2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: March 28, 1999 Commission File Number: 1-7911
--------------------------------- ----------------------------
FORT JAMES CORPORATION
----------------------
(Exact name of registrant as specified in its charter)
Virginia 54-0848173
- ---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 Lake Cook Road, Deerfield, IL 60015-4753
- ---------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 317-5000
- --------------------------------------------------------------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of $.10 par value common stock outstanding as
of April 15, 1999:
220,757,178 shares
<PAGE>
FORT JAMES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
March 28, 1999
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements:
Consolidated Balance Sheets as
of March 28, 1999 and December 27, 1998 3
Consolidated Statements of Operations for
the quarters ended March 28, 1999
and March 29, 1998 4
Consolidated Statements of Cash Flows for
the quarters ended March 28, 1999
and March 29, 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
FORT JAMES CORPORATION
CONSOLIDATED BALANCE SHEETS
March 28, 1999 and December 27, 1998
March December
(in millions, except share data) 1999 1998
- --------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 5.2 $ 5.3
Accounts receivable 917.6 891.5
Inventories 889.9 869.5
Deferred income taxes 146.7 162.7
Prepaid expenses and other current assets 29.0 25.1
- --------------------------------------------------------------------------------
Total current assets 1,988.4 1,954.1
- --------------------------------------------------------------------------------
Property, plant and equipment 8,058.8 8,158.2
Accumulated depreciation (3,548.4) (3,503.9)
- --------------------------------------------------------------------------------
Net property, plant and equipment 4,510.4 4,654.3
Goodwill 587.9 628.7
Other assets 567.9 555.2
- --------------------------------------------------------------------------------
Total assets $ 7,654.6 $7,792.3
================================================================================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 636.3 $ 702.8
Accrued liabilities 613.8 672.5
Current portion of long-term debt 236.4 240.0
- --------------------------------------------------------------------------------
Total current liabilities 1,486.5 1,615.3
- --------------------------------------------------------------------------------
Long-term debt 3,690.6 3,647.2
Deferred income taxes 741.3 756.5
Accrued postretirement benefits other than pensions 454.2 458.8
Other long-term liabilities 253.9 263.1
- --------------------------------------------------------------------------------
Total liabilities 6,626.5 6,740.9
- --------------------------------------------------------------------------------
Common stock, $.10 par value, 500.0 million shares
authorized; 220.7 million shares
outstanding at March 28, 1999
and 220.5 million at December 27, 1998 22.1 22.1
Additional paid-in capital 3,218.0 3,215.6
Accumulated comprehensive loss (179.1) (88.8)
Accumulated deficit (2,032.9) (2,097.5)
- --------------------------------------------------------------------------------
Total shareholders' equity 1,028.1 1,051.4
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 7,654.6 $7,792.3
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FORT JAMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters Ended March 28, 1999 and March 29, 1998
(in millions, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
Net sales 1,790.3 $1,795.6
Cost of goods sold 1,237.4 1,243.1
Selling and administrative expenses 302.8 283.8
Restructure and other unusual items - 7.5
- --------------------------------------------------------------------------------
Income from operations 250.1 261.2
Interest expense (68.1) (75.0)
Other income, net 3.7 8.8
- --------------------------------------------------------------------------------
Income before income taxes, extraordinary item, and
cumulative effect of a change in accounting principle 185.7 195.0
Income tax expense (63.7) (77.4)
- --------------------------------------------------------------------------------
Income before extraordinary item and
cumulative effect of a change in accounting principle 122.0 117.6
Extraordinary loss on early extinguishment
of debt, net of taxes (2.2) (2.6)
Cumulative effect of a change in
accounting principle, net of taxes (22.1) -
- --------------------------------------------------------------------------------
Net income 97.7 115.0
Preferred dividend requirements - (5.2)
- --------------------------------------------------------------------------------
Net income available to common stockholders $ 97.7 $ 109.8
================================================================================
Basic earnings per share:
Income before extraordinary item
and the cumulative effect of
a change in accounting principle $ 0.56 $ 0.54
Extraordinary loss on early extinguishment of debt (0.01) (0.01)
Cumulative effect of a change in accounting principle (0.10) -
- --------------------------------------------------------------------------------
Net income $ 0.45 $ 0.53
- --------------------------------------------------------------------------------
Weighted average common shares outstanding 219.5 208.5
================================================================================
Diluted earnings per share:
Income before extraordinary item and the
cumulative effect of a change in accounting principle $ 0.55 $ 0.53
Extraordinary loss on early extinguishment of debt (0.01) (0.01)
Cumulative effect of a change in accounting principle (0.10) -
- --------------------------------------------------------------------------------
Net income $ 0.44 $ 0.52
- --------------------------------------------------------------------------------
Weighted average common shares and
common share equivalents outstanding 220.4 210.9
================================================================================
Cash dividends per common share 0.15 $ 0.15
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FORT JAMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarters Ended March 28, 1999 and March 29, 1998
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Cash provided by (used for) operating activities:
Net income $ 97.7 $115.0
Depreciation expense 120.6 114.1
Amortization of goodwill 4.9 4.8
Deferred income tax provision 22.2 49.2
Restructure and other unusual items - 1.2
Loss on early extinguishment of debt, net of taxes 2.2 2.6
Cumulative effect of a change in accounting
principle, net of taxes 22.1 -
Change in current assets and liabilities:
Accounts receivable (60.5) (44.2)
Inventories (30.2) (21.2)
Prepaid expenses and other current assets (4.4) (4.8)
Accounts payable and accrued liabilities (73.6) (95.1)
Other, net (30.6) (11.6)
- --------------------------------------------------------------------------------
Cash provided by operating activities 70.4 110.0
- --------------------------------------------------------------------------------
Cash provided by (used for) investing activities:
Expenditures for property, plant and equipment (106.9) (97.4)
Proceeds from sale of assets - 4.4
Other, net 0.1 (2.5)
- --------------------------------------------------------------------------------
Cash used for investing activities (106.8) (95.5)
- --------------------------------------------------------------------------------
Cash provided by (used for) financing activities:
Additions to long-term debt 0.5 306.9
Payments of long-term debt (73.6) (75.3)
Net increase (decrease) in revolving debt 144.1 (231.5)
Common and preferred stock cash dividends paid (33.0) (37.3)
Proceeds from exercise of stock options 2.4 15.6
Other, net (4.1) (4.8)
- --------------------------------------------------------------------------------
Cash provided by (used for) financing activities 36.3 (26.4)
- --------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (0.1) (11.9)
Cash and cash equivalents, beginning of period 5.3 33.6
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5.2 $ 21.7
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
-------------------------------
Basis of Presentation:
In the opinion of management, the accompanying unaudited consolidated
financial statements of Fort James Corporation ("Fort James" or "the Company")
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the Company's consolidated financial position as of March 28,
1999 and its results of operations and cash flows for the quarters ended March
28, 1999 and March 29, 1998. The balance sheet as of December 27, 1998 was
derived from audited financial statements as of that date. The results of
operations for the quarter ended March 28, 1999 are not necessarily indicative
of the results to be expected for the full year.
Certain amounts in the financial statements and supporting footnote
disclosures have been reclassified to conform to the current year's
classification.
Prospective Accounting Pronouncements:
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires the recognition of
all derivatives in the statement of financial position as either assets or
liabilities and their measurement at fair value. Depending upon the nature of
the derivative, changes in fair value are either recognized in other
comprehensive income or in earnings. The Company has not determined what impact,
if any, Statement No. 133 will have on the Company's results of operations or
financial position. Statement No. 133 is effective for fiscal years beginning
after June 15, 1999.
2. Change in Accounting Policy
---------------------------
The Company adopted Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" which requires that start-up and organization costs be
expensed as incurred as of the beginning of 1999. The change in accounting
policy has been applied retroactively to unamortized start-up costs capitalized
in prior years. As a result, a charge of $34.1 million ($22.1 million after
taxes or $0.10 per diluted share) was recorded as a cumulative effect of a
change in accounting principle in the current quarter.
3. Inventories
-----------
The components of inventories were as follows as of March 28, 1999 and
December 27, 1998:
March December
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Raw materials $ 169.1 $ 185.4
Finished goods and work in process 579.8 558.2
Stores and supplies 170.2 170.9
- --------------------------------------------------------------------------------
919.1 914.5
Reduction to state certain inventories
at last-in, first-out cost (29.2) (45.0)
- --------------------------------------------------------------------------------
Total inventories $ 889.9 $ 869.5
================================================================================
4. Comprehensive Income
--------------------
Comprehensive income for the quarters ended March 28, 1999 and March 29,
1998 was $7.4 million and $81.8 million, respectively. The difference between
net income and comprehensive income is due to foreign currency translation
losses.
5. Income Taxes
------------
The Company's effective income tax rate was 34.3 percent for the quarter
ended March 28, 1999 compared to 39.7 percent for the first quarter of 1998.
The difference between the Company's effective income tax rate and the
statutory federal income tax rate is primarily due to state and foreign income
taxes and the reversal in 1999 of a valuation allowance established in 1998.
6. Net Income Per Common Share and Common Share Equivalent
-------------------------------------------------------
Income and share information used in determining earnings per share for the
quarters ended March 28, 1999 and March 29, 1998 were calculated as follows:
1999 1998
-------------------------------------------
(in millions,
except per share amounts) Income Shares Income Shares
- --------------------------------------------------------------------------------
Income before extraordinary
item and cumulative effect
of a change in accounting principle $ 122.0 $ 117.6
Less: Preferred stock dividends (5.2)
- --------------------------------------------------------------------------------
Amounts used to compute
basic earnings per share 122.0 219.5 112.4 208.5
Effect of dilutive securities:
Options 0.9 2.4
- --------------------------------------------------------------------------------
Amounts used to compute
diluted earnings per share $ 122.0 220.4 $ 112.4 210.9
================================================================================
Series K, L and N preferred stocks were antidilutive in the first quarter
of 1998.
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, including effluent and emission 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. Future regulations could materially increase the Company's
capital requirements and certain operating expenses in future years.
Fort James, along with others, has been identified as a potentially
responsible party ("PRP") 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
(collectively, the "Fox River Group"), 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. These agencies and tribes seek sediment restoration and
natural resources damages. In February 1999, the Wisconsin Department of Natural
Resources (the "WDNR") released a draft remedial investigation/feasibility study
for public comment, which provides sediment restoration alternatives for the Fox
River. While the draft study did not advocate any specific alternative or
combination of alternatives, the estimated total costs provided in the draft
study ranged from zero for 'no action' to approximately $720 million, depending
on the alternative or combination of alternatives selected. The Company has
reviewed the draft study and submitted timely comments both individually and in
conjunction with the Fox River Group. After consideration of the public
comments, the draft report may be revised to add to, delete from or amend the
list of potential sediment restoration alternatives. The WDNR and EPA will then
propose a particular alternative for further public comment. The sediment
restoration alternative or alternatives which may be proposed or ultimately
selected by the state and federal agencies, is unknown at this time. After the
alternative is selected, further changes may occur as a result of discussions
among the PRP's and the state and federal agencies concerning resolution of
government claims. The Company believes that its share of the restoration costs
for the Fox River 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.
The Company is also participating in the funding of a remedial
investigation/feasibility study of contamination of the Kalamazoo River by
hazardous substances.
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. As of March 28, 1999, Fort James' accrued
environmental liabilities, including remediation and landfill closure costs,
totaled $52.5 million.
Litigation:
In May 1997, the Attorney General of the State of Florida filed a civil
action in the United States District Court for the Northern District of Florida
at Gainesville (the "Florida District Court"), against the Company and seven
other manufacturers of sanitary commercial paper products alleging violations of
federal and state antitrust and unfair competition laws. The complaint seeks
damages on behalf of the state under Florida law of $1 million against each
defendant for each violation, unspecified treble damages and injunctive relief.
Three other state attorney generals have brought similar suits which are
expected to be consolidated in the Florida District Court. In addition, numerous
other filings have been filed in federal courts on behalf of an alleged class of
direct purchasers, all seeking similar damages for similar alleged violations.
The class actions were consolidated in the Florida District Court, and in July
1998, the Court conditionally certified the class. State class actions also have
been filed in certain states, on behalf of an alleged class of indirect
purchasers, seeking similar damages for similar alleged violations under state
law. The Company believes that these cases are without merit and is vigorously
defending both the federal and state actions.
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 material adverse effect on the consolidated
financial condition of Fort James but could have a material effect on
consolidated results of operations in a given quarter or year.
8. Fort James Operating Company
Fort James Operating Company ("FJOC") is an obligor of certain securities
registered under the Securities Act of 1933, thus subjecting it to reporting
requirements under Section 13 or 15 (d) of the Securities Exchange Act of 1934.
In accordance with Staff Accounting Bulletin No. 53, the following condensed
financial information for FJOC for the quarters ended March 28, 1999 and March
29, 1998 and as of March 28, 1999 and December 27, 1998 is presented in lieu of
consolidated financial statements because the securities are fully and
unconditionally guaranteed by Fort James and management has determined that such
information is not material to the holders of the securities:
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Condensed income statement information:
Net sales $ 1,168.9 $ 1,193.4
Gross profit 332.8 360.5
Income before extraordinary item and cumulative
effect of a change in accounting principle 10.4 43.2
Net income (loss) (8.5) 40.6
================================================================================
March December
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Condensed balance sheet information:
Current assets $ 1,039.4 $ 963.6
Noncurrent assets 3,475.6 3,521.9
Current liabilities 553.1 694.1
Noncurrent liabilities 5,313.8 5,130.4
Deficit (1,351.9) (1,339.0)
================================================================================
9. Segments
--------
Segment sales and income from operations before nonrecurring and other
unusual items for the quarters ended March 28, 1999 and March 29, 1998 and total
assets as of March 28, 1999 and March 29, 1998 were as follows:
<TABLE>
<S> <C>
Communi- Inter-
Tissue cations company
North Papers and and
(in millions) America Europe Dixie Packaging Fiber Corporate Total
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 852.0 $ 465.9 $ 175.6 $ 174.6 $ 196.0 $ (73.8) $1,790.3
Intercompany sales 0.3 - 0.9 28.5 44.1 - 73.8
Income from operations before
restructure and other unusual items 194.9 61.1 19.3 10.9 (14.2) (21.9) 250.1
Total assets 2,790.0 2,168.3 402.2 661.8 818.5 813.8 7,654.6
===========================================================================================================================
1998
Net sales $ 841.9 $ 458.0 $ 172.8 $ 180.4 $ 215.5 $ (73.0) $1,795.6
Intercompany sales - - 0.9 31.2 40.9 - 73.0
Income from operations before
restructure and other unusual items 201.0 55.7 17.9 10.3 6.4 (22.6) 268.7
Total assets 2,813.1 2,159.6 405.8 666.7 874.6 820.9 7,740.7
===========================================================================================================================
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Overview
1999 1998
------------------------ ------------------------
(in millions, Recur- Recur-
except per share data) Reported ring(a) Reported ring(b)
- --------------------------------------------------------------------------------
Net sales $1,790.3 $ 1,790.3 $1,795.6 $ 1,795.6
Income from operations 250.1 250.1 261.2 268.7
Net income 97.7 122.0 115.0 122.2
Diluted earnings per share $ 0.44 $ 0.55 $ 0.52 $ 0.55
===============================================================================
(a) Results include an extraordinary charge on the early extinguishment of
debt of $3.6 million ($2.2 million after taxes or $0.01 per diluted share) and a
charge of $34.1 million ($22.1 million after taxes or $0.10 per diluted share)
for the cumulative effect of a change in accounting for start-up costs.
(b) Results include a pretax charge of $7.5 million ($4.6 million after
taxes or $0.02 per diluted share) for merger related integration costs and an
extraordinary charge on the early extinguishment of debt of $4.2 million ($2.6
million after taxes or $0.01 per diluted share).
North America - Tissue
(in millions) 1999 1998 Inc/(Dec)
- --------------------------------------------------------------------------------
Net sales $ 852.0 $ 841.9 1.2%
Income from operations 194.9 201.0 (3.0%)
================================================================================
Average selling prices in the Tissue-North America business were
approximately 1 percent lower than the prior year as higher average retail
prices were more than offset by declines in average away-from-home prices.
Retail tissue sales and operating profits reached record first quarter
levels on strong tissue volume and higher average prices. Shipments were more
than 4 percent higher than prior year with increases in all product categories.
New product launches in the quarter included SOFT 'N GENTLE 1000 count which
allows the Company to compete in the extended roll life segment for the first
time; and MARDI GRAS Rainbow Pack, a variety pack of four new colors in a 360
count value pack size, which builds on the number one position of MARDI GRAS
napkins.
Away-from-home sales and operating profits declined versus the prior year
primarily due to lower average selling prices resulting from highly competitive
market conditions. Volume was essentially flat, however, good growth was
reported in the Sofpull towel and COMPACT and MICRO-TWIN tissue differentiated
product lines. We continue to be encouraged by the success in test markets for
the innovative ACCLAIM multi-layer dispenser napkins.
Europe - Tissue
(in millions) 1999 1998 Inc/(Dec)
- --------------------------------------------------------------------------------
Net sales $ 465.9 $ 458.0 1.7%
Income from operations 61.1 55.7 9.7%
================================================================================
Excluding the estimated effects of foreign currency translation,
Tissue-Europe sales would have decreased by 1 percent due to lower average
selling prices. Cost reduction benefits and lower raw material prices, partially
offset by unfavorable selling prices, were the primary reasons for the profit
improvement. The "pure white" kitchen roll line continues to perform well and
recorded solid growth across Europe.
Dixie
(in millions) 1999 1998 Inc/(Dec)
- --------------------------------------------------------------------------------
Net sales $ 175.6 $ 172.8 1.6%
Income from operations 19.3 17.9 7.8%
================================================================================
The increased Dixie sales were the result of strong retail volume
performance. This growth was partially offset by reduced away-from-home volumes
resulting from product line rationalization activities and lower average
pricing. The profit improvement was driven by cost reduction benefits and the
volume growth. Key initiatives which contributed to favorable volume include
larger size retail "value packs" and a new away-from-home plastic cutlery "dense
pack" which contains twice as much product per case as competitors' loose-filled
cutlery.
Packaging
(in millions) 1999 1998 Inc/(Dec)
- --------------------------------------------------------------------------------
Net sales $ 174.6 $ 180.4 (3.2%)
Income from operations 10.9 10.3 5.8%
================================================================================
Within the Packaging business, folding carton profits increased almost 50
percent over the comparable prior year quarter due to good progress in
controlling costs and higher volumes, especially in the frozen food, cereal,
dairy, dry food and personal care categories. New customers, including leading
consumer companies in the food and personal care industries, have recently been
added. The improvement in folding carton, however, was largely offset by erosion
in paperboard earnings caused by softer market pricing.
Communications Papers and Fiber
(in millions) 1999 1998 Inc/(Dec)
- --------------------------------------------------------------------------------
Net sales $ 196.0 $ 215.5 (9.0%)
Income (loss) from operations (14.2) 6.4 NM
================================================================================
NM - not meaningful
The decreases in operating profits and sales in the Communications Papers
and Fiber businesses were primarily the result of lower uncoated free sheet
paper and market pulp prices, partially offset by increased market pulp and
wastepaper volumes. During the second quarter, the Communications Papers
business announced a new entry in the EUREKA! family - a recycled reprographic
product aimed at environmental and cost conscious customers currently buying
non-recycled brands.
Financial Condition
Cash provided by operating activities totaled $70.4 million in the first
quarter of 1999, compared with $110.0 million in the prior year. The decrease is
primarily due to an increase in working capital. The Company's current ratio was
1.3 as of March 28, 1999, and 1.2 as of December 27, 1998, while working capital
increased to $501.9 million from $338.8 million for the same periods. The
increase in working capital is primarily due to seasonal decreases in
outstanding payables and accrued expenses. Higher accounts receivable and
inventory balances also contributed to the increase. Capital expenditures were
$106.9 million for the quarter ended March 28, 1999, compared to $97.4 million
in the prior year.
Accrued liabilities related to restructuring activities decreased during
the year due to the settlement of such liabilities through cash payments of $5.8
million for severance, $3.4 million for facility closures and $0.7 million for
contract termination costs.
During the first quarter of 1999, the Company redeemed $58.8 million of 9%
senior subordinated notes prior to their scheduled maturity. The redemption
resulted in an extraordinary loss on the early extinguishment of debt of $3.6
million ($2.2 million after taxes or $0.01 per diluted share). As of March 28,
1999, total indebtedness was $3.93 billion an increase of $39.8 million from
$3.89 billion as of December 27, 1998. As of March 28, 1999, the Company had
outstanding borrowings of approximately $1.07 billion supported by revolving
credit facilities compared to $911 million as of December 27, 1998. As of March
28, 1999, total outstanding debt (including the effect of interest rate swaps)
included approximately $2.9 billion of fixed rate and $1.0 billion of floating
rate obligations compared to $2.8 billion and $1.1 billion, respectively, as of
December 27, 1998. As of March 28, 1999, under the most restrictive provisions
of the Company's debt agreements, Fort James had additional borrowing capacity
of approximately $1.8 billion.
Effect of New Accounting Standards
- ----------------------------------
See Note 1 to the Consolidated Financial Statements.
Year 2000
- ---------
The Year 2000 ("Y2K") issue is the result of computer programs using two
digits rather than four to define the applicable year. The Company's computer
equipment, information technology (IT) software and devices with imbedded
technology that are time-sensitive may recognize a date using "00" as the year
1900 rather than the year 2000. The problem goes beyond standard IT application
software and includes phone systems, security systems, process control and shop
floor systems, embedded code, data and databases, operating systems, and
electronic networks. Any device that contains a microprocessor is subject to
this problem.
The Company established a Y2K Project Office to coordinate its Y2K efforts.
The Y2K Project Office is comprised of representatives from a variety of
departments throughout the Company, including manufacturing, legal, and
corporate communications, and is responsible for all aspects of the project,
including IT and non-IT date conversion plans, cost control, risk management
action plans, and both internal and external communications. The Y2K Project
Office reports to senior management and the Audit Committee of the Board of
Directors on a regular basis.
The Y2K Project is organized into various work categories. Where
appropriate, each category includes specific work plans, contingency plans,
schedules and goals. A brief description and status of the work categories
follows:
Mainframe - Internal Systems: Remediation of core business applications
that are not being replaced as a result of the merger is in process. System
applications for logistics, tax and intercompany accounting have been
remediated, tested and returned to production. Other applications are being
remediated and tested, where necessary, in conjunction with the Company's
business systems merger activity. Completion is estimated for the second quarter
of 1999.
Midrange: Accounts payable, procurement and general ledger applications
have been examined, remediated, tested and returned to production. Remediation
of the payroll system is in process with completion estimated for the third
quarter of 1999. Remediation of custom code for accounts receivable is estimated
to be completed during the second quarter of 1999.
Plants & Mills - (Distributed Systems): An inventory of software
applications at the Company's plants and mills has been completed. Project plans
detailing specific remediation activities by application are being implemented
at each facility. Approximately 70% of the applications inventoried have either
been verified as Y2K ready or remediated, tested and returned to production.
Completion is estimated for the third quarter of 1999.
Electronic Data Interchange ("EDI"): The Company is in the process of
upgrading or remediating all of its EDI systems. Completion is estimated for the
third quarter of 1999.
Process Control (Manufacturing Operations): Inventories of Programmable
Logic Controllers ("PLCs") and Distributed Control Systems ("DCS") have been
completed. Verification of Y2K compliance and the appropriate remediation and
testing efforts are in process. Completion is estimated for the third quarter of
1999.
Infrastructure: An inventory of intelligent devices was completed in the
first quarter of 1998. Examination of the inventoried products indicated that
only phone systems required upgrades. Hardware upgrades for devices not
supported by vendors have been completed. Software upgrades are currently
underway with completion estimated for the second quarter of 1999.
Desktop - includes Local Area Network ("LAN") and Wide Area Network
("WAN"): A detailed inventory of personal computers ("PCs"), LANs and WANs has
been completed. PCs that are not Y2K ready have been identified and are being
upgraded or replaced. A listing of business critical software packages is being
compiled and a software remediation team and process has been identified.
Additional vendor support to address the Y2K issues has been contracted.
Completion is estimated for the third quarter of 1999.
Value Chain: The Company completed a survey of its customers and suppliers
to identify and assess potential Y2K risks presented by significant trading
partners. If it is determined that a materially significant supplier or customer
will not be Y2K ready, the potential effect on the Company and the Company's
response is being evaluated in Business Continuity Planning as described below.
Completion of the Value Chain assessment is estimated for the second quarter of
1999.
Legal: Legal counsel is responsible for assuring that the Company's legal
rights are protected during the course of the Y2K Project.
Business Continuity Planning: The Business Continuity Planning project
consists of risk management, contingency planning, and disaster recovery. In
addition, responses provided to the Value Chain assessment are being used to
evaluate material external exposures. Completion is estimated for the fourth
quarter of 1999.
The Company spent approximately $12 million during 1999, $35 million during
1998, and $8 million during 1997 on the Y2K project. The Company currently
estimates additional spending of approximately $30 million to $40 million to
make the required Y2K system modifications and replacements, and for testing.
Costs for system maintenance and modification are expensed as incurred while
spending for new software or to replace existing systems is capitalized and
amortized over the assets' useful lives.
The Company expects its Y2K project to be completed on a timely basis;
however, due to the interdependent nature of computer systems there can be no
assurance that the systems of other entities on which the Company's systems rely
will be remediated in a timely manner. Though it is impossible to predict all
potential Y2K uncertainties, the Company believes that its Y2K Project will
significantly reduce its risk of material loss in the event of non-compliance by
the Company, its vendors or its suppliers. In the opinion of management, delays
in the production or processing of orders, or the delivery of finished goods
would be the most likely worst-case scenario of the inability of the Company or
its customers or suppliers to resolve their Y2K problems.
The foregoing Y2K Project timetable and assessments of costs and risks
reflect management's best estimates. These estimates were derived utilizing
numerous assumptions of future events. There can be no assurance, however, that
these estimates will be achieved or that actual results will not differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and the ability of technology vendors to deliver new
systems on schedule. In addition, there are certain material external risk
exposures represented by the Company's Value Chain, including but not limited to
the delivery of adequate energy supplies, for which the Company can exercise
minimal, if any, control. There can be no assurance that these efforts will
prevent the failure to become Y2K ready from having a material adverse affect on
the Company's financial condition or results of operations.
Information Concerning Forward-Looking Statements
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; determinations by regulatory and governmental
authorities; the ability to achieve synergistic and other cost reductions and
efficiencies; and the ability to successfully remediate Year 2000 problems.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
See Note 7 to the Consolidated Financial Statements of this Quarterly
Report on Form 10-Q.
Item 2. CHANGES IN SECURITIES.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The exhibits listed below are filed as part of this quarterly report.
Each exhibit is listed according to the number assigned to it in the
Exhibit Table of Item 601 of Regulation S-K.
Exhibit Starts
Number on Page
27 Financial Data Schedules for the quarter ended
March 28, 1999 (filed electronically only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended March 28, 1999, and subsequent thereto.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORT JAMES CORPORATION
By:/s/ William A. Paterson
William A. Paterson
Senior Vice President and Controller
(Principal Accounting Officer)
Date: April 22, 1999
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<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORT JAMES CORPORATION'S MARCH 28, 1999, FORM 10-Q
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<NAME> FORT JAMES CORPORATION
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