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: September 26, 1999 Commission File Number: 1-7911
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FORT JAMES CORPORATION
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(Exact name of registrant as specified in its charter)
Virginia 54-0848173
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 Lake Cook Road, Deerfield, IL 60015-4753
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 317-5000
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Not Applicable
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(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 October 27,
1999:
216,372,382 shares
<PAGE>
FORT JAMES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
September 26, 1999
TABLE OF CONTENTS
ITEM 1. Financial Statements:
Consolidated Balance Sheets as
of September 26, 1999 and September 27, 1998 3
Consolidated Statements of Operations for
the quarters and nine months ended September 26, 1999
and September 27, 1998 4
Consolidated Statements of Cash Flows for
the nine months ended September 26, 1999
and September 27, 1998 5
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION:
ITEM 2. Changes in Securities 17
ITEM 3. Defaults Upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<S> <C>
FORT JAMES CORPORATION
CONSOLIDATED BALANCE SHEETS
September 26, 1999 and December 27, 1998
September December
(in millions, except share data) 1999 1998
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Assets:
Current assets:
Cash and cash equivalents $ 7.7 $ 5.3
Accounts receivable 965.2 857.5
Inventories 819.3 806.5
Deferred income taxes 100.4 162.7
Prepaid expenses and other current assets 31.4 24.3
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Total current assets 1,924.0 1,856.3
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Property, plant and equipment 7,705.9 7,547.0
Accumulated depreciation (3,455.9) (3,225.4)
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Net property, plant and equipment 4,250.0 4,321.6
Goodwill, net 577.0 620.0
Net assets of discontinued operations - 403.4
Other assets 525.4 526.7
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Total assets $7,276.4 $ 7,728.0
================================================================================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 610.3 $ 679.2
Accrued liabilities 700.4 644.6
Current portion of long-term debt 236.9 240.0
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Total current liabilities 1,547.6 1,563.8
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Long-term debt 2,876.6 3,646.4
Deferred income taxes 808.7 756.5
Accrued postretirement benefits other than pensions 418.8 446.8
Other long-term liabilities 273.6 263.1
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Total liabilities 5,925.3 6,676.6
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Common stock, $.10 par value, 500.0 million shares authorized;
219.6 million shares outstanding at September 26, 1999
and 220.5 million at December 27, 1998 22.1 22.1
Additional paid-in capital 3,185.0 3,215.6
Accumulated comprehensive loss (177.6) (88.8)
Accumulated deficit (1,678.4) (2,097.5)
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Total shareholders' equity 1,351.1 1,051.4
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Total liabilities and shareholders' equity $7,276.4 $ 7,728.0
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FORT JAMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters and Nine months Ended
September 26, 1999 and September 27, 1998
Quarter Nine Months
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(in millions,
except per share amounts) 1999 1998 1999 1998
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Net sales $ 1,739.3 $1,713.7 $5,126.8 $5,113.6
Cost of goods sold (1,207.7)(1,132.7) (3,518.4)(3,432.1)
Selling and administrative expenses (363.4) (293.2) (951.6) (844.8)
Restructure and other items 13.4 (12.7) 14.5 (28.0)
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Income from operations 181.6 275.1 671.3 808.7
Interest expense (53.6) (65.6) (175.5) (203.0)
Other income (expense), net 0.4 (4.3) 18.5 (1.8)
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Income from continuing operations
before income taxes, extraordinary
items, and cumulative effect of a
change in accounting principle 128.4 205.2 514.3 603.9
Income tax expense (34.3) (57.6) (166.7) (208.4)
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Income from continuing operations
before extraordinary items and
cumulative effect of a change
in accounting principle 94.1 147.6 347.6 395.5
Income (loss) from discontinued
operations, net of taxes (1.5) 3.1 (6.4) 9.0
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Income before extraordinary items
and cumulative effect of a change
in accounting principle 92.6 150.7 341.2 404.5
Extraordinary loss on early
extinguishment of debt, net of taxes - - (33.2) (2.6)
Extraordinary gain on sale of
discontinued operations, net of tax 232.5 - 232.5 -
Cumulative effect of a change
in accounting principle, net of taxes - - (22.1) -
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Net income 325.1 150.7 518.4 401.9
Preferred dividend requirements - - - (5.2)
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Net income available
to common stockholders $ 325.1 $ 150.7 $ 518.4 $ 396.7
================================================================================
Basic earnings per share:
Income from continuing operations
before extraordinary items and the
cumulative effect of a change in
accounting principle $ 0.43 $ 0.69 $ 1.58 $ 1.82
Income (loss) from discontinued
operations, net of taxes (0.01) 0.01 (0.03) 0.04
Extraordinary loss on early
extinguishment of debt, net of taxes - - (0.15) (0.01)
Extraordinary gain on sale of
discontinued operations, net of taxes 1.06 - 1.06 -
Cumulative effect of a change in
accounting principle, net of taes - - (0.10) -
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Net income $ 1.48 $ 0.70 $ 2.36 $ 1.85
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Weighted average common
shares outstanding 219.2 219.0 219.4 215.0
================================================================================
Diluted earnings per share:
Income from continuing operations
before extraordinary items and
the cumulative effect of a change
in accounting priciple $ 0.43 $ 0.68 $ 1.58 $ 1.80
Income (loss) from discontinued
operations, net of taxes (0.01) 0.01 (0.03) 0.04
Extraordinary loss on early
extinguishment of debt, net of taxes - - (0.15) (0.01)
Extraordinary gain on sale of
discontinued operations, net of taxes 1.05 - 1.05 -
Cumulative effect of a change
in accounting principle, net of taxes - - (0.10) -
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Net income $ 1.47 $ 0.69 $ 2.35 $ 1.83
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Weighted average common shares and
common share equivalents outstanding 220.2 220.0 220.5 217.1
================================================================================
Cash dividends per common share $ 0.15 $ 0.15 $ 0.45 $ 0.45
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FORT JAMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine months Ended
September 26, 1999 and September 27, 1998
(in millions) 1999 1998
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Cash provided by (used for)operating activities:
Net income $518.4 $ 401.9
Depreciation expense 332.9 318.0
Amortization of goodwill 14.2 14.2
Deferred income tax provision 52.7 128.0
Restructure and other items (14.5) (20.5)
(Income) loss from discontinued operations, net of taxes 6.4 (9.0)
Gain on sale of discontinued operations, net of taxes (232.5) -
Loss on early extinguishment of debt, net of taxes 33.2 2.6
Cumulative effect of a change in accounting
principle, net of taxes 22.1 -
Change in current assets and liabilities, excluding
effects of acquisitions and dispositions:
Accounts receivable (125.0) (146.5)
Inventories (16.3) (4.0)
Prepaid expenses and other current assets (6.1) 7.2
Accounts payable and accrued liabilities (26.6) (34.3)
Other, net (16.1) (37.6)
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Cash provided by (used for)investing activities:
Expenditures for property, plant and equipment (346.5) (321.7)
Cash paid for acquisitions, net (56.7) (2.5)
Increase in net assets of discontinued operations (34.4) (9.9)
Proceeds from sale of discontinued operations 825.8 -
Other, net 2.2 14.6
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Cash provided by (used for) investing activities 390.4 (319.5)
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Cash provided by (used for) financing activities:
Additions to long-term debt 357.3 466.0
Payments of long-term debt (340.5) (94.3)
Net decrease in revolving debt (764.9) (594.6)
Premiums paid on early extinguishment of debt
and debt issuance costs (56.2) (5.6)
Redemption of preferred stock - (6.6)
Common and preferred stock cash dividends paid (98.9) (106.6)
Proceeds from exercise of stock options 15.0 27.5
Common stock purchases (53.6) -
Other, net 11.0 -
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Cash used for financing activities (930.8) (314.2)
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Increase (decrease) in cash and cash equivalents 2.4 (13.7)
Cash and cash equivalents, beginning of period 5.3 33.6
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Cash and cash equivalents, end of period $ 7.7 $ 19.9
================================================================================
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, except as
described in Note 3 of Notes to Consolidated Financial Statements) necessary to
present fairly the Company's consolidated financial position as of September 26,
1999, its results of operations for the quarters and nine months ended September
26, 1999 and September 27, 1998, and its cash flows for the nine months ended
September 26, 1999 and September 27, 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 and nine months ended September 26, 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. FASB Statement No. 137, which was issued in
July 1999, defers the Company's required adoption of Statement No. 133 until
fiscal 2001. The Company has not determined what affect, if any, Statement No.
133 will have on its results of operations or financial position.
2. Discontinued Operations
On August 2, 1999, Fort James completed the sale of its Packaging business
to ACX Technologies, Inc. for $825.8 million in cash. The Company recognized an
extraordinary gain on the sale of $381.9 million ($232.5 million after taxes, or
$1.05 per diluted share). The Packaging business consisted of the operations,
assets, and liabilities of the Company's folding carton, healthcare, and
microwave packaging manufacturing facilities. The Packaging business is treated
as a discontinued operation and the financial statements have been restated for
periods prior to the disposal date. The results of discontinued operations
include operating profits, certain unusual items, and an allocation of interest
expense and taxes.
Results of the Packaging business for the quarters and nine months ended
September 26, 1999 and September 27, 1998 were as follows:
Quarter Nine Months
-------------------------------------------------
(in millions) 1999 1998 1999 1998
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Net sales $ 51.6 $ 148.1 $ 330.5 $ 441.4
================================================================================
Income (loss) from discontinued
operations $ (2.3) $ 5.8 $ (9.1) $ 16.4
Tax benefit (expense) 0.8 (2.7) 2.7 (7.4)
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Income (loss) from discontinued
operations, net of taxes $ (1.5) $ 3.1 $ (6.4) $ 9.0
================================================================================
3. Unusual and Non-recurring Items
Results for the quarter and nine months ended September 26, 1999 included
net non-recurring credits of $13.4 million ($12.0 million after taxes, or $0.06
per diluted share) and $14.5 million ($12.7 million after taxes, or $0.06 per
diluted share), respectively. Non-recurring credits for the nine months included
a net reversal of merger-related restructure accruals due to revisions of
estimates, partially offset by a pretax charge for a permanent impairment
write-down of a non-operating asset.
Results for the quarter and nine months ended September 27, 1998 included
net pretax charges of $12.7 million ($7.8 million after taxes, or $0.03 per
diluted share) and $28.0 million ($17.3 million after taxes, or $0.08 per
diluted share), respectively. Net pretax charges for the nine months included
charges for severance, relocation, and other merger-related costs, which were
not accruable in 1997 under generally accepted accounting principles. These
charges were partially offset by contract terminations on terms more favorable
than anticipated in the restructure plan. In addition, the Company reversed
$10.5 million ($0.05 per diluted share for both the quarter and nine months) of
merger-related tax reserves established in 1997 in accordance with temporary IRS
regulations, which were subsequently rescinded.
For the third quarter and nine months ended September 26, 1999, income from
operations included $46.0 million of unusual items for severance and other costs
related to a reduction-in-force program and for antitrust and other litigation
accruals, of which $17.8 million is included in cost of sales and $28.2 million
is included in selling and administrative expense. The Company recorded a charge
of $25.0 million for a program that will reduce headcount by approximately 1,300
employees. As of September 26, 1999, headcount has been reduced by more than 400
employees and termination benefits of $0.9 million have been paid.
4. Stock Repurchase Program
Concurrent with the sale of the Packaging business, the Company began
execution of the previously announced $500 million, 18 month stock buy-back
program. During the quarter, 1.5 million shares were purchased at a total cost
of $53.6 million.
5. Inventories
The components of inventories were as follows as of September 26, 1999 and
December 27, 1998:
September December
(in millions) 1999 1998
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Raw materials $ 158.0 $ 164.2
Finished goods and work in process 503.1 510.9
Stores and supplies 172.1 163.2
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Reduction to state certain inventories 833.2 838.3
at last-in, first-out cost (13.9) (31.8)
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Total inventories $ 819.3 $ 806.5
================================================================================
6. Comprehensive Income
Comprehensive income for the quarters ended September 26, 1999 and
September 27, 1998 was $364.5 million and $229.8 million, respectively. For the
nine months ended September 26, 1999 and September 27, 1998, comprehensive
income was $429.6 million and $450.0 million, respectively. The difference
between net income and comprehensive income is due to foreign currency
translation gains and losses. Comprehensive income for the nine months ended
September 27, 1998 also included unrealized losses on securities.
7. Income Taxes
The Company's effective income tax rate was 32.4 percent for the nine
months ended September 26, 1999 compared to 34.5 percent for the first nine
months of 1998. The difference between the Company's effective income tax rate
and the statutory federal income tax rate for the first nine months of 1999, is
primarily due to state and foreign income taxes and the benefits of tax planning
strategies.
8. Extraordinary Loss on Early Extinguishment of Debt
The extraordinary loss on the early extinguishment of debt for the nine
months ended September 26, 1999 and September 27, 1998 was $54.4 million and
$4.2 million, net of income taxes of $21.2 million and $1.6 million,
respectively. During the first nine months of 1999, the Company refinanced
$125.3 million of 9.25% senior notes, $64.0 million of 8.38% senior notes, $62.0
million of 7.75% senior notes and $58.8 million of 9.0% senior subordinated
notes prior to their scheduled maturities. The debt was substantially replaced
with a e300 million, 4.75% Euro denominated bond.
9. Income Per Common Share and Common Share Equivalent
Income and share information used in determining earnings per share for the
quarters and nine months ended September 26, 1999 and September 27, 1998 were
calculated as follows:
<PAGE>
1999 1998
---------------------------------
(in millions, except per share amounts) Income Shares Income Shares
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Quarter:
Amounts used to compute basic earnings per share:
Income from continuing operations before
extraordinary items and cumulative
effect of a change in accounting principle $94.1 $ 147.6
Weighted average common shares outstanding 219.2 219.0
Effect of dilutive securities:
Options 1.0 1.0
- --------------------------------------------------------------------------------
Amounts used to compute diluted
earnings per share $94.1 220.2 $ 147.6 220.0
================================================================================
Nine months:
Amounts used to compute basic earnings per share:
Income from continuing operations before
extraordinary items and cumulative
effect of a change in accounting principle $ 347.6 $ 395.5
Preferred stock dividends - (5.2)
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Income available to
common stockholders 347.6 390.3
Weighted average common
shares outstanding 219.4 215.0
Effect of dilutive securities:
Options 1.1 2.1
- --------------------------------------------------------------------------------
Amounts used to compute
diluted earnings per share $ 347.6 220.5 $ 390.3 217.1
================================================================================
Series K, L and N preferred stocks, which were redeemed or converted in the
second quarter of 1998, were antidilutive in the first quarter of 1998.
10. 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 and nine months ended September
26, 1999 and September 27, 1998 and as of September 26, 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.
Quarter Nine Months
--------------------------------------
(in millions) 1999 1998 1999 1998
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Condensed income statement information:
Net sales $ 1,244.5 $ 1,114.6 $ 3,512.4 $3,301.2
Gross profit 367.1 373.0 1,055.9 1,080.6
Income from continuing operations
before extraordinary items and
the cumulative effect of a change
in accounting principle (11.2) (38.2) 31.9 46.8
Net income (26.5) (28.9) 6.1 66.2
================================================================================
September December
(in millions) 1999 1998
- ------------------------------------------------------------------
Condensed balance sheet information:
Current assets $ 975.0 $ 865.8
Noncurrent assets 3,116.6 3,575.7
Current liabilities 532.4 651.0
Noncurrent liabilities 4,894.7 5,129.5
==================================================================
<PAGE>
11. 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 other remedial
investigations and actions under federal and state laws. The Company, along with
six other current and former operators of pulp and paper facilities, has been
identified as a PRP for contamination by hazardous substances of the lower Fox
River. Various state and federal agencies and tribal entities are seeking
sediment restoration and natural resources damages. In February 1999, the
Wisconsin Department of Natural Resources released for public comment a draft
remedial investigation/feasibility study of the Fox River. While the draft study
did not advocate any specific restoration alternatives, it included estimated
total costs ranging from zero for 'no action' to approximately $720 million,
depending on the alternative or combination of alternatives selected. The final
restoration alternative and the Company's share of the related costs are unknown
at this time. The Company, along with other PRPs, is also participating in the
funding of a remedial investigation/feasibility study of contamination of the
Kalamazoo River. Management does not anticipate selection of a remedy prior to
2002. The Company believes that its share of the restoration costs for these
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 period.
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 September 26, 1999, Fort James' accrued
environmental liabilities, including remediation and landfill closure costs,
totaled $68.4 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.
Four other state attorney generals have brought similar suits that were
consolidated in the Florida District Court. In October 1999, the defendants
reached agreement in principal with the State of Florida by which the Florida
state case was settled. The Company admits no wrongdoing. Numerous other suits
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. Class actions also have been filed
in four 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 the various legal proceedings to which
the Company is a party cannot be predicted with certainty, it is the Company's
policy to accrue settlement costs when it is probable that such costs will be
incurred and when a range of loss can be reasonably estimated. 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 period.
<PAGE>
12. Segments
Segment sales and income from operations before unusual and non-recurring
items for the quarters and nine months ended September 26, 1999 and September
27, 1998 and total assets as of September 26, 1999 and September 27, 1998 were
as follows:
Tissue Communi- Inter-
----------------------- cations company
North Papers and and
(in millions) America Europe Dixie Fiber Corporate Total
- -------------------------------------------------------------------------------------------------------------------------
Quarter ended September 1999
Net sales $ 950.3 $ 452.1 $ 195.2 $ 209.3 $(67.6) $ 1,739.3
Intercompany sales 24.2 - 0.8 42.6 - 67.6
Income from operations before
restructure and other items (a) 125.6 50.8 20.3 1.8 (30.3) 168.2
=========================================================================================================================
Quarter ended September 1998
Net sales $ 935.7 $ 463.5 $ 193.3 $ 189.6 $(68.4) $ 1,713.7
Intercompany sales 27.7 - 0.9 39.8 - 68.4
Income from operations before
restructure and other items 228.3 59.3 20.5 2.0 (22.3) 287.8
=========================================================================================================================
Nine months ended September 1999
Net sales $ 2,763.4 $ 1,374.3 $ 591.1 $ 606.2 $(208.2) $ 5,126.8
Intercompany sales 80.1 - 2.4 125.7 - 208.2
Income from operations before
restructure and other items (a) 501.2 169.3 78.2 (21.0) (70.9) 656.8
Total assets 3,020.3 2,299.1 420.2 804.3 732.5 7,276.4
=========================================================================================================================
Nine months ended September 1998
Net sales $ 2,729.4 $ 1,387.7 $ 590.6 $ 615.5 $(209.6) $ 5,113.6
Intercompany sales 84.7 - 2.3 122.6 - 209.6
Income from operations before
restructure and other items 646.9 172.4 71.6 11.9 (66.1) 836.7
Total assets 3,046.8 2,333.0 412.9 840.2 1,181.1 (b) 7,814.0
=========================================================================================================================
(a) For the quarter and nine months ended September 26, 1999, income from
operations included $46.0 million of unusual items for severance and
litigation accruals, of which $17.8 million is included in cost of sales and
$28.2 million is included in selling and administrative expense. Details by
segment are outlined below.
Excluding Unusual Items
---------------------------
Unusual Items Third Quarter Year-to-Date
- ----------------------------------------------- ----------------------------
Tissue - North America $ 34.7 $ 160.3 $ 535.9
Tissue - Europe - 50.8 169.3
Dixie 0.9 21.2 79.1
Communications Papers and Fiber 2.1 3.9 (18.9)
Corporate 8.3 (22.0) (62.6)
- ------------------------------------------------- ----------------------------
Total $ 46.0 $ 214.2 $ 702.8
================================================= ============================
(b) Includes net assets of discontinued operations, which were previously
reported as a separate segment.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
For the quarters and nine months ended September 26, 1999 and September 27,
1998, the Company recorded certain unusual and non-recurring items. These items,
which are further discussed below, included unusual charges for severance costs
related to a reduction-in-force program, along with accruals for litigation, and
non-recurring merger-related restructure and other charges, results of
discontinued operations, extraordinary losses on the early extinguishment of
debt, an extraordinary gain on the sale of discontinued operations, and the
cumulative effect of a change in accounting principle.
1999 (a)(c) 1998 (b)(d)
--------------------------------------------------------
Excluding Excluding
(in millions, Unusual and Unusual and
except per share data) Reported Non-recurring Reported Non-recurring
- --------------------------------------------------------------------------------
Quarter:
Net sales $ 1,739.3 $ 1,739.3 $ 1,713.7 $ 1,713.7
Income from operations 181.6 214.2 275.1 287.8
Net income 325.1 110.2 150.7 144.9
Diluted earnings per share $ 1.47 $ 0.50 $ 0.69 $ 0.66
================================================================================
Nine months:
Net sales $ 5,126.8 $ 5,126.8 $ 5,113.6 $ 5,113.6
Income from operations 671.3 702.8 808.7 836.7
Net income 518.4 363.0 401.9 402.3
Diluted earnings per share $ 2.35 $ 1.65 $ 1.83 $ 1.83
================================================================================
(a) Income from operations and net income for the third quarter of 1999
included net non-recurring credits of $13.4 million ($12.0 million after
taxes or $0.06 per diluted share) for the reversal of merger-related
restructuring accruals due to revisions of estimates, partially offset by a
permanent impairment write-down of a non-operating asset, and unusual
charges of $46.0 million ($28.1 million after taxes or $0.13 per diluted
share) for severance and other costs related to a reduction-in-force
program and accruals for on-going litigation. Net income also included a
loss from discontinued operations of $2.3 million ($1.5 million after taxes
or $0.01 per diluted share) and an extraordinary gain on the sale of
discontinued operations of $381.9 million ($232.5 million after taxes or
$1.05 per diluted share).
(b) Income from operations and net income for the third quarter of 1998
included merger-related costs not accruable in 1997 of $12.7 million ($7.8
million after taxes or $0.03 per diluted share). Net income also included a
credit of $10.5 million ($0.05 per diluted share) for the reversal of
merger related tax reserves established in 1997 in accordance with
temporary IRS regulations, which were subsequently rescinded and income
from discontinued operations of $5.8 million ($3.1 million after taxes or
$0.01 per diluted share).
(c) Income from operations and net income for the first nine months of 1999
included net non-recurring credits of $14.5 million ($12.7 million after
taxes or $0.06 per diluted share) for the reversal of merger-related
restructure accruals due to revisions of estimates, partially offset by a
permanent impairment write-down of a non-operating asset, and unusual
charges of $46.0 million ($28.1 million after taxes or $0.13 per diluted
share) for severance and other costs related to a reduction-in-force
program and accruals for on-going litigation. Net income also included a
loss from discontinued operations of $9.1 million ($6.4 million after taxes
or $0.03 per diluted share), an extraordinary loss on early extinguishment
of debt of $54.4 million ($33.2 million after taxes or $0.15 per diluted
share), the cumulative effect of a change in accounting for start-up costs
of $34.1 million ($22.1 million after taxes or $0.10 per diluted share) and
an extraordinary gain on the sale of discontinued operations of $381.9
million ($232.5 million after taxes or $1.05 per diluted share).
(d) Income from operations and net income for the first nine months of 1998
included merger-related relocation costs and costs not accruable in 1997 of
$28.0 million ($17.3 million after taxes or $0.08 per diluted share). Net
income also included a credit of $10.5 million ($0.05 per diluted share)
for the reversal of merger related tax reserves established in 1997 in
accordance with temporary IRS regulations, which were subsequently
rescinded, income from discontinued operations of $16.4 million ($9.0
million after taxes or $0.04 per diluted share) and an extraordinary loss
on early extinguishment of debt of $4.2 million ($2.6 million after taxes
or $0.01 per diluted share).
Tissue - North America
Quarter Nine months
-------------------------- ---------------------------
(in millions) 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec)
- --------------------------------------------------- ---------------------------
Net sales $ 950.3 $ 935.7 1.6% $ 2,763.4 $ 2,729.4 1.2%
Income from operations,
before unusual items 160.3 228.3 -29.8% 535.9 646.9 -17.2%
Income from operations 125.6 228.3 -45.0% 501.2 646.9 -22.5%
=================================================== ===========================
Tissue - North America sales and income from operations for the third
quarter benefited from strong retail bath tissue and towel and away-from-home
bath tissue volume growth, offset by higher retail promotional spending and
lower away-from-home pricing. Higher distribution and warehousing costs and
accruals for unusual charges also adversely affected profits.
Income from operations for the nine months was generally affected by the
same factors as the quarter except that the benefits of away-from-home volume
growth were lower and inflationary costs were higher.
Tissue - Europe
Quarter Nine months
------------------------------ ---------------------------------
(in millions) 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec)
- --------------------------------------------- ---------------------------------
Net sales $ 452.1 $ 463.5 -2.5% $ 1,374.3 $ 1,387.7 -1.0%
Income from
operations 50.8 59.3 -14.3% 169.3 172.4 -1.8%
============================================= =================================
The Tissue - Europe business reported strong volume growth for the quarter
in primary branded markets, which was substantially offset by lower private
label volumes, competitive pricing activity and higher inflationary costs. In
addition, changes in foreign currency translation rates had a negative effect of
approximately 5% on sales and operating profits compared to the prior-year
quarter. The year-to-date effect of changes in exchange rates on both sales and
operating profits was not significant.
For the nine months the benefits of cost reduction efforts were largely
offset by lower average selling prices and increased promotional spending due to
competitive market conditions.
On July 1, 1999, the company completed the previously announced acquisition
of Demak'Up, broadening the Company's European product portfolio with the
leading European brand of cotton facial cleansing pads.
Dixie
Quarter Nine months
----------------------------- --------------------------
(in millions) 1999 1998 Inc/(Dec 1999 1998 Inc/(Dec)
- ---------------------------------------------------- --------------------------
Net sales $ 195.2 $ 193.3 1.0% $ 591.1 $ 590.6 0.1%
Income from operations,
before unusual items 21.2 20.5 3.4% 79.1 71.6 10.5%
Income from operations 20.3 20.5 -1.0% 78.2 71.6 9.2%
==================================================== ==========================
Income from operations for the Dixie business was marginally lower than the
prior year quarter as strong retail volumes and the benefits of cost reduction
efforts were offset by accruals for unusual items. Excluding unusual items,
profits improved by more than 3%. Retail volumes for the quarter and nine months
improved as a result of strong growth in plates and plastic party cups due to
new value packs and strength in the warehouse club channel. In addition, for the
nine months, cost reduction efforts also contributed to the improvement in
Dixie's results.
Communications Papers and Fiber
Quarter Nine months
--------------------------- -------------------------
(in millions) 1999 1998 Inc/(Dec) 1999 1998 Inc/(Dec)
- ---------------------------------------------------- -------------------------
Net sales $ 209.3 $ 189.6 10.4% $ 606.2 $ 615.5 -1.5%
Income from operations,
before unusual items 3.9 2.0 95.0% (18.9) 11.9 NM
Income (loss) from
operations 1.8 2.0 -10.0% (21.0) 11.9 NM
==================================================== ==========================
NM - not meaningful
<PAGE>
Communications Papers and Fiber results, excluding the effect of unusual
items, for the quarter and nine months reflect improvements in market pulp
volumes and cost reduction benefits. However, lower average year-to-date pricing
for uncoated free sheet, groundwood papers, and market pulp continue to offset
increased uncoated free sheet paper and pulp volumes.
Other Income
Other income for the nine months ended September 26, 1999 was $18.5 million
compared to other expense of $1.8 million in the prior year. The increase is
primarily attributable to interest income on a tax refund of $9.3 million and a
net improvement of $11.4 million in foreign currency translation gains (losses).
Discontinued Operations
On August 2, 1999, Fort James completed the sale of its Packaging business
to ACX Technologies, Inc. for $825.8 million in cash. As a result of the sale,
the Company recorded an extraordinary gain of $381.9 million ($232.5 million
after tax or $1.05 per diluted share). The operating results of the Packaging
business are treated as a discontinued operation and the financial statements
have been restated for periods prior to the disposal date. The results of
discontinued operations include operating profits, certain unusual items, and an
allocation of interest expense and taxes.
Financial Condition
Cash provided by operating activities totaled $542.8 million in the first
nine months of 1999, compared with $620.0 million in the prior year. The
decrease is primarily due to lower earnings and decreased accounts payable and
accrued liabilities, partially offset by reduced merger-related spending. The
Company's current ratio was 1.2 as of September 1999 and December 1998, while
working capital increased to $376.4 million from $292.5 million for the same
periods. The increase in working capital is primarily due to higher accounts
receivable, partially offset by decreased current deferred income taxes. Capital
expenditures were $346.5 million for the nine months ended September 1999,
compared to $321.7 million for the same period in the prior year. In the third
quarter of 1999, the Company received cash proceeds of $825.8 million from the
sale of its Packaging business, which were primarily used to reduce revolving
credit borrowings.
As of September 1999, total indebtedness was $ 3.1 billion and, including
the effect of interest rate swaps, included approximately $2.5 billion of fixed
rate and $0.6 billion of floating rate obligations. As of December 1998, total
indebtedness was $3.89 billion and, including the effect of interest rate swaps,
included $2.8 billion of fixed rate and $1.1 billion of floating rate
obligations. Outstanding borrowings of $0.2 billion were supported by revolving
credit and money market facilities as of September 1999, compared to $0.9
billion as of December 1998. Under the most restrictive provisions of the
Company's debt agreements, the Company had additional borrowing capacity of
approximately $2.0 billion as of September 1999.
Restructuring
Merger-related restructuring liabilities changed during the nine months as
follows:
December Estimate Cash Reclassi September
(in millions) 1998 Revisions Payments fications 1999
- --------------------------------------------------------------------------------
Facility closures and
write-downs of redundant
property, plant and equipment$ 24.9 $ 5.9 $ (9.1) $ (4.9) $ 16.8
Severance and other
employee-related costs 46.9 (21.3) (17.9) (3.1) 4.6
Costs of terminating
contracts and other
long-term agreements 7.8 2.9 (3.2) (3.5) 4.0
================================================================================
Accrued restructure costs $ 79.6 $ (12.5) $ (30.2) $ (11.5) $ 25.4
================================================================================
<PAGE>
Stock Repurchase Program
Concurrent with the sale of the Packaging business, the Company began
execution of the previously announced $500 million, 18 month stock buy-back
program. During the quarter, 1.5 million shares were purchased at a total cost
of $53.6 million.
Year 2000
As outlined in the Company's Form 10-K for the year ended December 27,
1998, the Company has established a Y2K Project Office to coordinate its Year
2000 ("Y2K") efforts. The Y2K Project Office is organized into various work
categories which, where appropriate, include specific work plans, contingency
plans, schedules, and goals. The vast majority of the Company's Y2K remediation
work has been completed according to previously identified time schedules.
However, the completion date for remediation of a limited number of Mainframe
Internal System applications has been revised to the fourth quarter of 1999. All
work categories are estimated to be completed prior to year-end; remaining in-
process efforts consist of a limited number of distinct modules and site
specific applications.
The Company's business continuity planning components include risk
management, contingency planning, and disaster recovery. The Company's business
continuity plans are substantially complete with mission critical processes
identified and executable recovery plans in place. On-going fourth quarter
activities will include command center staffing and communication procedures,
critical supply inventory build, and continued customer and supplier Y2K
compliance verification. In the event of an unforeseen Y2K related issue, the
command center will gather information, monitor compliance with contingency
plans, track resources, and provide centralized communications and executive
briefings.
The Company expects its Y2K project to be completed prior to year-end;
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, management believes that the Company's 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.
Approximately $4 million and $24 million in Y2K related expenses were
incurred during the quarter and nine months ended September 1999, respectively.
The Company anticipates incurring additional expense of $1 million to $2 million
to complete and test required Y2K system modifications and replacements.
Effect of New Accounting Standards
See Note 1 to the Consolidated Financial Statements.
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, the Company's ability to sustain
momentum in the retail marketplace, maintain continuing improvement in the away
from home market, successfully introduce new products, increase customer service
levels and concurrently manage distribution costs, the ability to achieve
projected net cost reductions, and the ability to successfully remediate Year
2000 problems.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
See Note 10 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
Number
10 Separation Agreement and Mutual Release
27 Financial Data Schedules for the nine months ended
September 26, 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 September 26, 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/Joseph W. McGarr
Joseph W. McGarr
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
Date: November 5, 1999
</TABLE>
SEPARATION AGREEMENT
This is a Separation Agreement dated as of October 8, 1999 between Fort
James Operating Company, its parent, affiliates, subsidiaries, predecessors,
successors and assigns (collectively "Fort James" or the "Company") and William
A. Paterson ("Paterson").
A. Paterson has been employed by Fort James as Senior Vice President
and Controller under his employment agreement dated as of May 27, 1997 (the
"Employment Agreement") and wishes to resign that employment and retire. Fort
James and Paterson have agreed on the terms under which he will terminate his
employment with the Company. The parties desire to resolve matters involving
Paterson's employment, the Employment Agreement and Paterson's separation from
employment with Fort James.
B. Paterson and Fort James further desire to settle, resolve and
release any and all existing or potential claims, controversies, differences,
disputes or disagreements, known or unknown, that Paterson may have with Fort
James in exchange for Fort James' agreement to provide Paterson certain
compensation and benefits to which he otherwise may not be entitled.
C. Fort James also desires to provide Paterson with additional
compensation over the next two (2) years in return for Paterson agreeing (i) not
to compete against Fort James, (ii) not to hire former Fort James employees who
worked with Paterson in the Controller's function at Fort James and (iii) to
cooperate with Fort James.
THEREFORE, in consideration of the above premises and the mutual
covenants and promises contained herein, Paterson and Fort James agree as
follows:
1. Termination of Employment. Paterson agrees to voluntarily terminate his
employment effective at the close of business on October 8, 1999 (his "Date
of Termination"). He will be paid all of his regular compensation and
benefits through that date. His last day of work and responsibilities shall
be October 8, 1999.
2. Severance Payments. Fort James shall pay Paterson in a lump sum, the amount
of $1,727,553 representing three (3) times the sum of (i) his current base
salary and (ii) his 1997 Management Incentive Bonus, less authorized
deductions and deductions for required taxes.
3. 1999 MIP Bonus Payment. Fort James shall pay Paterson $212,367.48
representing his bonus under the 1999 Management Incentive Plan.
4. Pension and Other Benefits.
(a) The Company will provide no medical, prescription or dental coverage
and no accidental death and dismemberment benefits to Paterson and members of
his family following his Date of Termination and Paterson expressly acknowledges
that these will not be provided. Instead, the Company agrees to pay Paterson a
lump sum or $20,000.
(b) Paterson is the beneficiary of 5,466 restricted shares and 39,800
performance shares issued pursuant to the 1996 Stock Incentive Plan (the
"Plan"). Paterson agrees to relinquish all right to the restricted and
performance shares as of October 8, 1999. In return, the Company agrees to pay
Paterson on or before October 31, 1999, an amount equivalent to the value on
October 8, 1999 of 45,266 shares of Common Stock of the Company (the "Common
Stock") determined by calculating the average of the high and low price (the
"Average Price") of the Common Stock plus an amount equal to $77,610,
representing the accrued dividends on such shares.
(c) The Company will reimburse Paterson for his initiation to Knollwood
County Club and will gross up the payment for taxes.
(d) Nothing herein shall forfeit or otherwise affect Paterson's right to
vested benefits in the Fort James 401(k) Plan and related SERP, which benefits
shall be paid to Paterson according to such plan.
(e) Paterson shall not be entitled to any other bonus payments or profit
sharing awards including any payments under the Management Incentive Plan.
(f) All payments referred to herein are gross payments from which Fort
James may withhold legal and authorized amounts for payment to taxing
authorities as required by law.
(g) The Company shall pay Paterson $21,000 for tax advice and tax
preparation expenses for calendar years 2000 through 2002.
(h) The Company will pay Paterson $45,466.82 representing the mortgage
buydown for three (3) years commencing 1/1/00 on his Lake Forest, Illinois
residence.
(i) The Company will pay the cost of the $1,500,000 life insurance policy
provided to Paterson under the split-dollar insurance program for the balance of
the fifteen (15) years from the date of issue. Thereafter, Paterson will be
responsible for the payments should he elect to continue the policy. For three
(3) years following his date of termination, the Company will maintain for
Paterson his long-term disability coverage and his group universal life
insurance as currently provided.
(j) The Company will reimburse Paterson for reasonable legal expenses in
connection with the negotiation of this Separation Agreement, not to exceed
$5,000. The Company agrees to pay as incurred, to the full extent permitted by
law, all legal fees and expenses which Paterson may reasonably incur as a result
of any contest (regardless of the outcome thereof) by the Company, Paterson or
others of the validity or enforceability of, or liability under, any provision
of the Employment Agreement or this Separation Agreement or any guarantee of
performance thereof (including as a result of any contest by Paterson about the
amount of any payment pursuant to this Agreement), plus in each case interest on
any delayed payment at the applicable Federal rate provided for in Section 7872
(f) (2) (A) of the Internal Revenue Code of 1986, as amended (the "Code").
(k) The Company acknowledges that upon his retirement, Paterson's options
for 25,000 shares granted on January 6, 1999 shall be vested and subject to
exercise for three (3) years from the Date of Termination.
(l) Paterson's existing 1996 and 1998 stock options shall be amended
effective October 8, 1999 as set forth in Exhibit A hereto.
5. Method of Payment. All cash payments required by this Agreement shall be
made by wire transfer to Paterson's account or accounts which he shall
designate in writing to the Company's Senior Vice President, General
Counsel. Such transfers shall be authorized and released in advance so as
to arrive in Paterson's account(s) by applicable due dates.
6. Company Car. Fort James agrees to transfer to Paterson no later than
October 31, 1999, the certificate of title to the automobile previously
provided him for his personal and business use. Paterson acknowledges that
after transfer of the title to the car to him, Fort James will no longer be
responsible for providing insurance or maintenance for the vehicle in any
manner and he shall be responsible for all costs associated with the
vehicle from that date forward.
7. General Release.
(a) In consideration of all payments due him hereunder or under the
Employment Agreement, Paterson hereby agrees, for himself, his successors,
heirs, representatives, executors, agents and assigns, to release and forever
discharge Fort James, including its affiliates, subsidiaries, parents,
predecessors, successors and assigns and their respective directors, officers,
employees and agents thereof from any and all claims, debts, responsibilities
and liabilities of every kind and character whatsoever, known or unknown,
suspected or unsuspected, which he has ever had or may have against Fort James,
including but not limited to, any and all claims arising out of Paterson's
employment or termination of employment with Fort James. Paterson acknowledges
that this Release includes any and all claims whether in contract or in tort,
claims that may be brought on his behalf by others, claims brought before any
court or administrative agency, or claims under any national, federal, state or
local statute or ordinance, including any claims under Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with
Disabilities Act or any other law.
It is acknowledged that this Separation Agreement does not release
Paterson's right to any vested benefits in the Fort James Corporation
StockPlus Plan (the "StockPlus Plan") and related SERP. Paterson's
eligibility for benefits in the StockPlus Plan will be controlled by the
terms of the plan.
(b) Fort James, including its affiliates, subsidiaries, parents,
predecessors, successors and assigns and their respective directors, officers,
employees and agents thereof hereby release and forever discharge Paterson, his
successors, heirs, representatives, executors, agents and assigns from any and
all claims, which it has ever had or may have against Paterson or any of the
foregoing persons, arising out of (x) Paterson's employment or termination of
employment with Fort James or (y) any event, condition or circumstance that
existed or arose on or prior to the Date of Termination. The foregoing release
will not apply to Paterson's obligations under this Separation Agreement. Fort
James acknowledges that this Release includes all claims whether in contract or
in tort, claims that may be brought on its behalf by others, claims brought
before any court or administrative agency, or claims under any national,
federal, state or local statute or ordinance.
8. Special Release Notification. This Separation Agreement includes a release
of all claims under the Age Discrimination in Employment Act, ("ADEA"),
and, therefore, pursuant to the requirements of the ADEA, Paterson
acknowledges that he has been advised (1) that this release includes but is
not limited to, all rights or claims arising under the ADEA up to and
including the date of execution of this release, but does not waive rights
or claims that may arise after the date of execution; (2) to consult with
an attorney or other advisor of his choosing concerning his rights and
obligations under this release; (3) to fully consider this release before
executing it, and that he has been offered at least twenty-one (21) days to
do so; (4) that this release shall become effective and enforceable seven
(7) days following execution of this Separation Agreement, during which
seven (7) day period Paterson understands that he may revoke his acceptance
of this Separation Agreement by delivering written notice to Clifford A.
Cutchins, IV, Senior Vice President and General Counsel, Fort James
Corporation, 1650 Lake Cook Road, Deerfield, Illinois 60015.
9. Post Employment Restrictions, Obligations
(a) Paterson agrees to comply with the terms of his Confidentiality
Agreement executed between himself and Fort James and not to otherwise use or
disclose Fort James confidential information in the future. A copy of this
Agreement is attached as Exhibit B.
(b) In return for the extension of the option exercise period, the vesting
and payment for the restricted shares and the performance shares as set forth in
Paragraph 4(b), Paterson agrees, in order to protect the Company's goodwill,
trade secrets and confidential information and thereby help ensure the long-term
success and development of the business, not to engage in competitive activities
on behalf of a competitive business for a period of two (2) years following the
Date of Termination with the Company for whatever reason, without first
obtaining written permission from either the Senior Vice President and General
Counsel or the Senior Vice President, Human Resources, which shall not be
unnecessarily withheld or delayed. "Engage in competitive activities" means
rendering services or being involved directly or indirectly in any way or in any
capacity whether as an officer, director, employee, agent, owner, shareholder or
consultant (excluding ownership of less than 5% of the stock of a publicly
traded company), in the manufacture, development, promotion or sale of any
towel, tissue or foodservice cup, plate or cutlery product of the type
manufactured by Fort James (the "Covered Products"). A "competitive business"
means any person or entity engaged in the manufacture or non-retail sale of the
Covered Products. Paterson acknowledges that products of the Company are sold
throughout North America and Western Europe. Accordingly, the geographic area
covered by this restraint shall include any county, city, town, province or
comparable unit of local government where the Covered Products are manufactured,
marketed or sold by the Company. The parties agree that this non-compete
provision supersedes all prior agreements between them on this subject.
(c) Paterson agrees for a period of two (2) years not to solicit directly
or indirectly for employment any employee or former employee of Fort James or
its affiliates, as of October 8, 1999, without the written consent of the Senior
Vice President, Human Resources for the Company, which shall not be unreasonably
withheld or delayed. Further, Paterson agrees that if any such Fort James
employee approaches him for employment, he will refer them to the appropriate
hiring official of his employer and will have no involvement either in the
hiring of the employee or in working with the employee should such employee work
for the same company for which Paterson works.
(d) Paterson agrees that as Senior Vice President and Controller, he
possesses intimate knowledge about all aspects of the Company's business,
business plans and other confidential or propriety information. He also agrees
that these restrictions are reasonable and necessary to protect the Company's
business and in consideration of the substantial benefits provided him
hereunder. If Paterson violates any of his obligations under this paragraph 9,
the Company shall have no further obligation to him under this Agreement as on
the date of breach. Paterson agrees that the Company will be irreparably harmed
and will be entitled to immediate injunctive relief in the event of such breach
in addition to any other monetary remedies.
(e) If any aspect of the above post employment restrictions are deemed void
or unenforceable by any court of competent jurisdiction, the parties agree that
the court should modify these restrictions to a point they would be enforceable
and enforce the restrictions to that extent
10. Indemnity. Fort James agrees to continue to indemnify and save Paterson
harmless from all claims, actions and liabilities which may arise in
connection with his reasonable performance of his duties for the Company.
Such indemnification shall be to the same extent as its indemnification of
active executives of equal rank but shall relate only to Paterson's alleged
actions or failure to act during the period in which he was employed by the
Company.
11. Future Cooperation. Paterson agrees to cooperate in providing transition
assistance related to his departure as may be reasonably required of him by
Fort James, including presences as a witness in legal proceedings as may be
necessary, both before and after his Date of Termination. Fort James will
reimburse Paterson $2,500 per day plus any reasonable expenses incurred in
this regard subject to written authorization from the Senior Vice
President, Human Resources.
12. Resignation. By his signature hereto, Paterson hereby resigns his position
as Senior Vice President and Controller and any and all other positions
with the Company, its subsidiaries, its parent and its affiliates.
13. Confidentiality. Paterson agrees that he will not divulge the contents of
this Separation Agreement which are agreed to be confidential in nature
except (a) Paterson may divulge the contents to his spouse, attorney,
financial advisor and income tax preparer; or (b) except as may be required
to comply with legal process. It is further agreed by Paterson that if it
is necessary that this Agreement or a significant portion be disclosed to
those listed above, Paterson agrees to instruct and request each of them,
or use such other efforts as may be reasonable, to keep any information so
disclosed confidential. If Paterson materially breaches this provision, the
Company will have no further obligation to him under this Agreement.
14. Entire Agreement. Paterson understands and agrees that all terms of this
Separation Agreement are contractual and are not a mere recital. The
parties represent and warrant that in negotiating and executing this
Separation Agreement, each have had an opportunity to consult with legal
counsel or other representatives of their own choosing concerning the
meaning and effect of each term or provision hereof, and that there are no
representations, promises or agreements other than those specifically
referred to or set forth in writing herein.
The parties represent and warrant that they have read this Separation
Agreement in its entirety, fully understand and agree to its term and
provisions, and intend and agree that it is a final and legal binding
settlement and release of all claims Paterson may have.
15. Severability. If any portions of this Separation Agreement are void or
deemed unenforceable for any reason, the unenforceable portions shall be
deemed severed from the remaining portions of this Agreement which shall
otherwise remain in full force and effect.
16. No Waiver. The decision of either party not to assert a claim for breach of
the Separation Agreement shall not be construed as a waiver of that or any
subsequent breach which might occur.
17. Corporate Authority. The officer executing this Separation Agreement on
behalf of Fort James represents that he has full corporate authority to do
so and to bind the Company, its parents, affiliates, subsidiaries,
predecessors, successors and assigns.
18. Governing Law. This Agreement shall be governed and construed according to
the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties have affixed their signatures:
By:/s/William A. Paterson
William A. Paterson
FORT JAMES OPERATING COMPANY
By:/s/Daniel J. Girvan
Daniel J. Girvan
Senior Vice President
<PAGE>
FORT JAMES CORPORATION
EXHIBIT A
AMENDMENT TO STOCK OPTIONS
FORT JAMES CORPORATION (the "Company") and William A. Paterson (the
"Participant") hereby agree to this Amendment to Stock Options as of October 8,
1999.
WHEREAS, the Participant has been granted certain options to acquire
shares of common stock of the Company ("Company Stock") which are listed below.
WHEREAS, in connection with the Participant's termination of employment
without cause, the Company and the Participant wish to modify certain terms of
such options.
WHEREAS, the terms of this Amendment to Stock Options have been
approved by the Compensation Committee of Fort James Corporation (the
"Committee").
THEREFORE, in consideration of the foregoing and the mutual covenants
hereinafter, the Company and the Participant agree as follows:
1. From the options granted to the Participant on January 6, 1998 to purchase
60,000 shares, all 60,000 shares (the "1998 Options") shall be vested and
exercisable as of October 8, 1999.
2. The 1998 Options and the options for 20,000 shares granted to Participant
on January 25, 1996 and 25,000 shares July 1, 1996 (the "1996 Options") may
be exercised at any time on or before October 8, 2001. To the extent not
previously exercised, the 1998 and 1996 Options shall expire and cease to
be exercisable on October 9, 2001.
3. Any provisions of the options relating to the time for vesting or the
period to exercise the 1996 and 1998 Options are superseded by this
Amendment to Stock Options, including provisions requiring the continuing
employment of the Participant or measuring periods to exercise the options
based on termination of employment by the Participant.
4. To the extent not specifically amended by the provisions of this Amendment
to Stock Options, the terms and conditions of the options shall continue to
apply.
5. Any controversy concerning this Amendment to Stock Options shall be
resolved by the Committee as it deems proper, and any interpretation of
this Amendment to Stock Options or other decision of the Committee shall be
final and conclusive.
6. If the Participant dies before an option expires as set forth and
established in Section 3 hereof, all of the options that he held at the
time of his death may be exercised by the personal representative of his
estate. The options may be exercised at any time until the expiration date
of the options.
7. As a further condition of this Amendment to Stock Options, and in
consideration of receipt of these rights, the Participant agrees to comply
with all provisions of the Separation Agreement between the Participant and
Fort James Operating Company. If the Committee determines that the
Participant has violated the provisions of the Separation Agreement, the
options shall terminate as of the date when a violation of the Separation
Agreement first occurred as determined by the Committee (the "Violation
Date") and the options shall no longer be exercisable as of the Violation
Date.
8. Any notice to be given under the terms of this Amendment to Stock Options
shall be addressed to Fort James Corporation, Corporate Secretary, P.O. Box
89, Deerfield, Illinois 60015, and any notice to be given to the
Participant or to his personal representative shall be addressed to him at
the last address on the records of the Company or at such other address as
either party may hereafter designate in writing to the other. Notices shall
be deemed to have been duly given if mailed, postage prepaid, addressed as
aforesaid.
<PAGE>
IN WITNESS WHEREOF, the Company and the Participant have caused this
Amendment to Stock Options to be signed, as of the dates below.
FORT JAMES CORPORATION
Date: September 29, 1999 By:/s/Miles L. Marsh
Miles L. Marsh
Chairman of the Board and CEO
WILLIAM A. PATERSON
Date: September 29, 1999 By:/s/William A. Paterson
William A. Paterson
<PAGE>
EXHIBIT B
CONFIDENTIALITY AND PATENT AGREEMENT
The word "Employer" as used herein shall mean James River Corporation
and all its present and future divisions, subsidiaries and affiliates, and the
obligations assumed by me herein shall be for the benefit of all regardless of
by which division, subsidiary or affiliate I may now, heretofore, or hereafter
be employed.
In consideration of my employment by Employer, I hereby agree to the
terms and conditions of this Agreement as follows:
1. CONFIDENTIALITY. I recognize that by virtue of my employment and training,
I will have access to information relating to the business of Employer
which I acknowledge must remain confidential. I recognize and agree that
this information is a valuable, special and unique asset of Employer's
business, and if it were to be known and used by myself or any entity
engaged in a similar business, it would be harmful and detrimental to the
interests of Employer.
Accordingly, unless specifically authorized in writing, I shall not use
or disclose, either during or after my employment, any secret or confidential
information, data or trade secrets relating to the business of Employer. Such
information, data or trade secrets shall include, but are not limited to, any
information concerning Employer's products, processes, services, inventions,
manufacturing methods, purchasing, accounting, engineering, marketing,
merchandising and selling or any other information concerning Employer's
business or its manner of operation and which is not generally known in
Employer's industry. I will disclose such information, data or trade secrets
only to other employees of Employer as required by my duties.
I understand why the foregoing information should not be divulged to
others, and that I also may learn certain things which may or may not require
confidential treatment. I recognize that it may often be difficult to draw an
exact line of distinction as to what does or does not require confidential
treatment, although, as a general rule, it may be said that any unpublished
information is secret and confidential. In those cases where doubt arises, I
will obtain written permission from Employer before using or divulging the
information in question.
Upon separation from my employment with the Company, regardless of the
reason, I shall promptly deliver to Employer all memoranda, notebooks, letters
and copies thereof, and all materials of a secret or confidential nature
relating to Employer's business, or its clients, and which are in my possession
or under my control.
This Confidentiality provision shall be construed as independent of any
other provision of this Agreement. The existence of any claim or cause of action
against Employer by me, whether predicated on the Agreement or otherwise, shall
constitute a defense to the enforcement of the Confidentiality provision by
Employer.
2. PATENT. I shall disclose promptly to Employer or its nominee any and all
inventions, discoveries and improvements related to the business or
activities of Employer, whether patentable or not, conceived or made by me
during the period of my employment or within one year thereafter. I shall
assign and agree to assign to Employer or its nominee all my interest in
such inventions, discoveries and improvements. Whenever requested to do so
by Employer, I shall execute any and all applications, assignments or other
instruments which Employer shall deem necessary to apply for and obtain
letters patent of the United States or any foreign country or to otherwise
protect the Company's interest therein. These obligations shall be binding
upon my assigns, executors, administrators and other legal representatives.
3. REMEDIES. I agree that if I breach or threaten to breach any provision of
this Agreement, the Company's remedies at law may be inadequate, and the
Company shall be entitled to an injunction restraining me from such breach
or threatened breach. Nothing contained herein shall be construed as
prohibiting the Company from pursuing any other remedies available to it
for such breach or threatened breach, including the recovery or money
damages, costs and attorney fees.
4. SEVERABILITY AND ENFORCEMENT. If any provision of this Agreement is void,
or so declared, such provision shall be deemed, and hereby is, severed from
this Agreement, which shall otherwise remain in full force and effect.
5. GOVERNING LAW. This Agreement shall be governed by the law of Connecticut.
IN WITNESS WHEREOF, parties hereto have executed this Agreement this
30th day of January, 1996.
Date:February 8, 1996 By:/s/William A. Paterson
William A. Paterson
Employee
By:/s/Charles S. Reed James River Corporation
Charles S. Reed Employer
Witness
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORT JAMES
CORPORATION'S SEPTEMBER 26, 1999,
FORM 10-Q FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<NAME> FORT JAMES CORPORATION
<CIK> 0000053117
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> SEP-26-1999
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 965
<ALLOWANCES> 0
<INVENTORY> 819
<CURRENT-ASSETS> 1,924
<PP&E> 7,706
<DEPRECIATION> 3,456
<TOTAL-ASSETS> 7,276
<CURRENT-LIABILITIES> 1,548
<BONDS> 2,877
0
0
<COMMON> 22
<OTHER-SE> 1,329
<TOTAL-LIABILITY-AND-EQUITY> 7,276
<SALES> 5,127
<TOTAL-REVENUES> 5,127
<CGS> (3,518)
<TOTAL-COSTS> (4,456)
<OTHER-EXPENSES> 19
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (176)
<INCOME-PRETAX> 514
<INCOME-TAX> (167)
<INCOME-CONTINUING> 348
<DISCONTINUED> (6)
<EXTRAORDINARY> 199
<CHANGES> (22)
<NET-INCOME> 518
<EPS-BASIC> 2.36
<EPS-DILUTED> 2.35
</TABLE>
