarized below.
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- --------
<S> <C>
(in millions)
Acquisitions of consolidated entities:
Fair value of assets acquired......................................... $199.9 $55.2 $2,119.9
Liabilities assumed or created........................................ (2.7) (1,543.0)
------ ----- --------
Cash paid for acquisitions............................................ 199.9 52.5 576.9
------ ----- --------
Cash acquired......................................................... (38.9)
------ ----- --------
Cash paid for acquisitions, net.................................... $199.9 $52.5 $ 538.0
------ ----- --------
------ ----- --------
Dispositions (other than Crown Vantage spin-off):
Fair value of assets sold............................................. $508.9 $13.7 $ 37.0
Non-cash consideration received....................................... (12.3) (2.8) (2.4)
------ ----- --------
Cash received from sale of assets.................................. $496.6 $10.9 $ 34.6
------ ----- --------
------ ----- --------
</TABLE>
NOTE 3 -- SEVERANCE AND OTHER ITEMS
1996
During 1996, the Company recorded a net severance and other items charge of
$10.7 million which included $40.6 million of severance charges and $59.3
million of asset write-downs offset by $89.2 million in net gains on business
dispositions (see Note 2). Severance charges related to the termination of 580,
200 and 90 employees at the Company's North American Consumer Products Business,
European Consumer Products Business and other domestic manufacturing and
corporate facilities, respectively. Asset write-downs related to the phase-out
of certain packaging equipment and planned asset consolidations in Europe. The
Company has made severance payments of $69.7 million to approximately 2,000
employees for whom severance costs have been accrued since December 1994.
1995
During 1995, the Company recorded $51.9 million which included severance
charges for announced reductions in work force of $42.7 million, related fixed
asset write-offs of $4.2 million and transaction costs associated with the Crown
Vantage spin-off of $5.0 million (see Note 2). Severance charges were primarily
related to the termination of approximately 1,050 employees located in Europe
and 370 employees located at domestic manufacturing and corporate facilities.
1994
In December 1994, the Company recorded $9.6 million which included
severance charges for announced reductions-in-force of $16.4 million, asset
write-offs of $28.9 million, and the reversal of $35.7 million of reserves
associated with a 1992 restructuring program. Severance charges represent the
costs related to the termination of approximately 650 employees primarily
located at Communications Papers and Packaging facilities. Asset write-offs
related to the phase-out of certain packaging equipment and planned asset
consolidations in Europe. The reversal of a portion of the 1992 restructuring
charge results from the Company's decision not to dispose of certain facilities.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4 -- OTHER INCOME
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C>
(in millions)
Equity in earnings of unconsolidated affiliates.............................. $ 7.7 $25.7 $13.7
Interest income.............................................................. 8.1 11.4 10.1
Gain on sale of assets....................................................... 3.4 4.7 3.5
Foreign currency exchange gains (losses)..................................... .6 (.4) (.1)
Other, net................................................................... (1.1) .6 1.6
----- ----- -----
Total other income......................................................... $18.7 $42.0 $28.8
----- ----- -----
----- ----- -----
</TABLE>
NOTE 5 -- INCOME TAXES
The components of income (loss) before income taxes, minority interests and
extraordinary item were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C>
(in millions)
Domestic................................................................ $405.9 $236.3 $ (55.5)
Foreign................................................................. 97.7 52.8 (15.2)
------ ------ -------
Income (loss) before income taxes, minority interests
and extraordinary item............................................. $503.6 $289.1 $ (70.7)
------ ------ -------
------ ------ -------
</TABLE>
Income tax expense (benefit) excluding income taxes on extraordinary item,
consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C>
Current: (in millions)
Federal............................................................... $ 67.9 $ 66.2 $ 5.4
State................................................................. 13.3 7.1 1.8
Foreign............................................................... 36.1 5.1 2.0
------ ------ -------
Total current income tax provision................................. 117.3 78.4 9.2
------ ------ -------
Deferred:
Federal............................................................... 42.0 18.5 (22.1)
State................................................................. 3.8 5.4 (3.4)
Foreign............................................................... 7.9 25.5 1.8
------ ------ -------
Total deferred income tax provision (benefit)...................... 53.7 49.4 (23.7)
------ ------ -------
Income tax expense (benefit)..................................... $171.0 $127.8 $ (14.5)
------ ------ -------
------ ------ -------
</TABLE>
During 1996 and 1995, tax benefits credited to shareholders' equity which
primarily related to the redemption of stock options were $3.0 million and $12.4
million, respectively. Cash payments for income taxes totaled $108.0 million in
1996, $73.0 million in 1995 and $16.6 million in 1994.
No provision for income taxes has been made for $66.2 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.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5 -- INCOME TAXES -- Continued
Principal reasons for the difference between the federal statutory income
tax rate on income (loss) before income taxes, minority interests, and
extraordinary item and the Company's effective income tax rate were as follows:
<TABLE>
<CAPTION>
Percent of Pretax Income or
(Loss)
-----------------------------
1996 1995 1994
----- ----- -----
<S> <C>
Federal statutory income tax rate............................................ 35.0% 35.0% (34.1)%
State income taxes, net of federal income tax effect......................... 2.5 3.6 (2.8)
Charitable contributions fair market value in excess of basis................ (3.2)
Federal audit settlement..................................................... (7.2)
Foreign losses not benefited................................................. 3.6 8.7
Amortization of goodwill..................................................... 2.3 2.7 6.0
Other items, net............................................................. 1.3 (3.2) 4.9
----- ----- -----
Effective income tax rate on current income (loss)......................... 33.9% 41.7% (20.5)%
----- ----- -----
Effect of increase in income tax rate........................................ 2.5
----- ----- -----
Effective income tax rate.................................................. 33.9% 44.2% (20.5)%
----- ----- -----
----- ----- -----
</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 James River's federal
income tax returns for the years 1990 through 1992. In the opinion of
management, potential adjustments resulting from these examinations will not
have a material effect on the Company's financial condition.
The income tax effects of temporary differences that gave rise to the net
deferred tax liability as of December 29, 1996, and December 31, 1995, were
related to the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
(in millions)
Property, plant and equipment.................................................. $ 932.8 $1,027.8
Pension benefits............................................................... 76.1 72.5
Other items.................................................................... 64.0 74.6
-------- --------
Total deferred tax liabilities............................................ 1,072.9 1,174.9
-------- --------
Postretirement benefits other than pensions.................................... (181.3) (184.3)
Alternative minimum tax credit carryforwards................................... (99.5) (128.5)
Accrued liabilities............................................................ (148.3) (105.2)
Tax loss carryforwards......................................................... (62.7) (132.0)
Other items.................................................................... (60.1) (66.8)
-------- --------
Total deferred tax assets................................................. (551.9) (616.8)
-------- --------
Valuation allowance....................................................... 31.0 43.8
-------- --------
Net deferred tax liability.............................................. $ 552.0 $ 601.9
-------- --------
-------- --------
</TABLE>
The valuation allowance as of December 29, 1996, and December 31, 1995,
reflects the impact of foreign net operating losses and tax credits for which
the Company does not currently anticipate receiving future tax benefits. If
recognized in the future, $9.5 million of these tax benefits will be allocated
to reduce goodwill of certain acquired subsidiaries.
As of December 29, 1996, the Company had $27.0 million of federal net
operating loss carryforwards which will expire by 2011, $104.3 million of
foreign net operating loss carryforwards which expire primarily from 1997
through 2005 and
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5 -- INCOME TAXES -- Continued
$2.8 million of foreign tax credit carryforwards which expire from 1998 through
2000. The Company also had alternative minimum tax ("AMT") credit carryforwards
of $99.5 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
contributory and noncontributory pension plans which cover substantially all
James River employees, and also participates in several multiemployer retirement
plans which provide defined benefits to 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 $19.5 million, $32.6 million and $26.7 million in 1996,
1995 and 1994, respectively. Plan assets consist principally of equity
securities and corporate and government obligations.
The components of net pension cost were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C>
(in millions)
Service cost............................................................ $ 16.7 $ 16.2 $ 20.8
Interest accrued on projected benefit obligation........................ 84.8 95.5 95.0
Net investment (income) loss on plan assets:
Actual................................................................ (162.9) (246.0) (12.8)
Deferral of difference between actual and expected
investment income.................................................. 59.1 137.0 (97.4)
Net amortization........................................................ 11.9 8.8 19.8
Contributions to multiemployer pension plans............................ 4.6 5.1 5.1
------- ------- ------
Net pension cost...................................................... $ 14.2 $ 16.6 $ 30.5
------- ------- ------
------- ------- ------
</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 1996, 1995 and 1994 business dispositions and severance
programs. Charges of $18.3 million, $8.0 million and $4.1 million are included
with severance and other expenses for the years ended December 29, 1996,
December 31, 1995, and December 25, 1994, respectively.
The actuarial assumptions used in determining net pension costs were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C>
Discount rate................................................................... 7.5% 8.6% 7.4%
Assumed rate of increase in compensation levels................................. 5.0% 5.0% 5.5%
Expected long-term rate of return on plan assets................................ 10.0% 10.0% 10.0%
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 6 -- PENSION PLANS -- Continued
The following table sets forth the funded status of the Company's plans:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
<S> <C>
(in millions)
Actuarial present value of:
Vested benefits.................................................... $ 902.2 $ 164.0 $ 859.9 $ 216.4
Nonvested benefits................................................. 31.6 17.6 29.8 23.3
----------- ----------- ----------- -----------
Accumulated benefit obligation.................................. 933.8 181.6 889.7 239.7
Effect of projected future salary increases........................ 22.8 .8 25.0 .5
----------- ----------- ----------- -----------
Projected benefit obligation.................................... 956.6 182.4 914.7 240.2
----------- ----------- ----------- -----------
Plan assets at fair value............................................ 1,200.4 158.0 1,067.6 198.7
----------- ----------- ----------- -----------
Plan assets in excess of (less than) projected benefit obligation.... 243.8 (24.4) 152.9 (41.5)
Unrecognized net (gain) loss......................................... (82.6) 11.9 10.0 31.9
Unrecognized prior service cost...................................... 33.3 30.9 30.9 40.6
Unrecognized net transition asset.................................... (7.7) (3.0) (8.7) (4.4)
Minimum pension liability............................................ (39.0) (67.6)
----------- ----------- ----------- -----------
Net pension asset (liability)...................................... $ 186.8 $ (23.6) $ 185.1 $ (41.0)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
As of December 29, 1996, benefit obligations were determined using a
discount rate of 7.75% and an assumed rate of increase in compensation levels of
5.0%. The effect of the changes in these assumptions was a decrease in the
projected benefit obligation of $28.6 million.
Other assets included net noncurrent pension assets of $202.2 million as of
December 29, 1996, and $211.7 million as of December 31, 1995, exclusive of the
additional minimum pension liabilities. As of December 29, 1996, $39.0 million
of additional minimum pension liabilities for underfunded plans were included in
other long-term liabilities, offset by an intangible asset of $30.5 million and
a charge of $5.1 million to retained earnings, net of deferred taxes of $3.4
million. As of December 31, 1995, the additional minimum pension liability of
$67.6 million was offset by an intangible asset of $40.2 million and a charge to
retained earnings of $16.7 million, net of deferred taxes of $10.7 million.
In 1995 net noncurrent pension assets and minimum pension liabilities were
reduced by $28.7 million and $22.2 million, respectively, reflecting plans spun
off with 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.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS -- Continued
The discount rate used in determining the net periodic postretirement
benefit cost was 7.4% for 1996, 8.5% for 1995 and 7.5% for 1994. The discount
rate used in determining the accumulated postretirement benefit obligation was
7.6% as of December 29, 1996. The effect of the increase in the discount rate
was a decrease in the accumulated benefit obligation of $10.7 million.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation begins at 8.5% in 1997, declining by .5% per
year through 2003 and .25% thereafter through 2005 to an ultimate rate of 5.0%.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of December 29, 1996, would
have increased by $33.8 million. The effect of this change on the sum of the
service cost and interest cost components of net periodic postretirement benefit
cost for 1996 would have been an increase of $4.4 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 Howard
up to age 65.
The discount rate used in determining the net periodic postretirement
benefit cost and accumulated postretirement benefit obligation was 7.5% for both
1996 and 1995 and 8% for 1994. The assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation begins at 9.5% in
1997, 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 29, 1996, or the net periodic postretirement benefit cost for 1996.
Fort James
The components of net periodic postretirement benefit cost for Fort James
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C>
(in millions)
Service cost................................................................. $ 8.1 $10.5 $12.5
Interest cost on accumulated postretirement benefit obligation............... 29.0 40.6 40.5
Net amortization............................................................. (7.7) (9.1) (7.3)
----- ----- -----
Net periodic postretirement benefit cost................................... $29.4 $42.0 $45.7
----- ----- -----
----- ----- -----
</TABLE>
Net amortization included amortization of prior service gains over
approximately 12 to 15 years. In 1996, the Company incurred curtailment gains of
$12.2 million related to its 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 and is being
amortized over 12 years, the average remaining service period of Fort Howard
active employees.
Summary information on Fort James' plans was as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C>
Accumulated postretirement benefit obligation: (in millions)
Retirees......................................................................... $191.0 $187.1
Fully eligible active participants............................................... 42.1 51.6
Other active participants........................................................ 120.6 159.5
------ ------
Total accumulated postretirement benefit obligation........................... 353.7 398.2
Unrecognized net gain.............................................................. 63.3 18.0
Unrecognized prior service gain.................................................... 81.1 88.9
------ ------
Accrued postretirement benefit obligation..................................... $498.1 $505.1
------ ------
------ ------
</TABLE>
As of December 29, 1996, and December 31, 1995, the Company has included
$22.4 million and $22.0 million of accrued postretirement benefit costs in
accrued liabilities, respectively, representing the estimated current portion of
this liability.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 -- BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
Inventories (in millions)
Raw materials.................................................................. $ 177.0 $ 249.5
Finished goods and work in process............................................. 498.8 640.6
Stores and supplies............................................................ 160.9 179.1
-------- --------
836.7 1,069.2
Subtraction to state certain inventories at last-in, first-out cost............ (35.1) (84.7)
-------- --------
Total inventories............................................................ $ 801.6 $ 984.5
-------- --------
-------- --------
Valued at lower of cost or market:
Last-in, first-out........................................................... $ 365.7 $ 482.9
First-in, first-out or average............................................... 435.9 501.6
-------- --------
Total inventories............................................................ $ 801.6 $ 984.5
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
Property, Plant and Equipment (in millions)
Land and improvements.......................................................... $ 214.6 $ 223.0
Buildings...................................................................... 1,154.3 1,221.1
Machinery and equipment........................................................ 6,202.6 6,375.3
Construction in progress....................................................... 263.0 240.1
-------- --------
7,834.5 8,059.5
Accumulated depreciation....................................................... (2,925.4) (2,813.3)
-------- --------
4,909.1 5,246.2
Timber and timberlands, net.................................................... 90.2 93.1
-------- --------
Net property, plant and equipment............................................ $4,999.3 $5,339.3
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
Capital Lease Assets
(Included in Property, Plant and Equipment totals above) (in millions)
Buildings...................................................................... $ 4.5 $ 4.0
Machinery and equipment........................................................ 187.7 187.0
-------- --------
Total assets under capital leases............................................ $ 192.2 $ 191.0
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
Accrued Liabilities (in millions)
Taxes payable, other than income taxes......................................... $ 102.6 $ 99.7
Interest payable............................................................... 92.0 101.6
Employee insurance benefits.................................................... 76.1 66.3
Compensated absences........................................................... 74.1 80.6
Other items.................................................................... 461.0 296.5
-------- --------
Total accrued liabilities.................................................... $ 805.8 $ 644.7
-------- --------
-------- --------
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 9 -- INDEBTEDNESS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
(in millions)
Revolving credit facilities, 5.02% average interest rate............................................... $ 368.3 $ 578.0
Money market notes, 6.95% average interest rate........................................................ 48.4 305.0
Commercial paper, 3.33% average interest rate.......................................................... 9.5 119.7
Term loans, notes and debentures:
7.55% average interest rate Term loan A, payable in 2002............................................. 624.0 810.0
8.08% average interest rate Term loan B, payable in 2002............................................. 119.0 330.0
6.7% notes, payable in 2003.......................................................................... 249.6 249.6
6.75% notes, payable in 1999......................................................................... 199.8 199.7
7.57% average interest rate medium-term notes, payable from 1997 to 2004............................. 200.0 200.0
7.75% debentures, payable in 2023.................................................................... 149.7 149.7
7.50% average interest rate notes, payable to 2009................................................... 119.9 183.3
8.25% notes, payable in 2002......................................................................... 100.0 100.0
8.375% notes, payable in 2001........................................................................ 199.5 199.4
9.0% subordinated notes, payable in 2006............................................................. 618.1 650.0
9.25% notes, payable in 2001......................................................................... 450.0 450.0
9.25% debentures, payable in 2021.................................................................... 200.0 200.0
9.77% note, payable from 2005 to 2014................................................................ 200.0 200.0
10% subordinated notes, payable in 2003.............................................................. 298.5 300.0
Capital lease obligations, average interest rate 10.9%, payable to 2017................................ 170.6 175.2
Revenue bonds, average interest rate 7.36%, payable to 2028............................................ 109.3 114.2
-------- --------
Total........................................................................................... 4,434.2 5,513.8
Less current portion............................................................................ 128.9 107.5
-------- --------
Long-term debt............................................................................. $4,305.3 $5,406.3
-------- --------
-------- --------
</TABLE>
Minimum Principal Payments
Minimum principal payments on long-term debt, excluding commercial paper,
money market notes and revolving credit borrowings, for the next five years are
as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
<S> <C>
(in millions)
Scheduled maturities......................................................... $128.9 $142.7 $349.3 $191.9 $846.1
</TABLE>
If the current level of commercial paper, money market notes and revolving
credit agreements remains outstanding until the expiration of the underlying or
supporting agreements, additional payments of $399 million and $27 million would
be required in 1999 and 2002, respectively. It is the Company's current
intention to refinance or renew such agreements prior to their expiration.
Revolving Credit Facilities
As of December 29, 1996, Fort James and its consolidated subsidiaries had
revolving credit agreements with various domestic and foreign banks providing
for unsecured borrowings of up to approximately $1,462 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 25 basis points on
$1,162 million and 50 basis points on $300 million of 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 10 to 20 basis
points of the committed amounts. The majority of the Company's domestic and
foreign revolving credit agreements, totaling $935 million, expire in December
1999; the remaining agreements expire in 1997, 1998 and 2002.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 9 -- INDEBTEDNESS -- Continued
Commercial Paper and Money Market Notes
As of December 29, 1996, the Company had domestic and foreign commercial
paper programs providing for commercial paper issuances of up to $624.1 million.
In addition, the Company had agreements with several banks providing for other
borrowings, dependent upon bank availability. Commercial paper and money market
notes generally bear interest at below-prime rates. As of December 31, 1995, the
outstanding commercial paper and money market notes had average interest rates
of 4.68% and 6.69%, respectively. 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 money market notes, these
borrowings have been classified as long-term debt.
Term Loans, Notes and Debentures
Interest on Term Loan A is payable at prime plus 0.75% or, subject to
certain limitations, at a reserve adjusted LIBOR rate plus 1.75% subject to
downward adjustment if certain financial criteria are met. Interest on Term Loan
B is payable at prime plus 1.50% or at a reserve adjusted LIBOR rate plus 2.50%.
Among other restrictions, Fort Howard's debt agreements: (i) restrict
payments of dividends, repayments of subordinated debt, purchases of Fort
Howard's common stock, additional borrowings and acquisition of property, plant
and equipment; (ii) require that certain financial ratios be maintained at
prescribed levels; (iii) restrict the ability of Fort Howard to make fundamental
changes and to enter into new lines of business, the pledging of Fort Howard's
assets and guarantees of indebtedness of others and (iv) limit dispositions of
assets and investments which might be made by Fort Howard. Fort Howard debt
containing these restrictions were refinanced simultaneously with the merger
(see Note 17).
James River's most restrictive agreements contain limitations on borrowings
and require maintenance of a minimum amount of net worth. As of December 29,
1996, under the most restrictive provisions of James River's debt agreements,
James River had additional borrowing capacity of $1.6 billion and net worth in
excess of the minimum requirement of approximately $390 million.
At December 31, 1996, receivables totaling $57 million, inventories
totaling $151 million and property, plant and equipment with a net book value of
$1,238 million were pledged as collateral or held in trust under the terms of
Fort Howard's debt agreements. Certain of James River's 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.
During 1996, the Company made payments on long-term debt of $1,049 million,
resulting in the reduction of commercial paper and money market borrowings of
$358 million, revolving credit agreements of $190 million and term loans, notes
and debentures and capital leases of $501 million. This reduction in long-term
debt was primarily funded through divestiture proceeds (see Note 2), common
stock issuance proceeds and cash flows from operations.
NOTE 10 -- FINANCIAL INSTRUMENTS
The Company is subject to market rate risk from exposure to changes in
interest rates and currency exchange rates and enters into various interest rate
and foreign exchange contracts to manage this exposure. Financial instruments
used for these purposes are evaluated against the Company's policies for
managing this risk, including counterparty performance and hedging practices,
and are monitored using techniques such as market valuations and sensitivity
analysis.
Interest Rate Instruments
The Company's strategy is to optimize the ratio of the Company's fixed to
variable rate financing consistent with maintaining an acceptable level of
exposure to the risk of interest rate fluctuation. To obtain this mix, the
Company primarily uses interest rate swaps and options that have the effect of
converting specific debt obligations of the Company from fixed to variable rate,
or vice versa, as required.
The Company has entered into interest rate swap agreements under which it
pays to counterparties a variable interest rate based on LIBOR and the
counterparties pay the Company a fixed interest rate on a notional principal
amount of $1,286 million. Additionally, the Company entered into options under
which premiums are paid to a counterparty in exchange for protection from paying
the LIBOR based rates in excess of 6.5% up to 8.01% on $646 million of the
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 10 -- FINANCIAL INSTRUMENTS -- Continued
$1,286 million in notional amount of interest rate swaps. These contracts mature
in September 1998 and January 1999. Also, the Company is a party to $500 million
in notional amount of LIBOR based interest rate cap agreements that limit
exposure on floating rate obligations to 8% plus Fort Howard's borrowing margin
until June 1, 1999. The weighted-average pay rate and receive rate under the
interest rate contracts were 3.0% and 2.7%, respectively, for the years ended
December 29, 1996, and December 31, 1995.
The fair value of the Company's financial instruments related to its
indebtedness were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
Carrying Value Carrying Value
or Gross or Gross
Notional Fair Notional Fair
Amount (1) Value Amount (1) Value
-------------- -------- -------------- -------
<S> <C>
(in millions)
Long-term debt, including current maturities $ (4,434) $(4,586) $ (5,514) $(5,675)
Interest rate swaps 1,286 (15) 1,286 (3)
Interest rate caps 500 1 500 2
<CAPTION>
(1) Long-term debt amount is carrying value; interest rate swap and cap amounts are notional amounts. The
interest rate caps have a carrying value of $8 million and $11 million at December 29, 1996, and
December 31, 1995, respectively.
</TABLE>
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.
Currency Instruments
The Company entered into foreign exchange contracts that hedge a portion of
its net investment in its European Consumer Products Business. The total
notional amount of such hedges was $470 million as of December 29, 1996, and
December 31, 1995. Of such notional amount, $330 million was denominated in
French francs and the remaining $140 million was denominated in British pounds,
Belgian francs and Spanish pesetas. In connection with these contracts, the
Company entered into interest rate swap agreements to mitigate the related
interest rate exposure of the foreign exchange contracts. The weighted-average
pay and receive rates on the interest rate agreements were 7.6% and 5.1%, and
7.9% and 5.4%, respectively, for the years ended December 29, 1996, and December
31, 1995, respectively. These contracts mature on September 1, 1998.
As of December 29, 1996, and December 31, 1995, the carrying value of
foreign exchange contracts was a net liability of $59.3 million and $86.7
million, respectively, and the fair value, based on quoted market prices of
comparable instruments, was a net liability of $85.3 million and $108.0 million,
respectively.
The Company's European Consumer Products Business entered into foreign
exchange contracts which mature in one year or less to hedge its market rate
risk from exposure to changes in foreign currency exchange rates primarily
resulting from intercompany financing and commercial transactions. As of
December 29, 1996, and December 31, 1995, the Company had net unrealized
(losses) gains of $(.1) million and $.4 million, respectively, on a notional
amount of $47 million and $81 million, respectively, for these hedge
instruments.
Credit Risk
The counterparties to the Company's interest rate and foreign exchange
contracts consist of a number of major financial institutions. The Company
continually monitors its positions with, and the credit quality of, these
institutions and does not anticipate nonperformance by the counterparties.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 -- COMMON STOCK
James River and Fort Howard had 150 million and 100 million (137.5 million
as retroactively converted) authorized shares of common stock as of December 29,
1996, respectively. Effective with the merger, the authorized shares of Fort
James common stock, $.10 par value ("Common Stock") was increased to 500 million
shares. Including the retroactive effect of converting Fort Howard common stock
into Fort James Common Stock, 188,468,378 shares were outstanding as of December
29, 1996, and the following shares were reserved for issuance:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Stock option plans...................................................................... 11,967,095
Incentive stock plan.................................................................... 2,772,158
Deferred stock plan..................................................................... 374,051
Director stock ownership plan........................................................... 97,175
Conversion of Series K preferred stock.................................................. 2,675,087
Conversion of Series L preferred stock.................................................. 5,451,077
Conversion of Series N preferred stock.................................................. 1,439,313
Conversion of Series P preferred stock.................................................. 15,341,215
----------
Total common shares reserved for issuance........................................ 40,117,171
----------
----------
</TABLE>
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.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 Annual Liquidation
--------------------------------------- Preferred Dividend Value
Liquidation Shares Annual Shares Requirement (in millions)
Value Outstanding Dividend Outstanding (in ----------------
Per Share 1996 Per Share 1996 millions) 1996 1995
----------- ----------- --------- ----------- ----------- ------ ------
<S> <C>
Series K*............................... $ 50 $3.3750 1,999,895 $ 6.7 $100.0 $100.0
Series L................................ 50 4,000,000 3.5000 1,000,000 14.0 200.0 200.0
Series N................................ 50 1,056,168 3.5000 264,042 3.7 52.8 52.8
Series O................................ 25 3,924,600 2.0625 196,230 8.1 98.1 100.0
Series P................................ 17.25 16,664,366 1.5525 166,644 25.9 287.5 287.5
----------- ----------- ------ ------
Total............................ 3,626,811 $58.4 $738.4 $740.3
----------- ----------- ------ ------
----------- ----------- ------ ------
</TABLE>
*Amounts listed for Series K are for preferred shares
As of December 29, 1996, the Company has reserved 150,000 preferred shares
for the issuance of Series M preferred stock under the Shareholder Rights Plan.
In connection with the merger, the Company increased the number of preferred
shares reserved for issuance to 250,000 shares.
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 a redemption price
declining from $50.35 per depositary share as of December 29, 1996, to $50 per
depositary share in October 1997, and thereafter, 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.
The Series O 8 1/4% Cumulative Preferred Stock ("Series O") is held in the
form of depositary shares, with each depositary share representing a
one-twentieth interest in a preferred share. The Series O depositary shares are
not redeemable prior to October 1, 1997. On or after that date, they are
redeemable by the Company at $25 per depositary share, plus accrued dividends.
The Series P 9% Cumulative Convertible Preferred Stock ("Series P") is held
in the form of depositary shares, with each depositary share representing a
one-hundredth interest in a preferred share. Each depositary share is entitled
to .8547 of a vote, voting as a single group with holders of Common Stock. The
Series P depositary shares are convertible at the option of the holder into
Common Stock at a rate of .9206 common shares for each depositary share. After
July 1, 1997, the Series P depositary shares are redeemable by the Company at a
call price payable in shares of Common Stock. The number of shares to be issued
upon redemption is tied to the market value of Common Stock at the time of
redemption. If still outstanding on July 1, 1998, each Series P depositary share
will automatically convert into 1.0771 shares of Common Stock.
NOTE 13 -- EMPLOYEE BENEFIT PLANS
The Company applies APB 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
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13 -- EMPLOYEE BENEFIT PLANS -- Continued
dates for awards under those plans consistent with the method of FASB Statement
123, "Accounting for Stock-Based Compensation," pro forma net income and
earnings per share would have been as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C>
(in millions, except
per share amounts)
Net income............................................................. $315.2 $139.3
Earnings per share..................................................... $ 1.40 $ .49
</TABLE>
James River's and Fort Howard's stock option plans provide for the granting
of options to purchase 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. James River's
options vest in two or three equal annual installments. Fort Howard's options
generally vest in five equal annual installments. Effective with the merger,
Fort Howard's options were automatically converted into Fort James options at
the merger exchange ratio and became fully vested pursuant to the plan
provisions. As of December 29, 1996, there were 1,054 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>
1996 1995 1994
------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
<S> <C>
(in thousands, except per share amounts)
Balance, beginning of year.................................... 9,437 $ 16.86 11,039 $ 17.52 10,669 $ 17.89
Granted..................................................... 2,416 23.90 2,225 22.82 938 16.35
Forfeited................................................... (150) 23.61 (176) 20.62 (153) 20.60
Exercised................................................... (951) 14.95 (3,477) 21.99 (23) 19.78
Expired..................................................... (209) 27.77 (174) 28.62 (392) 23.33
------ --------- ------ --------- ------ ---------
Balance, end of year.......................................... 10,543 $ 18.34 9,437 $ 16.86 11,039 $ 17.52
------ --------- ------ --------- ------ ---------
------ --------- ------ --------- ------ ---------
Exercisable................................................... 6,679 6,698 8,797
Available for grant........................................... 2,707
Weighted-average fair value of options granted
during the year............................................. $ 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>
James River Fort Howard
----------------- -----------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C>
Dividend yield...................................................................... 2.00% 2.00% 0.00% 0.00%
Volatility rate..................................................................... 27.26% 26.02% 19.26% 24.32%
Risk-free interest rate............................................................. 6.18% 6.37% 6.07% 5.51%
Expected option life................................................................ 5 years 5 years 5 years 5 years
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13 -- EMPLOYEE BENEFIT PLANS -- Continued
The following table summarizes information about fixed stock options
outstanding, including the retroactive effect of converting Fort Howard's
options into Fort James' options, as of December 29, 1996:
<TABLE>
<CAPTION>
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>
(in thousands, except year and per share amounts)
$11.19-$14.36 5,548 3.7 years $12.31 4,891 $12.04
$15.63-$22.97 1,948 8.4 years 19.38 719 18.91
$23.07-$31.87 2,114 7.6 years 26.39 651 26.34
$32.25-$40.66 933 7.2 years 33.69 418 33.83
----------- -----------
Total 10,543 6,679
----------- -----------
----------- -----------
</TABLE>
Deferred Stock Plan
The Company's Deferred Stock Plan provides for the award of hypothetical
shares of Common Stock ("Units") to certain officers and key employees. The
value of each Unit on the award date is equal to the current market value of a
share of Common Stock. Benefits will be paid in cash and Common Stock as vested
or, at the option of the holder, over varying periods after retirement. As of
December 29, 1996, Units were held by 40 employees. The Company recognized
compensation expense under the Deferred Stock Plan of $1.1 million in 1996, $2.1
million in 1995 and $3.4 million in 1994.
Deferred Stock Plan activity was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ----- -----
<S> <C>
(in thousands)
Outstanding Units, beginning of year................................................ 537 559 631
Granted........................................................................... 39 108 8
Accrued dividends................................................................. 7 19 16
Distributed....................................................................... (104) (77) (74)
Canceled.......................................................................... (105) (72) (22)
---- ----- -----
Outstanding Units, end of year...................................................... 374 537 559
---- ----- -----
---- ----- -----
</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
715,650 shares of Common Stock were granted in 1996 (of which 2,825 shares were
deferred) at a weighted-average grant date fair value of $26.79 per share.
Awards granted to officers and key employees will vest in eight years, with the
potential for earlier vesting based on the Company's performance, and awards
granted to directors will vest one year from the date of grant. Incentive stock
awards of 150,000 shares of Common Stock were granted in 1996 at a
weighted-average grant date fair value of $26.44 per share. 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 $3.0
million in 1996. As of December 29, 1996, there were 1,489 thousand 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 94 thousand shares available for grant as of December 29, 1996.
Pursuant to Fort Howard's 1995 Stock Incentive Plan, 12,000 shares were
granted as restricted stock awards in September 1996 at a grant date fair value
of $24.50 per share. These shares automatically vested pursuant to the plan
provisions and converted into Fort James Common Stock effective with the merger.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13 -- EMPLOYEE BENEFIT PLANS -- Continued
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 50% rate. The Company additionally
contributes 1% of all eligible employees' base salary to the plan. As of
December 29, 1996, there were 22,000 participants in the plan, and the plan held
10 million shares of Common Stock and $77 million of other investments. Company
contributions to this plan totaled $16.8 million in 1996, $15.2 million in 1995
and $16.1 million in 1994.
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 29, 1996, there were approximately 6,000
participants in these plans, and the plans held .4 million shares of Common
Stock. Company contributions to these plans totaled $16.3 million in 1996, $13.2
million in 1995 and $12.7 million in 1994.
In addition, the Company maintains a stock purchase plan for the benefit of
certain Canadian employees. As of December 29, 1996, 65,000 shares of Common
Stock were held in this plan.
NOTE 14 -- RELATED PARTY TRANSACTIONS
As of December 29, 1996, Morgan Stanley Group Inc. ("Morgan Stanley Group")
and certain of its affiliates controlled 26% of Fort Howard's common stock.
Morgan Stanley, Dean Witter Discover & Co. (the surviving Corporation in the
June 1, 1997, merger of Morgan Stanley Group with and into Dean Witter Discover
& Co.) ("Morgan Stanley, Dean Witter") and certain of its affiliates own less
than 5% of the outstanding common shares of Fort James upon conversion of their
Fort Howard common stock.
Morgan Stanley & Co. Incorporated ("MS&Co"), an affiliate of Morgan
Stanley, Dean Witter, has served as lead underwriter with respect to Fort
Howard's common stock and public debt offerings and has received underwriting
fees of $3 million in 1996, $7 million in 1995 and $20 million in 1994 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 provides
financial advisory services for Fort Howard for which it receives customary
fees. Pursuant to an agreement terminated effective December 31, 1994, MS&Co
provided financial advisory services to Fort Howard for which Fort Howard paid
MS&Co $1 million in 1994. Fort James is a party to interest rate cap agreements
(see Note 10) including one such agreement with MS&Co which was purchased in
1994 for $2 million. Additionally, in connection with the merger, Fort Howard
has agreed to pay MS&Co approximately $20 million in fees for its services as an
investment advisor.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 29, 1996, future minimum rental payments under noncancelable
operating leases were as follows:
<TABLE>
<CAPTION>
Minimum
Rentals
-------------
<S> <C>
(in millions)
1997..................................................................................... $ 25.1
1998..................................................................................... 22.8
1999..................................................................................... 20.5
2000..................................................................................... 19.8
2001..................................................................................... 16.6
2002 and thereafter...................................................................... 48.4
-------------
Total future minimum rentals...................................................... $ 153.2
-------------
-------------
</TABLE>
Rent expense totaled $70.3 million in 1996, $71.6 million in 1995 and $72.7
million in 1994.
Sale and leaseback transactions
Certain buildings and machinery and equipment at Fort Howard's tissue
facilities were sold and leased back from various financial institutions. These
leases are treated as capital leases. Future minimum lease payments as of
December 29, 1996, are as follows:
<TABLE>
<CAPTION>
Minimum
Payments
-------------
<S> <C>
(in millions)
1997..................................................................................... $ 23.7
1998..................................................................................... 23.4
1999..................................................................................... 23.3
2000..................................................................................... 22.8
2001..................................................................................... 22.6
2002 and thereafter...................................................................... 310.4
-------------
Total payments........................................................................... 426.2
Less imputed interest at rates approximating 10.9%....................................... 255.6
-------------
Present value of capital lease obligations........................................ $ 170.6
-------------
-------------
</TABLE>
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. Most of these Debentures were
retired by means of a tender offer to all holders which commenced on September
18, 1992. The remainder were redeemed on November 2, 1992. Merrill Lynch & Co.,
which acted as James River's dealer manager for the tender, is also named as a
defendant in the Alabama case. In general, the complaints allege 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 seek damages
in excess of $50 million plus punitive damages in excess of $500 million. The
Alabama case has been certified as a class action and holders of approximately
one-half of the Debentures elected not to be part of the class. 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. Most of the holders electing out of the class are plaintiffs in the
Connecticut case. Fort James believes that these claims are without merit and
intends to defend them vigorously. In May 1996, James River settled the
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 15 -- COMMITMENTS AND CONTINGENT LIABILITIES -- Continued
claim of an institutional holder of approximately 16.54% of the Debentures for
$425,000 plus reimbursement of attorneys' fees.
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.
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 remediation and restoration of the river, and natural
resources damages. At this time, the Company, in conjunction with other PRPs,
has agreed to participate in the funding of remedial studies and a natural
resources damages assessment and is engaged in negotiations with federal and
state agencies and tribes to resolve outstanding claims.
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 $57.0 million and
$43.8 million as of December 29, 1996, and December 31, 1995, 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 potentially responsible party at
additional sites in the future or that the costs associated with such additional
sites would not be material.
In December 1993, the EPA published draft rules which contain proposed
regulations affecting pulp and paper industry discharges of wastewater and
gaseous emissions, commonly referred to as the "cluster rules." The final rules
are likely to be issued in 1997. These rules may require significant changes in
the pulping and/or bleaching processes presently used in some U.S. pulp mills,
including several of Fort James' mills. Based on its evaluation of the rules as
they are currently expected to be issued, the Company believes that capital
expenditures of approximately $100 million may be required during the nominal
compliance period of three years following the date of promulgation to bring
Fort James' facilities into compliance.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 commercial
market channels; (ii) the Packaging segment, which after the sale of the
Flexible Packaging group, manufactures folding cartons and paperboard
principally for food and other consumer products manufacturers; and (iii) the
Communications Papers segment, which after the spin-off to Crown Vantage (see
Note 2), 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. Jamont N.V.'s operating results, which
represent the majority of the European Consumer Products Business' operations,
have been included beginning in July 1994 when it became a consolidated
subsidiary.
<TABLE>
<CAPTION>
Consumer Products
-------------------- Intersegment
North Communications elimination/
America Europe Packaging Papers Corporate Total
-------- -------- --------- -------------- ------------ --------
<S> <C>
(in millions)
1996
Net sales...................................... $4,362.0 $1,980.2 $1,139.9 $ 456.7 $ (231.7) $7,707.1
Segment results before severance and
other items.................................. 753.3 177.1 91.9 22.2 (124.5) 920.0
Severance and other 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 21.0 539.5
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 severance and
other items.................................. 583.5 63.5 76.1 191.2 (79.0) 835.3
Severance and other 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 19.5 599.6
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
1994
Net sales...................................... $3,846.9 $ 819.1 $1,637.6 $ 999.9 $ (199.8) $7,103.7
Segment results before severance and
other items.................................. 448.6 15.1 78.0 (35.8) (72.5) 433.4
Severance and other items...................... (5.8) (15.7) 11.3 2.2 (1.6) (9.6)
-------- -------- --------- -------------- ------------ --------
Income (loss) from operations.................. 442.8 (0.6) 89.3 (33.6) (74.1) 423.8
Depreciation and amortization.................. 239.5 54.9 81.1 125.4 83.2 584.1
Capital expenditures........................... 218.3 35.1 109.6 60.0 12.3 435.3
Total assets................................... 3,561.0 2,658.1 1,150.9 1,457.4 777.8 9,605.2
</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 unconsolidated affiliates, and the
net pension asset. During each of the three years in the period ended December
29, 1996, export sales to foreign markets from the Company's domestic operations
represented less than 10% of total sales to unaffiliated customers; no single
customer accounted for more than 10% of total sales in any year.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 17 -- SUBSEQUENT EVENTS (UNAUDITED)
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 million, net of tax benefits. The foreign exchange
contracts were designated as hedges of a portion of the Company's net investment
in its European Consumer Products Business (see Note 10). The Company terminated
such contracts prior to their original expiration in September 1998.
Additionally, the Company effectively unwound $648 million of the $1,286 million
in notional amount of interest rate swaps (see Note 10), following the overall
reduction of debt in 1996.
As a part of the Company's ongoing program of timberland divestitures, on
April 29, 1997, pursuant to an offering memorandum dated September 12, 1996,
Fort James completed the sale of approximately 95,000 acres of timberlands
located in Alabama and Mississippi for cash proceeds of $111 million. The
Company recorded a gain of $57.7 million ($35.2 million, net of taxes, or $.17
per share).
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. The actions are the
subject of a motion for transfer and consolidation before the Joint Panel of
Multidistrict Litigation. The litigation is in its earliest stages. The Company
intends to defend the litigation vigorously.
In July 1997, the Company announced that as of September 2, 1997, it is
calling its Series P 9% Cumulative Convertible Preferred Stock for conversion
into Common Stock at a conversion ratio of .9206 shares of Common Stock for each
Series P depositary share. The conversion of the Series P depositary shares will
reduce the Company's aggregate cash dividends by approximately $16.5 million per
year.
In August 1997, the Company announced that as of October 1, 1997, it is
calling its Series O 8 1/4% Cumulative Preferred Stock for redemption at its
face value of $98.1 million.
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. The Debt
Refinancing Plan is expected to result in a reduction of interest expense of
approximately $50 million annually. 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 tender offers in
the fourth quarter, purchased a total of $1.28 billion of such 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 conjunction with the merger, in December 1997, the Company recorded a
$458 million pretax restructure charge ($317.6 million net of taxes). This
charge included approximately $235 million of costs associated with planned
plant closures and write-offs of redundant assets, $103 million of severance and
other employee related costs for planned headcount reductions, $83 million of
contract termination costs and $49 million for other costs related to the merger
offset by a $12 million gain on the sale of northern timberlands.
F-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations and Financial Condition
Business Combination
On August 13, 1997, a wholly-owned subsidiary of James River Corporation of
Virginia ("James River") merged with and into Fort Howard Corporation ("Fort
Howard") creating a new company, Fort James Corporation ("Fort James" or the
"Company") -- a world-class consumer products company. Effective with the
merger, James River was renamed Fort James Corporation. In connection with the
merger, Fort James issued 104.8 million shares of Common Stock for all the
outstanding common stock of Fort Howard based on a conversion ratio of 1.375
shares of Fort James 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 for
financial reporting purposes. Accordingly, Fort James' 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. The
financial data presented in this Management Discussion and Analysis of Results
of Operations and Financial Condition has also been restated to include the
combined financial results of James River and Fort Howard.
RESULTS OF OPERATIONS -- 1996 COMPARED TO 1995
Net sales decreased to $7,707 million in 1996 from $8,888 million in 1995,
while net income increased to $319.9 million from $141.1 million during the same
periods. The comparability of revenues and results was affected by divestitures
and non-recurring items. In 1996, the Company sold its Flexible Packaging and
related Inks divisions, as well as several small domestic Consumer Products
Business facilities. In 1995, Fort James 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. Acquisitions and
divestitures are more fully described in Note 2 of Notes to Consolidated
Financial Statements.
Non-recurring severance and other charges for 1996 and 1995, which are
further described in Note 3 of Notes to Consolidated Financial Statements,
included the following (in millions):
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
Pretax Net Pretax Net
------ ------ ------ ------
<S> <C>
Severance costs.......................................................................... $(40.6) $(25.3) $(42.7) $(25.3)
Asset write-downs........................................................................ (59.3) (36.7) (4.2) (2.6)
Gain on divestitures..................................................................... 89.2 49.1
Crown Vantage spin-off costs............................................................. (5.0) (4.2)
French statutory tax rate increase....................................................... (6.3)
------ ------ ------ ------
Total............................................................................... $(10.7) $(12.9) $(51.9) $(38.4)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Excluding non-recurring items, income before extraordinary item was $340.9
million, or $1.54 per share, in 1996 compared with $198.3 million, or $.85 per
share, in 1995.
Segment Data
The following tables set forth sales and operating results, before
severance and other items, by business segment for 1996 and 1995. The pro forma
information is presented as if Crown Vantage and the Flexible Packaging division
were excluded from each year's results.
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------- ----------------------
Net Segment Net Segment
1996 (in millions): Sales Results(a) Sales Results(a)
-------- ---------- -------- ----------
<S> <C>
Consumer Products:
North American................................................................ $4,362.0 $753.3 $4,362.0 $753.3
European...................................................................... 1,980.2 177.1 1,980.2 177.1
Packaging....................................................................... 1,139.9 91.9 854.5 89.5
Communications Papers........................................................... 456.7 22.2 456.7 22.2
Intersegment eliminations and corporate expenses................................ (231.7) (124.5) (210.4) (124.5)
-------- ---------- -------- ----------
Total......................................................................... $7,707.1 $920.0 $7,443.0 $917.6
-------- ---------- -------- ----------
-------- ---------- -------- ----------
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------- ----------------------
Net Segment Net Segment
1995 (in millions): Sales Results(a) Sales Results(a)
-------- ---------- -------- ----------
<S> <C>
Consumer Products:
North American................................................................ $4,440.6 $583.5 $4,448.6 $585.5
European...................................................................... 1,949.9 63.5 1,949.9 63.5
Packaging....................................................................... 1,659.9 76.1 974.7 90.9
Communications Papers........................................................... 1,091.4 191.2 645.5 126.7
Intersegment eliminations and corporate expenses................................ (253.9) (79.0) (216.8) (73.3)
-------- ---------- -------- ----------
Total......................................................................... $8,887.9 $835.3 $7,801.9 $793.3
-------- ---------- -------- ----------
-------- ---------- -------- ----------
</TABLE>
(a) Represents segment results before severance and other items. The allocation
of severance and other items by segment is presented in Note 16 of Notes to
Consolidated Financial Statements.
North American Consumer Products Business
In 1996, the Company's North American Consumer Products Business reported
sales of $4,362 million and operating results, before severance and other items,
of $753 million. Sales declined by $79 million, or 2 percent, from the $4,441
million reported in 1995, while operating results, before severance and other
items, improved by $169 million, or 29 percent, from the $584 million reported
in 1995. This business' return on sales, before severance and other items,
improved to 17.3 percent in 1996 from 13.2 percent in 1995.
The decline in net sales was principally attributable to the divestitures
of the Company's foam cup and specialty operations businesses, combined with the
decline in average selling price 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 personal care products were offset by lower retail
tabletop volumes. Average pricing was comparable to the prior year for retail
personal care 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 the commercial channel declined from the prior year,
reflecting a combination of unit volume increases for personal care products,
more than offset by unit volume and price decreases for foodservice products.
Average pricing for commercial personal care products improved slightly compared
to 1995 levels. High industry utilization rates contributed to relatively stable
commercial personal care 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.
Net sales into the warehouse club and private label channels continued to
increase over 1995 sales, driven by both stronger volumes and higher average
selling prices.
The North American Consumer Products Business is fully integrated for its
virgin pulp requirements, with excess capacity of between 200,000 and 250,000
metric tons per year sold as market pulp. Net sales of market pulp fell sharply
from 1995 levels, resulting from the precipitous decline in industry selling
prices during 1996.
The improvement in operating results for the North American Consumer
Products Business 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.
On a discretionary basis, the Company currently plans to continue to increase
spending on advertising and marketing supporting its consumer branded products
in 1997, to be funded with a portion of the incremental savings expected to be
realized from cost reduction activities.
European Consumer Products Business
In 1996, the Company's European Consumer Products Business reported sales
of $1,980 million and operating results, before severance and other items, of
$177 million. Sales increased by $30 million, or 2 percent, from the $1,950
million reported in 1995, while operating results increased by $113 million, or
more than 175 percent, from the $64 million reported in 1995. This business'
return on sales, before severance and other items, improved to 8.9 percent in
1996 from 3.3 percent in 1995.
F-31
<PAGE>
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 compared to 1995, in response to dramatically lower raw
material costs.
Similar to most of its European tissue competitors, the majority of Fort
James' European Consumer Products Business are not integrated producers.
Approximately two-thirds of the business' fiber requirements are met with
purchased market pulp (some of which is purchased from Fort James' North
American Consumer Products Business), while the remaining one-third is provided
by its deinked pulp and wastepaper facilities. After climbing dramatically in
1995, market pulp and wastepaper costs fell sharply in the first half of 1996.
The reduction in fiber costs, without a commensurate reduction in average
selling prices, contributed to the higher margins reported in 1996.
In addition to lower fiber costs, operating profit improvements were
generated by manufacturing cost reductions and increased volumes, partially
offset by lower average selling prices and increased expenses for advertising,
consumer promotion and trade spending.
Although improving, the European-wide tissue capacity utilization rate is
not at an optimal level. Therefore, the Company expects continued competitive
pressure on tissue pricing in 1997 in the face of continued low raw material
costs.
Packaging Business
In 1996, the Company's Packaging Business reported sales of $1,140 million
and operating results, before severance and other items, of $92 million. Sales
decreased by $520 million from the $1,660 million reported in 1995, while
operating profits, before severance and other items, increased by $16 million
from the $76 million reported in 1995. 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
from $975 million in 1995 to $855 million in 1996, while operating profits,
before severance and other items, decreased from $91 million to $90 million,
respectively. This business' pro forma return on sales, before severance and
other items, improved to 10.5 percent in 1996 from 9.3 percent in 1995.
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, directionally following bleached and recycled
paperboard raw material costs.
The increase in the Packaging Business' 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 sale of the Flexible Packaging division and the spin-off
of packaging operations to Crown Vantage, as these divisions reported operating
losses in 1995.
Communications Papers Business
In 1996, the Communications Papers Business reported sales of $457 million
and operating results, before severance and other items, of $22 million. Sales
decreased by $634 million, from $1,091 million in 1995, while operating profits,
before severance and other items declined by $169 million, from $191 million in
1995. The majority of the decline in sales was due to the spin-off of a large
portion of the Communications Papers Business to Crown Vantage in August 1995.
On a pro forma basis, excluding the spun-off operations, sales decreased from
$646 million in 1995 to $457 million in 1996, while profits declined from $127
million to $22 million, respectively. This business' pro forma return on sales,
before severance and other items, declined from 19.7 percent in 1995 to 4.8
percent in 1996.
The decline in pro forma sales was attributable to lower average selling
prices and lower unit volumes in 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 averaged approximately $250 per
ton lower in 1996 compared to 1995, while selling prices for uncoated groundwood
averaged approximately $50 per ton lower. Unit volumes declined from 1995 levels
by 6 to 7 percent for both uncoated free sheet and uncoated groundwood. 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.
F-32
<PAGE>
The decline in the Communications Papers Business' pro forma operating
profits was a direct result of the decline in selling prices and volumes,
partially offset by lower wood chip costs. Fort James' two Communications Papers
Business facilities are located in the Pacific Northwest, where the Company does
not own a significant amount of timberlands. Accordingly, Fort James relies on
purchased wood chips to supply these integrated facilities. Northwestern wood
chip costs, which have been higher than in other regions because of
environmental restrictions on timber harvesting, increased sharply during the
first nine months of 1995 in connection with the over-heated pulp and paper
markets, before declining between 20 and 25 percent in 1996.
Other Income and Expense Items
General corporate expenses, before severance and other items, increased to
$125 million in 1996 from $79 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 programs. Corporate costs are expected to begin trending lower in
1997, as the new systems installations are completed.
The Company estimates that transaction costs associated with the merger
will be approximately $50 million to $60 million. All fees and transaction
expenses related to the merger and the restructuring of the combined companies
will be expensed as required under the pooling-of-interests accounting method.
These expenses have not been reflected in these consolidated statements of
operations, but will be reflected in the consolidated statements of operations
of the Company in the third and fourth quarters of 1997. The range of
restructuring charges cannot be reasonably estimated until an analysis of the
newly combined operations is complete and a detailed restructuring plan is
developed.
Interest expense decreased by $112 million, from $536 million in 1995 to
$424 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 flow to pay down debt resulted in a $1,761
million reduction in outstanding debt during 1995 and 1996, as debt declined
from $6,195 million as of the beginning of 1995 to $4,434 million as of the end
of 1996.
Other income declined by $23 million, from $42 million in 1995 to $19
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 equity 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.
The Company's effective tax rate was 33.9 percent in 1996, compared to 41.7
percent in 1995, excluding the effect of the charge resulting from the French
income tax rate increase. This change in the effective tax rate was due to the
settlement of a federal audit of Fort Howard's 1988 through 1995 tax returns
which resulted in a $36 million tax benefit representing taxes previously
accrued for these years.
The Company's net income in 1996 was decreased by an extraordinary loss of
$8 million (net of income taxes of $5 million) representing the write-off of
deferred loan costs associated with the prepayment of a portion of outstanding
indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash provided by operations increased to $1,085 million in 1996, 42 percent
higher than the $766 million provided in 1995. Working capital reductions
generated $230 million of cash in 1996, including $83 million from inventory
reductions resulting principally from lower per unit valuations. Free cash flow
(cash provided by operations, less expenditures for property, plant and
equipment and dividends) increased to $488 million in 1996, from $157 million in
1995, before the effect of divestitures and acquisitions.
Investing Activities
Net cash used for investing activities totaled $193 million during 1996 and
included $500 million of capital expenditures and $200 million of cash paid for
the remaining 14 percent minority interest in Jamont N.V., which is included in
the Company's European Consumer Products Business, net of $497 million of cash
proceeds from asset sales and $10 million of other miscellaneous cash proceeds.
During 1995, net cash used for investing activities was $479 million and
included capital spending of $489 million and cash paid for acquisitions of $53
million, net of cash proceeds from asset sales and other items of $62 million.
F-33
<PAGE>
The $497 million of 1996 cash proceeds from divestitures included $373
million from the sale of the Flexible Packaging division, $52 million from the
sale of the foam cup operations, $30 million from the sale of the specialty
operations, $27 million from the sale of the Inks division, and $15 million from
other miscellaneous asset sales. Future free cash flow may be directed toward
debt reduction.
Capital spending of $500 million in 1996 increased by $11 million compared
to 1995 spending of $489 million. On a pro forma basis, excluding spending for
Flexible Packaging and Crown Vantage from both years, spending was approximately
$487 million in 1996 compared to $408 million in 1995. Nearly three-quarters of
the total 1996 expenditures were for the Consumer Products Business, including
approximately $25 million of spending on tissue converting equipment
modernizations at the Pennington, Alabama, mill and $15 million for secondary
fiber capacity expansions in Green Bay, Wisconsin. The Company currently expects
1997 capital spending to be in the range of $500 million. In September 1996,
Fort Howard's Board of Directors authorized the installation of a new tissue
machine at the Savannah, Georgia mill. The expansion is planned for completion
in 1999 at an estimated cost of $160 million. Contractual capital commitments as
of December 29, 1996, were not material.
Financing Activities
Total indebtedness decreased by $1,080 million, from $5,514 million as of
December 31, 1995, to $4,434 million as of December 29, 1996, principally from
the use of divestiture proceeds, net of acquisitions, proceeds from a common
stock offering, and free cash flow. During 1996, new borrowings totaled $4
million and debt payments totaled $1,049 million. Additionally, changes in
foreign currency translation rates reduced debt denominated in foreign
currencies by $35 million.
As of December 29, 1996, Fort James and its subsidiaries had domestic and
foreign revolving credit facilities providing for unsecured borrowings of up to
$1,462 million, of which $935 million expire in December 1999 and the balance
expires in 1997, 1998 and 2002. The Company also had domestic and foreign
commercial paper programs, supported by the revolving credit facilities,
providing for issuances of up to $624 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 29, 1996, the Company had outstanding
borrowings of $426 million that were supported by the revolving credit
facilities, including $368 million outstanding under such facilities, $48
million of money market notes and $10 million of commercial paper.
Total outstanding debt of $4,434 million on December 29, 1996, included
approximately $3,205 million of fixed rate and $1,229 million of floating rate
obligations. As of December 29, 1996, the Company also had outstanding interest
rate swap agreements that effectively converted $1,286 million of fixed rate
debt and other financial obligations to variable rate obligations. The effect of
the swaps was an increase in interest expense of approximately $4 million in
1996 and $8 million in 1995. These contracts expire between September 1998 and
January 1999. As of December 29, 1996, the interest rate swaps had a fair value
of $(15) million. The Company is also party to LIBOR-based interest rate cap
agreements which limit the interest cost to the Company with respect to $500
million of floating rate obligations to 8 percent plus the Company's borrowing
margin until June 1, 1999. At current market rates at the end of 1996, the fair
value of the Company's interest rate cap agreements is $1 million compared to a
carrying value of $8 million. Additional information on the interest rate swaps
and caps is provided in Note 10 of Notes to Consolidated Financial Statements.
As of the end of 1996, Fort James' weighted-average interest rate was 8.24
percent (including the impact of the interest rate swaps), compared to 8.22
percent as of the end of 1995. Subsequent to the end of 1996, the Company
effectively unwound $648 million of the swap agreements (see Note 17 of Notes to
Consolidated Financial Statements).
James River's most restrictive debt agreements contain limitations on
borrowings and require maintenance of a minimum amount of net worth. As of
December 29, 1996, under the most restrictive provisions of James River's debt
agreements, James River had additional borrowing capacity of $1.6 billion and
net worth in excess of the minimum requirement of approximately $390 million.
Among other restrictions, Fort Howard's debt agreements: (i) restrict payments
of dividends, repayments of subordinated debt, purchases of Fort Howard's common
stock, additional borrowings and acquisition of property, plant and equipment;
(ii) require that certain financial ratios be maintained at prescribed levels;
(iii) restrict the ability of Fort Howard to make fundamental changes and to
enter into new lines of business, the pledging of Fort Howard's assets and
guarantees of indebtedness of others and (iv) limit dispositions of assets and
investments which might be made by Fort Howard. Fort Howard debt containing
these restrictions were refinanced simultaneously with the merger (see below).
On August 12, 1997, James River paid the outstanding balance of $91 million
on its European credit facility with proceeds from other available European
financings, and terminated this agreement. On August 13, 1997, prior to the
effectiveness of the merger, James River paid down and terminated its $200
million 9.77% note agreement using proceeds from divestitures and excess cash
flow. On August 13, 1997, after the effectiveness of the merger, Fort James
entered into a
F-34
<PAGE>
$2.5 billion credit agreement and, upon repayment of any outstanding balances,
terminated its two existing domestic revolving credit facilities and term loans
A and B. The $2.5 billion credit agreement expires in 2002. The interest rate
payable on outstanding balances under revolving loans pursuant to this credit
agreement is generally based, at the option of the Company, on the prime rate,
LIBOR, certificate of deposit rates, or federal fund effective rates.
In 1996, Fort Howard issued 10.52 million shares of common stock (14.5
million when converted to Fort James Common Stock) for net proceeds of $204
million. These proceeds were primarily used to pay down debt. As of December 29,
1996, Fort James had $738 million face value of outstanding preferred stocks. Of
this total, (i) $287 million (the Series P preferred stock) will be redeemed by
the Company at a call price payable in common shares beginning September 2,
1997; (ii) $98 million (the Series O preferred stock) will be redeemed with cash
at face value of $98.1 million beginning on October 1, 1997; and (iii) $353
million (the Series K, L, and N preferred stocks) are exchangeable for
convertible subordinated debentures or are redeemable at a cash price of $355
million. The terms of these preferred stocks are more fully described in Note 12
of Notes to Consolidated Financial Statements.
Dividends paid declined from $120 million in 1995 to $97 million in 1996.
The decline was solely attributable to timing, with five common dividend payment
dates occurring in 1995, versus three quarterly payment dates occurring in 1996.
As of the end of 1996, the Company had outstanding foreign currency
contracts totaling $470 million, which were designated as a hedge of a portion
of the investment in the European Consumer Products Business. These contracts
were principally denominated in French francs, British pounds, Belgian francs
and Spanish pesetas and expire on September 1, 1998. Subsequent to the end of
the year, the Company unwound all $470 million of the foreign currency
contracts. See Note 17 of Notes to Consolidated Financial Statements.
Contractual Labor Agreements
Fort James currently employs approximately 30,000 people. The majority of
hourly employees are members of unions. Contracts covering approximately 3,000
domestic and Canadian employees are scheduled for renegotiation in 1997.
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, 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, to
comply with increasingly stringent standards for air, water, and solid and
hazardous waste regulations. Capital expenditures totaling approximately $23
million in 1996 and $54 million in 1995 were made by Fort James for pollution
control facilities and equipment.
In 1993, the U.S. Environmental Protection Agency ("EPA") published draft
regulations, generally referred to as the "cluster rules," intended to reduce
air and water discharges of specific substances from U.S. pulp and paper mills.
The final rules are likely to be issued in 1997. These rules may require
significant changes in the pulping and/or bleaching processes presently used in
some U.S. pulp mills, including several of Fort James' mills. Based on its
evaluation of the rules as they are currently expected to be issued, the Company
believes that capital expenditures totaling approximately $100 million may be
required during the nominal three-year compliance period following the date of
promulgation, in order to bring Fort James' facilities into compliance.
As of December 29, 1996, Fort James had been identified as a potentially
responsible party ("PRP"), along with others, under federal or state laws with
respect to approximately 50 sites where hazardous substances or other
contaminants are located. Among these superfund 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 remediation and restoration of the river, and natural resources
damages. At this time, the Company, in conjunction with other PRPs, has agreed
to participate in the funding of remedial studies and a natural resources
damages assessment and is engaged in negotiations with federal and state
agencies and tribes to resolve outstanding claims. Note 15 of Notes to
Consolidated Financial Statements provides information on the Company's accrued
remediation liabilities.
F-35
<PAGE>
Contingent Liabilities
During 1994, Fort James was sued by certain former holders of Fort James'
10 3/4% Debentures due October 1, 2018. Most of these debentures were retired by
means of a tender offer to all holders which commenced on September 18, 1992.
The remainder were redeemed on November 2, 1992. In general, the complaints
allege violations of a covenant prohibiting the use of lower cost borrowed funds
to redeem the debentures before October 1, 1998, and violations of various
disclosure obligations, and seek damages in excess of $50 million plus punitive
damages in excess of $500 million. In June 1997, the Alabama Court granted James
River summary judgment on the claims and dismissed the action. The plaintiffs
have appealed to the Alabama Supreme Court. Fort James believes that these
claims are without merit and intends to defend them vigorously. Further
information on Fort James' contingent liabilities is included in Note 15 of
Notes to Consolidated Financial Statements.
Adoption of Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") which is effective for
periods beginning after December 15, 1997, including interim periods. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements, either in the
statement of operations or a separate statement. Additionally, SFAS 130 requires
the display of the accumulated balance of other comprehensive income. Note 1 of
Notes to Consolidated Financial Statements describes the pro forma impact of
SFAS 130 for the years ended December 29, 1996, December 31, 1995, and December
25, 1994.
In June 1997, the Financial Accounting Standards Board also issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") which is effective for periods beginning after
December 15, 1997, including interim periods after the year of initial adoption.
SFAS 131 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 SFAS 131
will have on the operating segments reported nor the impact SFAS 131 will have
on the related disclosures.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is effective for periods
ending after December 15, 1997, including interim periods. SFAS 128 establishes
standards for computing and presenting earnings per share ("EPS") by replacing
primary EPS with the presentation of basic EPS and requiring dual presentation
of basic and diluted EPS on the face of the income statement. Note 1 of Notes to
Consolidated Financial Statements describes the pro forma impact of SFAS 128 for
the years ended December 29, 1996, December 31, 1995, and December 25, 1994.
Effect of Changing Prices
Prior to 1994, the Company had experienced only moderate levels of
inflation for several years. Between mid-1994 and mid-1995, the Company
experienced significant increases in the cost of many of its base raw materials.
In almost all cases, selling price increases followed these cost increases,
although on a lag basis. In the second half of 1995 and throughout 1996, costs
of many of these same raw materials declined.
F-36
<PAGE>
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
Fort James' 1995 consolidated net sales increased 25 percent to $8,888
million compared with $7,104 million in 1994. The change in results was impacted
by (i) the effect of the inclusion of Jamont N.V. sales in the European Consumer
Products Business for a full year in 1995, (ii) the spin-off of Crown Vantage in
1995, and (iii) the impact of higher pricing for many of Fort James' products.
Income from operations totaled $783 million in 1995, a nearly two-fold
improvement over the $424 million reported in 1994. The Company reported net
income of $141 million, or $.50 per share, in 1995, versus a net loss of $83
million, or $(.96) per share, in 1994.
The 1995 results included $32 million, net of taxes and minority interests,
primarily for severance and related costs, an extraordinary loss on debt
repurchases of $19 million, net of taxes, and $6 million, net of minority
interests, for the cumulative effect of an increase in the French income tax
rate. Non-recurring items reported in 1994 included $16 million, net of taxes,
for severance, litigation and environmental costs, an extraordinary loss on debt
repurchases of $28 million, net of taxes, and after-tax income of $5 million for
interest income on tax refunds. Excluding non-recurring items, net income was
$198 million, or $.85 per share, in 1995 compared to a net loss of $44 million,
or $(.67) per share, in 1994.
In July 1994, Fort James increased its ownership interest in Jamont N.V.,
which represents the majority of the European Consumer Products Business, from
43.2% to 86.4% for a purchase price of approximately $575 million. This business
was included in Fort James' consolidated results for all of 1995, compared to
only five months in 1994, accounting for approximately $815 million of the
increase in net sales and $35 million of the increase in operating profits
between 1994 and 1995. In addition, interest expense and preferred dividend
requirements increased by approximately $39 million and $13 million,
respectively, due to this purchase.
North American Consumer Products Business
Reported net sales for the North American Consumer Products Business
increased by 15 percent, to $4,441 million in 1995 from $3,847 million in 1994.
Net sales of retail products increased over the prior year, principally due to
higher net selling prices. For the first nine months of 1995, retail product
volumes were slightly higher than the prior year; however, fourth quarter retail
volumes were significantly below the prior year's due to reduced promotional
spending in the quarter. Net sales of commercial products increased over the
prior year, reflecting significantly higher selling prices, partially offset by
lower volumes. Price increases were implemented in commercial markets several
times during the first half of 1995, following a sharp escalation in wastepaper
costs. Commercial product volumes declined compared to 1994 levels, resulting
from a combination of the Company's decision to reduce its product line
offerings and more competitive pricing conditions experienced in the second half
of 1995. Net sales of warehouse club products increased over the prior year,
reflecting both higher volumes and higher average selling prices.
Operating profits, before severance and other items, for the North American
Consumer Products Business increased to $584 million in 1995 from $449 million
in 1994, while operating profits improved to 13 percent from 12 percent. The
improved profitability was driven by cost reduction initiatives combined with
pricing gains which outpaced raw material cost increases.
European Consumer Products Business
Reported 1995 net sales for the European Consumer Products Business were up
sharply due to the consolidation of Jamont N.V. results for all of 1995, versus
only five months in 1994. On a pro forma basis, reflecting a full year of
results in both 1994 and 1995, sales increased by 19 percent, from $1,634
million in 1994 to $1,950 million in 1995. Increased pro forma sales were driven
by a combination of price increases, implemented to recover sharply higher raw
material costs, and mix improvements, partially offset by lower shipments.
Market pulp and wastepaper cost increases during 1994 and 1995 outpaced tissue
price increases, resulting in a contraction in margins. In addition, volumes
declined in response to the business' aggressive program to increase pricing.
The negative impact of these items was largely offset by cost reduction program
benefits, as work force reductions were made during 1995. On a pro forma basis,
operating profits, before severance and other items, improved 28 percent from
$50 million in 1994 to $64 million in 1995.
Packaging Business
Reported net sales for the Packaging Business were relatively level, at
$1,660 million in 1995 compared to $1,638 million in 1994. On a pro forma basis,
excluding the specialty packaging papers facilities spun off to Crown Vantage,
net sales increased by 7 percent, from $1,361 million in 1994 to $1,459 million
in 1995. Net sales increases reflected higher average prices for most products,
on relatively level shipments. Price increases were implemented in all major
product categories,
F-37
<PAGE>
including folding cartons, paperboard and flexible packaging, in an effort to
pass through the cost escalation in major raw material inputs, such as
wastepaper, plastic resins, and paperboard, experienced in the first half of
1995. Operating profits, before severance and other items, declined slightly
from $78 million in 1994 to $76 million in 1995. On a pro forma basis, excluding
the spun-off facilities, profitability increased from $65 million in 1994 to $80
million in 1995. While the spun-off operations contributed approximately $13
million to 1994 profits, they generated an operating loss during the eight
months they were included in 1995 results, due to unrecovered pulp cost
increases. Flexible packaging 1995 results were also below 1994 levels, and were
negatively affected by unrecovered raw material cost increases, competitive
markets caused in part by new industry capacity and higher manufacturing costs.
Communications Papers Business
Net sales for the Communications Papers Business increased to $1,091
million in 1995 from $1,000 million in 1994, despite the exclusion of the
facilities spun off to Crown Vantage during the last four months of 1995. On a
pro forma basis, assuming the spin-off had occurred at the beginning of 1994,
net sales would have totaled $646 million in 1995 versus $482 million in 1994.
Selling prices for uncoated free sheet papers increased sharply during the
first nine months of 1995, before falling slightly in the fourth quarter.
Average selling prices for the retained uncoated free sheet operations increased
from $600 per ton in 1994 to $970 per ton in 1995. During the first half of
1995, shipments for the retained uncoated free sheet operations were comparable
to the prior year. However, shipments fell approximately 20 percent during the
second half of the year due to major customer inventory corrections and weaker
economic growth, causing Fort James to curtail production in the fourth quarter.
Average selling prices for uncoated groundwood papers increased from $445 per
ton in 1994 to $675 per ton in 1995, while shipments were comparable with those
of the prior year.
Reported operating results, before severance and other items, improved from
a loss of $36 million in 1994 to a profit of $191 million in 1995. On a pro
forma basis, excluding facilities spun off to Crown Vantage, this business had
an operating loss of $22 million in 1994 compared to a profit of $127 million in
1995. The improved profitability was driven principally by significantly higher
pricing, partially offset by higher Northwestern wood chip and other raw
material costs.
Other Income and Expense Items
General corporate expenses, before severance and other items, increased to
$79 million in 1995, from $73 million in 1994. Corporate expenses for 1994
included $11 million of non-recurring litigation and environmental costs, while
1995 expenses included more than $10 million of costs for systems redesign
efforts related to cost reduction initiatives.
Interest expense increased by $13 million, from $523 million in 1994 to
$536 million in 1995. The majority of the increase was due to the full year's
impact of the consolidation of Jamont N.V. in the European Consumer Products
Business, partially offset by the debt reduction following the Crown Vantage
spin-off and debt reduction from proceeds of common stock issuance.
Other income increased to $42 million in 1995, from $29 million in 1994.
Substantially all of the increase was attributable to higher equity earnings of
unconsolidated affiliates, principally from the improved performance of Aracruz
following the sharp upturn in worldwide market pulp prices in 1995.
In 1995, the Company reported an effective tax rate of 41.7 percent,
excluding the charge for the French income tax rate increase. This differed from
the combined federal and state statutory rate primarily because of the relative
size of nondeductible goodwill amortization expense and certain foreign pretax
losses for which no tax benefit was then available. At 20.5 percent, the 1994
effective tax rate was lower than the 1995 rate, principally because of the
effect of nondeductible expenses relative to the pretax loss.
The Company's net income in 1995 was decreased by an extraordinary loss of
$19 million (net of income taxes of $12 million) representing the redemption
premiums and write-offs of deferred loan costs associated with the prepayment or
redemption of a portion of the Company's outstanding indebtedness.
F-38
EXHIBIT 99.2
FORT JAMES CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters (13 Weeks) and Six Months (26 Weeks) Ended
June 29, 1997 and June 30, 1996
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C>
(in millions, except per share amounts)
Net sales...................................................................... $1,854.3 $2,014.6 $3,672.1 $3,995.6
Cost of goods sold............................................................. 1,286.1 1,451.5 2,564.2 2,899.6
Selling and administrative expenses............................................ 282.3 332.6 571.2 651.5
Severance and other items (income) expense..................................... (57.7) 7.0 (57.7) 30.4
-------- -------- -------- --------
Income from operations....................................................... 343.6 223.5 594.4 414.1
Interest expense............................................................... 94.5 108.9 190.3 225.1
Other income, net.............................................................. 4.2 3.9 11.2 7.4
-------- -------- -------- --------
Income before income taxes, minority interests
and extraordinary item.................................................... 253.3 118.5 415.3 196.4
Income tax expense............................................................. 103.1 48.2 167.6 79.6
-------- -------- -------- --------
Income before minority interests and extraordinary item...................... 150.2 70.3 247.7 116.8
Minority interests............................................................. (.5) (3.4) (.8) (2.5)
-------- -------- -------- --------
Income before extraordinary item............................................. 149.7 66.9 246.9 114.3
-------- -------- -------- --------
Extraordinary loss on debt repurchases......................................... (.6) (3.3) (1.9) (3.3)
-------- -------- -------- --------
Net income................................................................... $ 149.1 $ 63.6 $ 245.0 $ 111.0
-------- -------- -------- --------
-------- -------- -------- --------
Preferred dividend requirements................................................ (8.1) (14.6) (16.3) (29.3)
-------- -------- -------- --------
Net income applicable to common shares....................................... $ 141.0 $ 49.0 $ 228.7 $ 81.7
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share:
Before extraordinary item.................................................... $ .68 $ .29 $ 1.12 $ .48
Extraordinary loss on debt repurchases....................................... (.02) (.01) (.02)
-------- -------- -------- --------
Net income per share...................................................... $ .68 $ .27 $ 1.11 $ .46
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common shares and
common share equivalents..................................................... 207.5 180.8 206.8 177.1
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Q-1
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 29, 1997 and December 29, 1996
<TABLE>
<CAPTION>
June December
1997 1996
-------- --------
<S> <C>
(in millions)
Assets
Current Assets:
Cash and cash equivalents.......................................................................... $ 217.2 $ 34.6
Accounts receivable................................................................................ 774.0 781.3
Inventories........................................................................................ 833.2 801.6
Prepaid expenses and other current assets.......................................................... 41.4 52.6
Deferred income taxes.............................................................................. 125.4 138.5
-------- --------
Total current assets............................................................................ 1,991.2 1,808.6
-------- --------
Property, plant and equipment........................................................................ 7,873.7 7,924.7
Accumulated depreciation............................................................................. (3,105.7) (2,925.4)
-------- --------
Net property, plant and equipment............................................................... 4,768.0 4,999.3
Investments in affiliates............................................................................ 161.5 154.6
Other assets......................................................................................... 498.6 464.4
Goodwill............................................................................................. 663.8 730.0
-------- --------
Total assets.................................................................................... $8,083.1 $8,156.9
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable................................................................................... $ 608.4 $ 607.3
Accrued liabilities................................................................................ 713.1 805.8
Current portion of long-term debt.................................................................. 133.0 128.9
-------- --------
Total current liabilities....................................................................... 1,454.5 1,542.0
-------- --------
Long-term debt....................................................................................... 4,156.4 4,305.3
Accrued postretirement benefits other than pensions.................................................. 475.2 475.9
Deferred income taxes................................................................................ 747.8 690.5
Other long-term liabilities.......................................................................... 255.3 291.7
-------- --------
Total liabilities............................................................................... 7,089.2 7,305.4
-------- --------
Shareholders' Equity:
Preferred stock, $10 par value, 5.0 million shares authorized, issuable in series;
shares outstanding, 3.6 million.................................................................... 738.4 738.4
Common stock, $.10 par value, shares outstanding, June 29, 1997 -- 191.4 million
and December 29, 1996 -- 188.5 million............................................................. 19.1 18.9
Additional paid-in capital........................................................................... 2,460.5 2,407.0
Retained deficit..................................................................................... (2,224.1) (2,312.8)
-------- --------
Total shareholders' equity...................................................................... 993.9 851.5
-------- --------
Total liabilities and shareholders' equity...................................................... $8,083.1 $8,156.9
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Q-2
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months (26 Weeks) Ended
June 29, 1997 and June 30, 1996
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C>
(in millions)
Cash Provided by (used for) Operating Activities:
Net income.............................................................................................. $245.0 $111.0
Depreciation expense and cost of timber harvested....................................................... 242.2 255.5
Amortization of goodwill................................................................................ 10.2 10.3
Deferred income tax provision........................................................................... 77.6 19.0
Amortization of deferred loan costs..................................................................... 7.2 6.6
Equity in earnings of unconsolidated affiliates......................................................... (4.9) (1.4)
Dividends received from unconsolidated affiliates....................................................... 1.9 5.3
Severance and other items............................................................................... (57.7) 30.4
Loss on debt repurchase, net of tax..................................................................... 3.2 3.3
Change in current assets and liabilities:
Accounts receivable.................................................................................. (46.1) (14.2)
Inventories.......................................................................................... (46.7) 94.5
Other current assets................................................................................. 15.5 (.3)
Accounts payable and accrued liabilities............................................................. (37.7) 12.4
Foreign currency hedge............................................................................... (31.5)
Other, net.............................................................................................. (36.1) (21.2)
------ ------
Cash provided by operating activities........................................................... 342.1 511.2
------ ------
Cash Provided by (used for) Investing Activities:
Expenditures for property, plant and equipment.......................................................... (178.1) (210.1)
Cash received from sale of assets....................................................................... 113.3 66.5
Other, net.............................................................................................. 7.9 3.0
------ ------
Cash used for investing activities.............................................................. (56.9) (140.6)
------ ------
Cash Provided by (used for) Financing Activities:
Additions to long-term debt............................................................................. 75.2 1.8
Payments of long-term debt.............................................................................. (170.1) (525.1)
Common stock issued, net of offering costs.............................................................. 203.8
Common and preferred stock cash dividends paid.......................................................... (54.8) (55.2)
Common stock issued on exercise of stock options........................................................ 47.1 3.2
Other, net.............................................................................................. (1.5)
------ ------
Cash used for financing activities.............................................................. (102.6) (373.0)
------ ------
Increase (decrease) in cash and cash equivalents.......................................................... 182.6 (2.4)
Cash and cash equivalents, beginning of period............................................................ 34.6 67.0
------ ------
Cash and cash equivalents, end of period.................................................................. $217.2 $ 64.6
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Q-3
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
All financial information for Fort James Corporation ("Fort James" or the
"Company") includes the results of James River Corporation of Virginia ("James
River") and Fort Howard Corporation ("Fort Howard") for all periods presented
giving retroactive effect to the merger on August 13, 1997 (See Note 2). In the
opinion of management, the accompanying unaudited consolidated financial
statements of Fort James Corporation contain all adjustments (consisting of only
normal and necessary accruals) necessary to present fairly the Company's
consolidated financial position as of June 29, 1997, and its results of
operations and cash flows for the quarters (13 weeks) and six months (26 weeks)
ended June 29, 1997, and June 30, 1996. The balance sheet as of December 29,
1996, was derived from audited financial statements as of that date. The results
of operations for the six months ended June 29, 1997, are not necessarily
indicative of the results to be expected for the full year.
Derivative Financial Instruments:
The Company's debt structure and international operations give rise to
exposure to market risks from changes in interest rates and foreign currency
exchange rates. To manage these risks, derivative financial instruments may be
utilized by the Company including interest rate swaps, caps and options on its
long-term debt and foreign exchange contracts on certain of its net investments
in foreign operations. The Company does not hold or issue financial instruments
for trading purposes. Occasionally, the Company may terminate a derivative
financial instrument. If an interest rate swap, cap or an 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 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.
Reclassifications:
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation 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.
Adoption of Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") which is effective for
periods beginning after December 15, 1997, including interim periods. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements, either in the
statement of operations or a separate statement. Additionally, SFAS 130 requires
the display of the accumulated balance of other comprehensive income. On a pro
forma basis, for the quarters and six months ended June 29, 1997, and June 30,
1996, comprehensive income is as follows:
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------- ----------------
1997 1996 1997 1996
------ ----- ------ ------
<S> <C>
(in millions)
Net income...................................................... $149.1 $63.6 $245.0 $111.0
Other comprehensive income (loss), net of tax:
Foreign currency translation.................................. (25.7) (3.9) (114.9) (24.9)
Unrealized gain (loss) on securities.......................... 18.3 2.6 13.9 (0.6)
------ ----- ------ ------
Other comprehensive income (loss).......................... (7.4) (1.3) (101.0) (25.5)
------ ----- ------ ------
Comprehensive income............................................ $141.7 $62.3 $144.0 $ 85.5
------ ----- ------ ------
------ ----- ------ ------
</TABLE>
In June 1997, the Financial Accounting Standards Board also issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") which is effective for periods beginning after
December 15, 1997,
Q-4
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
1. SIGNIFICANT ACCOUNTING POLICIES -- Continued
including interim periods after the year of initial adoption. SFAS 131
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 SFAS 131 will
have on the operating segments reported, nor the impact SFAS 131 will have on
the related disclosures.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is effective for periods
ending after December 15, 1997, including interim periods. SFAS 128 establishes
standards for computing and presenting earnings per share ("EPS") by replacing
primary EPS with the presentation of basic EPS and requiring dual presentation
of basic and diluted EPS on the face of the income statement. On a pro forma
basis, for the quarters and six months ended June 29, 1997, and June 30, 1996,
EPS as reported would have been:
<TABLE>
<CAPTION>
Second
Quarter Six Months
------------ -------------
1997 1996 1997 1996
---- ---- ----- ----
<S> <C>
Basic earnings per share................................................ $.71 $.27 $1.14 $.46
Diluted earnings per share.............................................. .67 .27 1.10 .46
</TABLE>
2. ACQUISITIONS AND DISPOSITIONS
Effective August 13, 1997, in connection with the merger, the Company
issued 104.8 million shares of its common stock for all the outstanding common
stock of Fort Howard. 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.
Q-5
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
2. ACQUISITIONS AND DISPOSITIONS -- Continued
Net sales, income before extraordinary item and net income for the
individual companies reported prior to the merger are as follows:
<TABLE>
<CAPTION>
Second
Quarter Six Months
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C>
(in millions)
Net sales
James River.................................................................. $1,412.4 $1,570.2 $2,794.3 $3,125.6
Fort Howard.................................................................. 411.4 402.4 812.2 788.1
Reclassifications............................................................ 30.5 42.0 65.6 81.9
-------- -------- -------- --------
Total................................................................... $1,854.3 $2,014.6 $3,672.1 $3,995.6
-------- -------- -------- --------
-------- -------- -------- --------
Income before extraordinary item
James River.................................................................. $ 90.8 $ 30.5 $ 138.3 $ 51.0
Fort Howard.................................................................. 58.9 36.4 108.6 63.3
-------- -------- -------- --------
Total $ 149.7 $ 66.9 $ 246.9 $ 114.3
-------- -------- -------- --------
-------- -------- -------- --------
Net income
James River.................................................................. $ 90.8 $ 30.5 $ 138.3 $ 51.0
Fort Howard.................................................................. 58.3 33.1 106.7 60.0
-------- -------- -------- --------
Total $ 149.1 $ 63.6 $ 245.0 $ 111.0
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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 James River. The
conforming of the accounting practices of James River and Fort Howard resulted
in no adjustments to net income or shareholders' equity. There were no
significant intercompany transactions between James River and Fort Howard.
The Company estimates that transaction costs associated with the merger
will be approximately $50 million to $60 million. All fees and transaction
expenses related to the merger and the restructuring of the combined companies
will be expensed as required under the pooling-of-interests accounting method.
These expenses have not been reflected in these consolidated statements of
operations, but will be reflected in the consolidated statements of operations
of the Company in the third and fourth quarters of 1997. The range of
restructure charges cannot be reasonably estimated until an analysis of the
newly combined operations is complete and a detailed restructure plan is
developed.
As a part of the Company's ongoing program of timberland divestitures, on
April 29, 1997, pursuant to an offering memorandum dated September 12, 1996,
Fort James completed the sale of approximately 95,000 acres of timberlands
located in Alabama and Mississippi for cash proceeds of $111 million. The
Company recorded a gain of $57.7 million ($35.2 million net of taxes, or $.17
per share) in severance and other items.
Q-6
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
3. OTHER INCOME
The components of other income were as follows for the six months ended
June 29, 1997, and June 30, 1996:
<TABLE>
<CAPTION>
June June
1997 1996
----- ----
<S> <C>
(in millions)
Interest and investment income........................................................ $ 4.9 $3.5
Equity in earnings of unconsolidated affiliates....................................... 4.0 1.3
Gain on sale of assets................................................................ 1.4 3.9
Foreign currency exchange gains (losses).............................................. (.4) 1.0
Other, net............................................................................ 1.3 (2.3)
----- ----
Total other income.................................................................. $11.2 $7.4
----- ----
----- ----
</TABLE>
4. INCOME TAXES
The Company's effective income tax rate was 40.4% for the six months ended
June 29, 1997, compared to 40.5% for the first six months of 1996.
5. INVENTORIES
The components of inventories were as follows as of June 29, 1997, and
December 29, 1996:
<TABLE>
<CAPTION>
June December
1997 1996
------ --------
<S> <C>
(in millions)
Raw materials.................................................................... $175.7 $177.0
Finished goods and work in process............................................... 537.6 498.8
Stores and supplies.............................................................. 158.2 160.9
------ --------
871.5 836.7
Reduction to state certain inventories at last-in, first-out cost................ (38.3) (35.1)
------ --------
Total inventories.............................................................. $833.2 $801.6
------ --------
------ --------
</TABLE>
6. FINANCIAL INSTRUMENTS
The Company held $638 million and $1,286 million in notional amount of
interest rate swaps with fair value liabilities of $9 million and $15 million as
of June 29, 1997, and December 29, 1996, respectively. During the first quarter
of 1997, the Company effectively unwound $648 million in notional amount of
interest rate swaps at a cost of approximately $8 million. The cost of unwinding
the interest rate swaps will be amortized to interest expense over the remaining
periods originally covered by the contracts. The original maturity dates were
between September 1998 and January 1999. The Company is also party to
LIBOR-based interest rate cap agreements which limit the interest cost to the
Company with respect to $500 million of floating rate obligations to 8% plus
Fort Howard's borrowing margin until June 1, 1999. The fair value of these cap
agreements was $.3 million compared to a carrying value of $6 million as of June
29, 1997.
During the first quarter of 1997, the Company unwound $470 million in
notional amount of foreign exchange contracts, along with related interest rate
agreements, at a cost of $31 million, net of tax benefits. The foreign exchange
contracts were designated as hedges of a portion of the Company's net investment
in its European Consumer Products Business. The net termination cost was
recorded as a component of equity. The Company terminated such contracts prior
to their original expiration in September 1998.
The fair value of the Company's debt was $4,466 million and $4,586 million
as of June 29, 1997, and December 29, 1996, respectively. Additionally, as of
June 29, 1997, the pay-in-kind notes received from the spin-off of Crown Vantage
Inc., valued at $89 million, are carried on the books at a fair value of
approximately $109 million.
Q-7
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
6. FINANCIAL INSTRUMENTS -- Continued
The estimated fair values of the Company's financial instruments were based
on both quoted market prices of comparable instruments and current market rates
as of June 29, 1997, and December 29, 1996, respectively.
7. COMMITMENTS AND CONTINGENT LIABILITIES
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. Future regulations could materially increase the Company's
capital requirements and certain operating expenses in future years.
In December 1993, the U.S. Environmental Protection Agency ("EPA")
published draft rules which contain proposed regulations affecting pulp and
paper industry discharges of wastewater and gaseous emissions, generally
referred to as "cluster rules". The final rules are likely to be issued in 1997,
with a nominal compliance date of 2000. These rules may require significant
changes in the pulping and/or bleaching process presently used in some U.S. pulp
mills, including several of the Company's mills. The implementation of the rules
could materially increase the Company's capital expenditures between 1998 and
2000. Based on its evaluation of the rules as they are currently expected to be
issued, the Company believes that capital expenditures of approximately $100
million may be required to bring the Company's facilities into compliance. This
estimate could change, depending on several factors, including changes to the
proposed regulations, new developments in control and process technology, and
inflation.
In addition, Fort James has been identified as a potentially responsible
party ("PRP"), along with others, at various EPA designated Superfund sites and
is involved in remedial investigations and actions under federal and state laws.
Among these superfund 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 remediation and
restoration of the river, and natural resources damages. At this time, the
Company, in conjunction with other PRPs, has agreed to participate in the
funding of remedial studies and a natural resources damages assessment and is
engaged in negotiations with federal and state agencies and tribes to resolve
outstanding claims.
It is the Company's policy to accrue remediation costs when it is probable
that such costs will be incurred and when they can be reasonably estimated. As
of June 29, 1997, the Company's accrued environmental liabilities, including
remediation and landfill closure costs, totaled $58.0 million. The Company
periodically reviews the status of all significant existing or potential
environmental issues and adjusts its accrual as necessary. 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 PRP's. 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 quarter or 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.
Litigation:
In 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. Most of these Debentures were retired by
means of a tender offer to all holders, which commenced on September 18, 1992.
The remainder were redeemed on November 2, 1992. Merrill Lynch & Co., which
acted as James River's dealer manager for the tender, is also named as a
defendant in the Alabama case. In general, the complaints allege 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 seek damages
in excess of $50 million plus punitive damages in excess of $500 million. The
Alabama case has been certified as a class action and holders of approximately
one-half of the Debentures elected not to be part of the class. In June 1997,
the Alabama court granted James
Q-8
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
7. COMMITMENTS AND CONTINGENT LIABILITIES -- Continued
River summary judgement on the remaining claims, and dismissed the action. The
plaintiffs have appealed to the Alabama Supreme Court. Most of the holders
electing out of the Alabama class are plaintiffs in the Connecticut case. Fort
James believes that all these claims are without merit and intends to defend
them vigorously. In May 1996, James River settled the claim of an institutional
holder of approximately 16.54% of the Debentures for $425,000 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. The actions are the
subject of a motion for transfer and consolidation before the Joint Panel of
Multidistrict Litigation. The litigation is in its earliest stages. The Company
intends to defend the litigation vigorously.
Although the ultimate disposition of legal proceedings cannot be predicted
with certainty, it is the 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 quarter or year.
Q-9
<PAGE>
FORT JAMES CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
8. SEGMENT INFORMATION
Fort James' net sales and income from operations by business segment were
as follows for the quarters and six months ended June 29, 1997, and June 30,
1996:
<TABLE>
<CAPTION>
Consumer Products
-------------------- Intersegment
North Communications elimination/
America Europe Packaging Papers Corporate Total
-------- -------- --------- -------------- ------------ --------
<S> <C>
(in millions)
Quarter ended June 1997
Net sales...................................... $1,127.2 $ 465.4 $ 198.3 $112.0 $ (48.6) $1,854.3
Segment results before severance and other
items........................................ 231.1 52.9 23.8 0.4 (22.3) 285.9
Severance and other items income............... 57.7 57.7
-------- -------- --------- -------------- ------------ --------
Income from operations......................... 288.8 52.9 23.8 0.4 (22.3) 343.6
Quarter ended June 1996
Net sales...................................... $1,145.3 $ 496.7 $ 319.9 $113.8 $ (61.1) $2,014.6
Segment results before severance and other
items........................................ 184.2 48.8 24.0 3.2 (29.7) 230.5
Severance and other items expense.............. (3.3) (3.0) (.7) (7.0)
-------- -------- --------- -------------- ------------ --------
Income from operations......................... 180.9 48.8 21.0 3.2 (30.4) 223.5
Six months ended June 1997
Net sales...................................... $2,204.6 $ 938.0 $ 395.0 $231.3 $ (96.8) $3,672.1
Segment results before severance and other
items........................................ 435.7 105.3 45.0 (3.2) (46.1) 536.7
Severance and other items income............... 57.7 57.7
-------- -------- --------- -------------- ------------ --------
Income from operations......................... 493.4 105.3 45.0 (3.2) (46.1) 594.4
Six months ended June 1996
Net sales...................................... $2,236.3 $1,007.1 $ 661.1 $226.0 $ (134.9) $3,995.6
Segment results before severance and other
items........................................ 361.8 79.9 53.8 7.4 (58.4) 444.5
Severance and other items expense.............. (26.0) (3.3) (1.1) (30.4)
-------- -------- --------- -------------- ------------ --------
Income from operations......................... 335.8 79.9 50.5 7.4 (59.5) 414.1
</TABLE>
Q-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations
Overview
Fort James reported net income of $149.1 million, or $.68 per share, for
the second quarter ended June 29, 1997, compared with $63.6 million, or $.27 per
share for the same quarter of the prior year. Net sales for the second quarter
were $1,854 million, compared to $2,015 million in the prior year. For the six
months ended June 29, 1997, net income was $245 million, or $1.11 per share,
compared with $111 million, or $.46 per share in 1996. Net sales for the first
six months of 1997 were $3,672 million compared to $3,996 million in 1996. The
comparability of these results was impacted by nonrecurring charges and the 1996
divestitures of the Flexible Packaging and related Inks divisions, as well as
several small domestic Consumer Products facilities.
Items Affecting Comparability
Non-recurring charges for the quarters and six months ended June 29, 1997,
and June 30, 1996, were as follows:
<TABLE>
<CAPTION>
June 29, 1997 June 30, 1996
-------------------------- --------------------------
Net Net
Income Per Income Per
Gross Impact Share Gross Impact Share
------ ------ ------ ------ ------ ------
<S> <C>
(in millions, except per share amounts)
Quarters ended:
Severance costs..................................................... $ 4.9 $ 3.0 $ .01
Net (gain) loss on asset divestitures............................... $(57.7) $(35.2) $ (.17) 2.1 1.2 .01
------ ------ ------ ------ ------ ------
Total (income) expense........................................... $(57.7) $(35.2) $ (.17) $ 7.0 $ 4.2 $ .02
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Six months ended:
Severance costs..................................................... $ 18.7 $ 11.4 $ .07
Net (gain) loss on asset divestitures............................... $(57.7) $(35.2) $ (.17) 11.7 7.1 .04
------ ------ ------ ------ ------ ------
Total (income) expense........................................... $(57.7) $(35.2) $ (.17) $ 30.4 $ 18.5 $ .11
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
Net income for the quarters and six months ended June 29, 1997, excluding
non-recurring items, was $113.9 million or $.51 per share, and $209.8 million,
or $.94 per share, respectively, compared with $67.8 million, or $.29 per share,
and $129.5 million, or $.57 per share in the same periods of 1996. Net sales for
the second quarter and six months, excluding divested operations, were $1,854
million and $3,672 million in 1997, respectively, compared with $1,883 million
and $3,699 million for the comparable periods in 1996.
North American Consumer Products Business
Operating profits before severance and other items for the North American
Consumer Products Business, excluding results from divestitures, increased by
25%, from $185.3 million in the second quarter of 1996 to $231.1 million in the
current quarter. Net sales for the quarters were similar, excluding revenues
from divested operations, at $1,128 million in 1997, compared to $1,133 million
in 1996. Second quarter results reflect volume gains in retail and commercial
towel and tissue and retail tabletop categories, reduced manufacturing and raw
material costs, and benefits of cost reduction initiatives, partially offset by
foodservice volume declines of 5% and lower average selling prices led by
competitors in the second quarter of 1996 for retail towel and tissue products.
For the six months ended June 29, 1997, operating profits before severance
and other items, excluding divestitures, were $435.7 million, an increase of 20%
over the comparable six months in 1996. Excluding divestitures, revenues for the
first six months of 1997 increased 1% over the prior year. The increase in
profitability over the first half of 1997 as compared to the prior year was also
attributable to strong sales volumes, and reduced wood and wastepaper costs,
combined with continued cost reduction benefits. Overall increased operating
profits were partially offset by a decline in earnings attributable to market
pulp sales. This business has approximately 200,000 tons of pulp capacity in
excess of its annual requirements, which is sold as market pulp. Market pulp
volume improvements of 10% over prior year's first six months levels were more
than offset by average net selling price declines.
European Consumer Products Business
Operating profits for the European Consumer Products Business increased
slightly to $52.9 million, compared to $48.8 million in the second quarter of
1996. Operating profits of $105.3 million for this business for the six months
ended June 29, 1997, were 32% above the $79.9 million reported in the prior
year. The improvement in the European Consumer
Q-11
<PAGE>
Products Business' operating profits was attributable to a combination of
stronger volumes and lower raw material costs and other cost reductions,
partially offset by the strengthening of the U.S. dollar, lower average pricing
and additional promotional costs. The net impact of foreign currency translation
to the U.S. dollar for the six months ended June 29, 1997, was a reduction in
profits of approximately 6%. As a net buyer of approximately 450,000 tons per
year of market pulp, the European Consumer Products Business continues to
benefit from year over year declines in the cost of this raw material. Net sales
declined 6% and 7% in the second quarter and the first six months of 1997,
respectively, to $465 million and $938 million from $497 million and $1,007
million in the comparable periods of 1996. While finished product sales volumes
improved over the first half of 1996, revenues continue to be negatively
impacted by the strengthening of the U.S. dollar and a decline in average
pricing. Improved finished product sales volumes reflect a continued volume
growth in nearly all geographic markets.
Packaging Business
Excluding the results attributable to the divestitures of the Flexible
Packaging and Inks divisions in the second half of 1996, operating profits
before severance and other items for the Packaging Business improved by 18% to
$23.8 million in the current quarter from $20.1 million in the second quarter of
1996 while profits for the first six months decreased 2% to $45.0 million in
1997 from $45.9 million in the prior year. Net sales, adjusted for the Flexible
Packaging and Inks transactions, were flat in the second quarters at $198
million in 1997 compared to $200 million in the prior year and decreased 6% to
$395 million from $420 million for the six months ended June 29, 1997, and June
30, 1996, respectively. The current quarter's and six months' results reflect
increased volumes for folding cartons and paperboard, lower manufacturing and
raw material costs, partially offset by lower average selling prices.
Communications Papers Business
Operating profits for the Communications Papers Business declined to $.4
million from $3.2 million in the second quarter of 1996. The operating profits
for the six months decreased to a loss of $3.2 million from a profit of $7.4
million for the same period in 1996. Net sales for the second quarter were
similar at $112 million in 1997 and $114 million in 1996, while net sales for
the six months improved more than 2% to $231 million from $226 million in the
prior year. The improvement in net sales for the first half of 1997 over the
prior year is attributable to increased volumes of 24% due primarily to
market-related production curtailments, which occurred in the first half of
1996. However, volume gains were more than offset by selling price declines.
Other Income and Expense Items
General corporate expenses, before severance and other items, totaled $22.3
million and $46.1 million in the second quarter and first six months of 1997,
respectively, compared to $29.7 million and $58.4 million for the same periods
in the prior year. The majority of the decrease was related to reductions in
spending on new integrated management information systems, as design and
installation projects are being completed and systems become operational.
Interest expense decreased from $225.1 million to $190.3 million between the
first six months of 1996 and the first six months of 1997. This decrease was
attributable to the reduction in average outstanding debt since the second
quarter of 1996. Other income increased to $11.2 million in 1997 from $7.4
million in 1996, principally due to improved earnings of unconsolidated
affiliates. The change in the effective tax rate for 1997 is discussed in Note 4
of Notes to Consolidated Financial Statements. The Company's net income in the
second quarter and first six months of 1997 was decreased by extraordinary
losses of $.6 million and $1.9 million ($.4 million and $1.3 million, net of
taxes), respectively, representing the write-off of deferred loan costs
associated with the prepayment of debt.
Adoption of Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") which is effective for
periods beginning after December 15, 1997, including interim periods. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements, either in the
statement of operations or a separate statement. Additionally, SFAS 130 requires
the display of the accumulated balance of other comprehensive income. Note 1 of
Notes to Consolidated Financial Statements describes the pro forma impact of
SFAS 130 for the quarters and six months ended June 29, 1997, and June 30, 1996.
In June 1997, the Financial Accounting Standards Board also issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") which is effective for periods beginning after
December 15, 1997, including interim periods after the year of initial adoption.
SFAS 131 established standards for the way public companies report information
about operating segments in both interim and annual financial statements,
including related disclosures
Q-12
<PAGE>
about products and services, geographic areas, and major customers. The Company
has not determined what, if any, impact SFAS 131 will have on the operating
segments reported nor the impact SFAS 131 will have on the related disclosures.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is effective for periods
ending after December 15, 1997, including interim periods. SFAS 128 establishes
standards for computing and presenting earnings per share ("EPS") by replacing
primary EPS with the presentation of basic EPS and requiring dual presentation
of basic and diluted EPS on the face of the income statement. Note 1 of Notes to
Consolidated Financial Statements describes the pro forma impact of SFAS 128 for
the quarters and six months ended June 29, 1997, and June 30, 1996.
Financial Condition
Cash provided by operating activities totaled $342.1 million in the first
half of 1997, compared with the $511.2 million provided in the prior year. This
decrease in cash provided by operating activities resulted from a payment on the
unwinding of the Company's foreign currency hedge (See Note 6 of Notes to
Consolidated Financial Statements) and increases in working capital. The
Company's current ratio was 1.4 as of June 29, 1997, and 1.2 as of December 29,
1996, reflecting a working capital increase to $537 million from $263 million
for the same periods primarily due to a temporary increase in cash balances.
Capital expenditures were $178.1 million for the six months ended June 29, 1997,
compared to $210.1 million in the first half of 1996 reflecting divested
operations and timing of expenditures.
Total indebtedness decreased modestly from $4,434 million as of December
29, 1996, to $4,289 million as of June 29, 1997. As of June 29, 1997, the
Company had outstanding borrowings of approximately $447 million supported by
revolving credit facilities. These borrowings included $306 million outstanding
under such facilities, $89 million of commercial paper and $52 million of money
market notes. Total outstanding debt as of June 29, 1997, included approximately
$3,168 million of fixed rate and $1,121 million of floating rate obligations.
Note 6 of Notes to Consolidated Financial Statements describes the Company's
interest rate swap agreements.
As of June 29, 1997, under the most restrictive provisions of the James
River's debt agreements, James River had additional borrowing capacity of
approximately $1.6 billion and net worth in excess of the minimum requirements
specified by such agreements of approximately $390 million. As of June 29, 1997,
Fort Howard had $236 million in available borrowing capacity under its revolving
credit facility.
On August 12, 1997, James River paid the outstanding balance of $91 million
on its European credit facility with proceeds from other available European
financings, and terminated this agreement. On August 13, 1997, prior to the
effectiveness of the merger, James River paid down and terminated its $200
million 9.77% note agreement using proceeds from divestitures and excess cash
flow. On August 13, 1997, after the effectiveness of the merger, Fort James
entered into a $2.5 billion credit agreement and, upon repayment of any
outstanding balances, terminated its two existing domestic revolving credit
facilities and term loans A and B. The $2.5 billion credit agreement expires in
2002. The interest rate payable on outstanding balances under revolving loans
pursuant to this credit agreement is generally based, at the option of the
Company, on the prime rate, LIBOR, certificate of deposit rates, or federal
funds effective rates.
In August 1997, James River announced that as of October 1, 1997, it is
calling its Series O 8 1/4% Cumulative Preferred Stock for redemption at its
face value of $98.1 million.
In July 1997, James River announced that as of September 2, 1997, it is
calling its Series P 9% Cumulative Convertible Preferred Stock for conversion
into common stock at a conversion ratio of .9206 shares of common stock for each
Series P depositary share. The conversion of the Series P depositary shares will
reduce the Company's aggregate cash dividends by approximately $16.5 million per
year.
As a part of the Company's ongoing program of timberland divestitures, on
April 29, 1997, pursuant to an offering memorandum dated September 12, 1996,
Fort James completed the sale of approximately 95,000 acres of timberlands
located in Alabama and Mississippi for cash proceeds of $111 million. The
Company recorded a second quarter after-tax gain of $35.2 million on this sale.
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. 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; and opportunities that may be presented to
and pursued by the Company.
Q-13
