SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended Commission File
December 27, 1998 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, Illinois 60015-4753
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code
(847) 317-5000
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
---------------------------- -----------------------
Common Stock, $.10 par value New York Stock Exchange
Rights to Purchase Series M New York Stock Exchange
Cumulative Participating
Preferred Stock, $10 par value
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 (check mark) No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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Aggregate market value of voting stock held by non-affiliates
of the registrant, at close of business, February 24, 1999...........$6,470,274,110
Number of shares of $.10 par value common stock outstanding,
as of February 24, 1999.............................................. 220,734,298
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Documents Incorporated By Reference:
(1) Portions of the registrant's Annual Report to Shareholders for the
year ended December 27, 1998, incorporated into Parts I and II hereof; and (2)
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on April 22, 1999, incorporated into Part III hereof.
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FORT JAMES CORPORATION
ANNUAL REPORT ON FORM 10-K
DECEMBER 27, 1998
TABLE OF CONTENTS
PART I
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Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7a Quantitative and Qualitative Disclosures about Market Risk 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
PART III
Item 10. Directors and Executive Officers of the Registrant 13
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 14
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PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Fort James Corporation ("Fort James" or the "Company") is a leading
worldwide manufacturer and marketer of paper-based consumer products, including
towel and tissue products and disposable tabletop and foodservice products. The
Company offers a complete tissue-based product line ranging from premium and
near-premium virgin pulp-based products to value and economy products
manufactured primarily from recycled fibers. The Company's principal towel and
tissue products include bathroom tissue, paper towels, table napkins, boxed
facial tissue and wipers. Disposable tabletop and foodservice products include
paper and plastic cups, paper plates, and plastic cutlery. The Company also
produces and markets communications papers and paper-based packaging for food
and other consumer products.
Fort James was created by the merger of a subsidiary of James River
Corporation of Virginia ("James River") with and into Fort Howard Corporation
("Fort Howard") in August 1997 (the "Merger"). The Merger was accounted for as a
pooling of interests. In connection with the Merger, James River was renamed
"Fort James Corporation."
Fort James' principal U.S. retail tissue brands include QUILTED NORTHERN
bathroom tissue, BRAWNY paper towels, MARDI GRAS printed napkins and paper
towels, VANITY FAIR premium dinner napkins, NORTHERN paper napkins, and SOFT'N
GENTLE bath and facial tissue. The Company's principal retail tabletop brand is
DIXIE disposable cups and plates. The Company believes that it is the leading
supplier of tissue and disposable tabletop products to the growing warehouse
club channel. The Company also believes it is the leading supplier of private
label tissue products. The Company is a leading producer of tissue products for
the U.S. away-from-home channel and is also one of the largest producers of
disposable cups, plates and related products for the away-from-home food service
industry.
In Europe, sales into retail channels are supported by both branded and
private label product offerings. Branded European products include LOTUS
bathroom tissue and handkerchiefs, VANIA feminine hygiene products, OKAY kitchen
towels, and MOLTONEL bathroom tissue, sold primarily in France; LOTUS kitchen
towels, sold in the Netherlands; COLHOGAR bathroom tissue and kitchen towels,
sold in Spain; TENDERLY bathroom tissue, sold in Italy; EMBO bathroom tissue,
sold in Finland; DELICA bathroom tissue and kitchen towels, sold in Greece;
NOUVELLE, KITTENSOFT and INVERSOFT bathroom tissue, sold in the British Isles;
and SELPAK premium tissue products, sold in Turkey.
Based on its 25% operating margin, the Company believes that it is among
the lowest-cost producers of tissue products in North America. This cost
advantage is derived from a number of factors, including the size and scale of
certain of the Company's manufacturing plants, the competitive condition of its
tissue-making manufacturing assets and the benefits realized from its
proprietary deinking technology.
Portions of the Fort James Corporation Annual Report to Shareholders for
the year ended December 27, 1998, (the "1998 Annual Report") are incorporated in
this Form 10-K by specific reference.
BUSINESS INITIATIVES
Fort James' near-term business initiatives focus on three areas: leveraging
revenue growth opportunities; pursuing aggressive cost reduction, including
merger synergies; and achieving financing cost savings.
(1) LEVERAGING REVENUE GROWTH OPPORTUNITIES
Fort James has extensive and geographically-balanced manufacturing and
customer bases - both domestically and in Europe. With manufacturing facilities
located across the U.S., the Company has the capability to alter premium and
economy product mix at its various facilities. This broad geographical balance
creates revenue growth opportunities not available to geographically restricted
competitors.
Fort James also has attractive international revenue growth
opportunities both in Europe, where the Company believes it has greater than
average growth opportunities, and in selected emerging markets. Geographically,
Fort James has a strong presence in southern European countries such as Spain,
Italy, Greece and Turkey, where per capita consumption of tissue products is
growing faster than in the northern and western European regions. Additionally,
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the Company is well positioned to take advantage of the less developed, faster
growing away-from-home channel in Europe through its away-from-home expertise
and proprietary deinking technology. The Company is also pursuing growth
opportunities for tissue sales in selected emerging markets. In 1998, the
Company began an expansion project to increase annual tissue capacity at its
Turkish joint venture by 50,000 tons. The expansion project should strengthen
the venture's already leading position in Turkey, as well as providing it with
greater access to neighboring markets in the Middle East, Asia, Russia and other
former Soviet republics. In 1995, the Company formed a joint venture for a
tissue converting operation in Shanghai, China and in 1997 opened a tissue
converting plant in Russia.
In 1998, the Company purchased the assets of Beckett Technologies, a
microwave packaging company headquartered in Ontario, Canada, thereby building
upon the value-added nature of its Packaging business. These assets strengthen
and expand the Company's line of microwave packaging and open up a new and
potentially high-growth market.
(2) AGGRESSIVE COST REDUCTION
In 1998, the Company implemented a number of cost-savings programs that
had been previously identified as a result of the Merger. During 1998, the
Company achieved estimated merger synergies and cost savings, net of $80 million
of inflation, of $150 million. Key components of the savings were $98 million
from purchasing and material substitution, $37 million from headcount
reductions, and $30 million from plant closures.
During 1998, the Company continued to rationalize its manufacturing
base. Tissue mills in Ashland, Wisconsin, Carthage, New York and Cava dei
Tirreni, Italy were permanently closed. Additional closures of a cutlery plant
in Houston, Texas, a foodwrap plant in Menasha, Wisconsin, and carton plants in
Redmond, Washington, and Chambersburg, Pennsylvania were announced. Management
believes that the closure of these smaller, less efficient facilities, and the
transfer of some of their assets to larger, more modern facilities, should make
the Company more efficient and cost effective.
During 1998, the Company also rationalized its Dixie line of products to
better focus its marketing and distribution efforts.
In August 1998, the Company's newest tissue machine, which is located at
the Rincon, Georgia mill, began production. This is the Company's eleventh
superwide tissue machine. Only one machine of a similar size currently operates
outside the Fort James system. The size and efficiency of the Company's
machinery reinforce its position as one of the industry's lowest cost producers.
In addition, productivity improvements to the Company's paper machines in 1998
resulted in approximately 86,000 tons of incremental tissue production.
(3) FINANCING COST SAVINGS
Fort James is focused on lowering financing costs, both through
refinancing higher-cost debt and aggressively reducing debt, which is expected
to be one of the primary uses of the Company's free cash flow in the near-term.
During 1998, the Company simplified its capital structure and reduced
cash dividend requirements by redeeming and converting all of its Series K
$3.375 Cumulative Convertible Exchangeable Preferred Stock, its Series L $14.00
Cumulative Convertible Exchangeable Preferred Stock and its Series N $14.00
Cumulative Convertible Exchangeable Preferred Stock (the "Preferred Stock").
Substantially all of the outstanding Preferred Stock was converted into 9.5
million shares of common stock with the balance redeemed for $1.8 million in
cash. The conversion reduced annual net dividend payments by approximately $19
million.
At the same time, the Company continued to aggressively lower corporate
debt. During 1998, total debt was reduced by more than $300 million and interest
expense decreased by $63 million.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" which establishes standards for the way public companies report
information about operating segments in both interim and annual financial
statements, including related disclosures about products and services,
geographic areas, and major customers. As a result, the Company's segments,
which are organized based on the products it offers, have been restated as
follows: (i) Tissue - North America, which manufactures and markets paper-based
consumer towel and tissue products; (ii) Tissue - Europe, which also
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manufactures and markets paper-based consumer towel and tissue products, as well
as feminine hygiene products and health care and pharmacy items; (iii) Dixie,
which manufactures and markets disposable plates, cups and cutlery principally
under its DIXIE brand; (iv) Packaging, which manufactures folding cartons and
paperboard principally for food and other consumer products manufacturers; and
(v) Communications Papers, which manufactures and markets uncoated business and
printing papers serving the commercial printing and office markets, and Fiber,
which includes the Harmon Associates wastepaper brokerage business and market
pulp sales to both intercompany and third-party customers. The Communications
Papers and Fiber businesses, for which separate reporting is not required, have
been aggregated. Both the Dixie and Fiber businesses were previously included in
the Consumer Products - North America business. Financial information on the
Company's segments for the three years ended December 27, 1998, is presented in
Note 14 of Notes to Consolidated Financial Statements in the 1998 Annual Report,
which information is incorporated herein by reference.
(C) NARRATIVE DESCRIPTION OF BUSINESS
PRINCIPAL PRODUCTS
Fort James processes basic raw materials, such as wood, wood pulp,
wastepaper, paperboard and plastic resins, into products which generally are
close to or in their end use form.
TISSUE-NORTH AMERICA
In 1998, the Tissue-North America business had sales of $3.4 billion,
representing 47% of consolidated sales. Operating profits were $865 million in
1998 and represented 69% of operating profits before corporate expenses and
restructure and other unusual items.
In the retail channel, which accounts for approximately 62% of sales,
Fort James produces both branded and private label products. The Company's
principal retail tissue brands (rankings are based on U.S. industry statistics
for the 52 week period ended January 16, 1999) include QUILTED NORTHERN bathroom
tissue (the number two bathroom tissue brand), BRAWNY paper towels (the number
two paper towel brand), MARDI GRAS printed napkins (the leading paper napkin
brand) and paper towels, VANITY FAIR premium dinner napkins (the number one
premium napkin brand), NORTHERN paper napkins (the number three paper napkin
brand), and SOFT'N GENTLE bathroom and facial tissue.
Fort James believes it is the leading supplier of private label towel
and tissue products in the U.S., with an estimated market share of approximately
40%. The Company's private label customers include retailers such as Wal-Mart,
Kroger, Aldi and Federated Stores. Additionally, the Company believes it is the
leading supplier of towel and tissue products to the warehouse club channel,
which includes Price/Costco and Sam's Clubs.
The away-from-home channel, in which the Company sells its towel and
tissue products to foodservice, janitorial supply and sanitary paper
distributors for use in restaurants, offices, factories, hospitals, schools and
hotels, is also an important distribution channel for the Company. Fort James
believes it is the leading producer of towel and tissue products for the 2.2
million ton U.S. away-from-home channel, where it estimates its share at
approximately 40% of total industry revenues. Based on internal Company
estimates, Fort James believes it holds the leading position in the sale of
away-from-home towels, bathroom tissue, and napkins and the number two position
in away-from-home wipers and facial tissue.
TISSUE-EUROPE
In 1998, the Tissue - Europe business had sales of $1.9 billion,
representing 26% of consolidated sales. Operating profits were $236 million in
1998 and represented 19% of operating profits before corporate expenses and
restructure and other unusual items.
During 1998, tissue-based products accounted for approximately 85% of
annual sales, feminine hygiene products accounted for 6% of sales, ancillary
products, such as health care and pharmacy items, accounted for 4% of sales, and
unconverted tissue parent rolls accounted for the remaining 5% of sales. Fort
James sells its towel and tissue products through both retail and away-from-home
distribution channels in Europe. Sales into retail channels are supported by
both branded and private label product offerings. Approximately 78% of European
towel and tissue sales were into retail distribution channels and the remaining
22% were into away-from-home channels.
With production facilities in 10 countries, Fort James has a broad,
pan-European base, and is among the category leaders in most European countries,
with the exception of Germany, Austria and Switzerland, where the Company has no
operations. The Company's largest European operations are in France and the
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United Kingdom, which account for approximately 41% and 30%, respectively, of
sales. Based on its estimates, the Company believes it holds the leading
position in French towel and tissue sales, with a share greater than 35%, and
the number two position in the British Isles, with a share greater than 30%. A
significant portion of sales in the British Isles are private label. Fort James
is also well-represented in the faster-growing southern European and
Mediterranean regions including Spain, Italy, Greece and Turkey, where the
Company believes its shares of tissue sales approximate 16%, 9%, 15% and 60%,
respectively.
The Company's principal European brands include LOTUS bathroom tissue and
handkerchiefs (both hold a number one position in France), MOLTONEL bathroom
tissue (the number two tissue in France), LOTUS kitchen towels (the number one
kitchen towel in the Netherlands), OKAY kitchen towels (the number one kitchen
towel in France), COLHOGAR bathroom tissue and kitchen towels (both hold number
one positions in Spain), KITTENSOFT towels and bathroom tissue (both hold number
one positions in Ireland), EMBO bathroom tissue (the number one tissue in
Finland), TENDERLY bathroom tissue (the number two tissue in Italy), DELICA
bathroom tissue and kitchen towels (both hold number two positions in Greece),
VANIA feminine hygiene products (the leader in France), and SELPAK premium
tissue products.
DIXIE
During 1998, the Dixie business reported operating profits of $89
million representing 7% of operating profits before corporate expenses and
restructure and other unusual items, on sales of $776 million, which represents
11% of consolidated sales. The Dixie business is conducted primarily in North
America.
Similar to the tissue business, the Company's disposable tabletop and
foodservice products are sold through both retail and away-from-home
distribution channels. Approximately 53% of sales are into retail distribution
channels and the remaining 47% are into away-from-home distribution channels.
The Company's principal retail tabletop brand is DIXIE, ranked number
one for disposable cups and number two for disposable plates/bowls. The Company
believes that it is also the leading supplier of tabletop products to the
warehouse club channel, and is one of the largest producers of disposable cups,
plates and related products for the away-from-home foodservice industry.
PACKAGING
In 1998, the Packaging business had sales of $718 million, representing
8% of consolidated sales, and operating profits of $57 million, representing 5%
of operating profits before corporate expenses and restructure and other unusual
items. The Packaging business is concentrated primarily on the sale of
paper-based folding cartons for packaging food, health care products and other
consumer products. Folding cartons and other converted packaging account for
more than 82% of current annual sales, with the balance represented by sales of
unconverted paperboard. The Packaging business is conducted primarily in North
America.
The Company's carton operations are backward integrated to a 300,000 ton
per year bleached paperboard operation and a 320,000 ton per year coated
recycled paperboard operation. The bleached paperboard mill also provides cup
and plate stock for the Company's DIXIE line of disposable tabletop products.
The Company believes it is currently ranked number three in sales of
folding cartons in the United States; holds leading positions in both web
lithographic and flexographic technology for printing and converting folding
cartons for packaging food, health care products and other consumer products;
and is a leader in the development and introduction of new microwave packaging
technologies.
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COMMUNICATIONS PAPERS AND FIBER
For 1998, Communications Papers and Fiber sales totaled $797 million and
represented 8% of consolidated sales. Operating profits for 1998 were $2
million.
The Communications Papers business is concentrated on the sale of
printing and publishing papers used in brochures, catalogs, manuals, direct mail
and advertising inserts, and on cut-size office printing and copying papers used
in high-speed printers, copiers and offset duplicators. The Company is the
largest producer of uncoated communications papers in the western United States
and its EUREKA! brand is the number one recycled brand of office and printing
papers in the western United States.
The Company's domestic operations are fully integrated to either its
kraft or deinked pulp operations, with excess production sold as market pulp by
the Fiber business. Fiber sales include both intercompany sales of market pulp
and third-party sales of wastepaper.
MARKETING
The Tissue-North America and Dixie businesses have organized their
marketing efforts both along distribution channels and by product line.
Marketing of the Company's Packaging products is managed at the product group
level. Fort James' consumer products are marketed directly to customers through
national and regional sales organizations. The Company's retail sales force
markets both consumer towel, tissue and tabletop products directly to grocery
stores, drug stores and mass merchandisers. Away-from-home towel and tissue
products are primarily sold through outside distributors, who generally focus on
specific market segments. Regional distribution centers located throughout the
United States are utilized to minimize inventories and transportation costs.
Marketing of Fort James' consumer products within Europe is generally
similar to such efforts in the United States. However, national (individual
country) sales organizations are necessary due to customer preferences and
language and cultural differences among countries. Additionally, logistics and
distribution costs remain much higher in Europe than in the United States, and
thus, the majority of products are produced and sold within national or regional
markets.
RAW MATERIALS AND SUPPLIES
Fort James utilizes a variety of raw materials in its manufacturing
processes. These include wood, wood pulp, wastepaper, selected base papers and
boards, plastic films, resins and chemicals. Fort James believes there is
generally a sufficient supply of these or substitutable raw materials.
In addition to these materials, pulp and paper production depends on an
adequate supply of water, electric power and various forms of fuel for the
generation of steam and electricity. The Company's major types of purchased
fuels and energy include electricity, natural gas, coal, oil and petroleum coke.
The Company internally generates approximately 45% of its North American
electrical energy needs, with co-generation facilities at a number of its major
facilities.
The Company's paper products are manufactured principally from
wood-based pulp and deinked pulp which are both produced internally and
purchased from external sources. The Company produces deinked pulp through the
recycling of wastepaper and other reclaimable fiber sources. The capacity of
Fort James' pulping facilities in North America and Europe is summarized as
follows:
Pulp Type Capacity (Tons Per Year)
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North America Europe Total
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Kraft/Chemical 1,905,000 - 1,905,000
Groundwood/Mechanical 120,000 - 120,000
Deinked/Secondary 1,764,000 263,000 2,027,000
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Total 3,789,000 263,000 4,052,000
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In addition to the Company's internal sources, several types of pulp are
purchased from other suppliers in the United States, Canada and other parts of
the world. Purchased pulp is used to supply partially integrated paper mills, to
obtain types of pulp not produced by the Company, or to minimize transportation
costs. Fort James is a net seller in North America of approximately 220,000 tons
per year of market pulp. The Company's paper machines in Europe are supplied
through a combination of Fort James' North American pulp production, secondary
fiber pulp and purchased chemical pulp.
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Fort James is a leader in the industry in developing towel and tissue
products from recycled wastepaper. Currently, the Company recycles approximately
2.8 million tons of wastepaper annually. The Company uses wastepaper in making a
large portion of its consumer and away-from-home tissue products in both North
America and Europe, as well as in making its coated recycled paperboard for
folding cartons and in certain communications papers. The Company believes that
its use of wastepaper gives it a cost advantage over other tissue-producing
competitors. The Company has developed a network for obtaining deinked and other
grades of wastepaper.
Pulpwood and woodchips used in Fort James' pulp mills are primarily
obtained from leased lands, lands covered by long-term cutting rights
agreements, pulpwood and woodchip supply contracts and open market purchases.
All of the timberlands controlled by Fort James are managed on a sustained-yield
basis, and the rate of harvesting is generally equal to or less than the average
growth rate. Fort James presently has controlled access to the timber supply
from a total of approximately 1.8 million acres of timberland. The majority of
this acreage is located in Canada.
Fort James also purchases bleached paperboard from outside vendors for
use in folding cartons, plates and cups. Fort James produces approximately
three-quarters of its bleached paperboard needs at its Naheola, Alabama mill.
The balance of the Company's requirements is purchased from outside bleached
producers, over two-thirds of which is acquired pursuant to long-term contracts
with prices that are at or below prevailing market prices.
Fort James purchases a significant amount of polystyrene and polypropylene
plastic resins, which are utilized in the production of tabletop products
including plastic cups and other containers; lids for plastic and paper
containers; and plastic cutlery. The Company purchases plastic resins pursuant
to negotiated arrangements with a variety of suppliers.
TRADEMARKS AND PATENTS
Fort James has a number of trademarks and trade names registered
domestically and in certain foreign countries under which it conducts its
business. Trademarks include, among others, QUILTED NORTHERN, BRAWNY, MARDI
GRAS, VANITY FAIR, SOFT'N GENTLE, VANIA, DIXIE, SUPERWARE, SO-DRI, GREEN FOREST,
LOTUS, COLHOGAR, TENDERLY, ENVISION, PREFERENCE, DIXIE/MARATHON, QUILT-RAP,
QWIK-CRISP, MICRO-RITE, EUREKA!, and WORD PRO. The Company considers its
trademarks, in the aggregate, to be material to its business, and consequently,
seeks trademark protection by all available means. The Company also has a
variety of material patents and licenses related to its business. While, in the
aggregate, the foregoing patents and licenses are of material importance to Fort
James' business, the Company believes the loss of any one or any related group
of such intellectual property rights would not have a material adverse effect on
its operations.
SEASONAL BUSINESS
While seasonal variation in demand is not a major factor in the
Company's business, the first and fourth quarters of the year are generally the
lowest in net sales and operating income. Net sales and profit margins in the
Dixie business are generally higher in the spring and summer (second and third
quarters) compared to the winter (fourth and first quarters) due to the seasonal
volume strength of the retail DIXIE paper cup and plate business during the
summer months. In addition, the away-from-home tissue portion of the North
American and European Tissue businesses generally experience lower sales volumes
in the fourth quarter, when many industrial customers are on extended holiday
shutdowns. Profit margins for the Company have also historically been lower in
the first and fourth quarters because of holiday, vacation and maintenance
shutdowns and higher seasonal energy costs.
CUSTOMERS
For 1998, sales to Fort James' five largest customers in the aggregate
accounted for approximately 13% of consolidated net sales. Sales to the five
largest Tissue - North America customers accounted for approximately 22% of its
sales, sales to the five largest Tissue - Europe customers accounted for
approximately 27% of its sales; sales to the five largest Dixie customers
accounted for approximately 9% of its sales; sales to the five largest Packaging
customers accounted for approximately 27% of its sales; and sales to the five
largest Communications Papers and Fiber customers accounted for approximately
29% of its sales. There were no individual customers, however, to which sales
exceeded 10% of Fort James' consolidated net sales. Though the loss of a single
customer may be significant to an individual segment, the Company believes that
such loss would not have a long-term material adverse effect on its consolidated
financial condition.
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ORDER BACKLOG
In the Tissue-North America, Tissue-Europe, Dixie, and Packaging
businesses, the Company maintains product inventories to meet delivery
requirements of its customers; therefore, the backlog of customer orders for
these segments is not significant. In the Communications Papers business, the
Company's backlogs were generally 5 to 25 days as of December 27, 1998 and 10 to
30 days as of December 28, 1997. Order backlog does not vary substantially on a
seasonal basis.
COMPETITION
Fort James experiences intense competition in both North America and
Europe. Fort James' competitors include a number of large diversified paper and
consumer products companies, such as The Procter & Gamble Company,
Kimberly-Clark Corporation and Georgia-Pacific Corporation and large European
companies such as Svenska Cellulosa Aktiebolaget (SCA). Fort James also competes
with smaller low-cost regional producers that seek to displace the Company's
private label products mainly through price competition. The Company competes on
the basis of price, product quality and performance, product development
effectiveness, service, and sales and distribution support. Aggressive
competitive pricing actions, which may become more intense due to changing
industry conditions, could reduce revenues and adversely affect the Company's
operating results or financial condition. Increased marketing expenditures by
manufacturers of competing branded products could prompt the Company to increase
its advertising or promotional expenditures for key branded products. Markets
for consumer products are generally regional or national, with limited imports
and exports, due to the high bulk and low density of these products, as well as
brand recognition factors. Markets for communications papers, however, can be
affected by increased imports from Europe, Asia and Latin America.
RESEARCH AND DEVELOPMENT
Fort James' major research and development facilities are located in
Neenah, Wisconsin and Kunheim, France and its engineering centers are located in
Green Bay, Wisconsin; Kalamazoo, Michigan; and Kunheim, France. The primary
efforts at these facilities are to improve existing products, develop new
processes and products, improve product quality and process control, and provide
technical assistance in adhering to regulatory standards. In addition, emphasis
is placed upon expanding the Company's capability to deink a broader range of
wastepaper grades and upon improving environmental processes.
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 has made and will continue to make substantial capital
investments and operating expenditures, as well as production adjustments, to
comply with increasingly stringent standards for air, water, and solid and
hazardous waste regulations. During 1998, capital expenditures totaling
approximately $31 million were made by Fort James for pollution control
facilities and equipment. Capital expenditures for such purposes on existing
facilities are also estimated to be approximately $30 million for 1999.
Estimates of costs for future environmental compliance are necessarily imprecise
due to, among other things, the continuing emergence of new environmental laws
and regulations and environmental control or process technology developments.
While the Company believes that its environmental control costs are likely to
increase as environmental regulations become broader and more stringent, Fort
James is unable to predict the amount or timing of such increases. Such future
regulations could materially increase the Company's capital requirements in
future years.
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, 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. Public comments on the draft report must
be submitted by April 12, 1999. The Company is reviewing the draft study and
intends to submit its comments prior to that deadline. 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.
It is the Company's policy to accrue remediation costs on an
undiscounted basis when it is probable that such costs will be incurred and when
a range of loss can be reasonably estimated. Fort James' accrued environmental
liabilities, including remediation and landfill closure costs, totaled $54.1
million as of December 27, 1998 and $55.4 million as of December 28, 1997. The
Company periodically reviews the status of all significant existing or potential
environmental issues and adjusts its accruals as necessary. The accruals do not
reflect any possible future insurance recoveries. Estimates of costs for future
remediation are necessarily imprecise due to, among other things, the
identification of presently unknown remediation sites and the allocation of
costs among potentially responsible parties. The Company believes that its share
of the costs of cleanup for its current remediation sites will not have a
material adverse impact on its consolidated financial position but could have a
material effect on consolidated results of operations in a given year. As is the
case with most manufacturing and many other entities, there can be no assurance
that the Company will not be named as a PRP at additional sites in the future or
that the costs associated with such additional sites would not be material.
Further information pertaining to hazardous substance cleanup, accrued
environmental liabilities and other environmental matters affecting the Company
is set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Environmental Matters" and Note 13 of Notes to
Consolidated Financial Statements in the 1998 Annual Report, which information
is incorporated herein by reference.
9
<PAGE>
YEAR 2000 DATE CONVERSION
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000" on pages 30 through 32 of the 1998 Annual
Report, which information is incorporated herein by reference.
PERSONNEL
Fort James currently employs approximately 27,500 people. Contracts
covering approximately 3,000 domestic and Canadian employees are scheduled for
renegotiation in 1999.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information regarding the Company's domestic and foreign
operations is included in Note 14 of Notes to Consolidated Financial Statements
in the 1998 Annual Report, which information is incorporated herein by
reference. International operations are generally characterized by the same
conditions discussed in the narrative description of business and may also be
affected by additional elements including changing currency values and different
rates of inflation and economic growth. The effects of these additional elements
are more significant in the Tissue-Europe business, which includes substantially
all of the Company's international business.
10
<PAGE>
ITEM 2. PROPERTIES
The pulp and papermaking facilities of Fort James, the number of paper
or paperboard machines, and the principal types of products produced at each
facility are as follows:
<TABLE>
<CAPTION>
Facility Locations (A) Machines Principal Products
- ---------------------- -------- ------------------
<S> <C> <C>
Tissue-North America:
- --------------------
Pennington, Alabama (Naheola) (B) 5 Tissue
Savannah, Georgia (C) 5 Tissue
Old Town, Maine (B) 2 Tissue
Muskogee, Oklahoma (C) 5 Tissue
Halsey, Oregon (C) 2 Tissue
Clatskanie, Oregon (Wauna) (B) 3 Tissue
Camas, Washington (B) 6 Tissue
Green Bay, Wisconsin (East) (C) 6 Tissue
Green Bay, Wisconsin (West) (C) 11 Tissue
Tissue-Europe:
- -------------
Nokia, Finland (C) 3 Tissue
Gien, France 3 Tissue
Louviers (Hondouville), France (E) 2 Tissue
Muntzenheim (Kunheim), France 2 Tissue
Patras (Achaia), Greece 1 Tissue
Castelnuovo, Italy 1 Tissue
Potenza (Avigliano), Italy 1 Tissue
Cuijk, Netherlands (E) 2 Tissue
Allo, Spain 2 Tissue
Karamursel, Turkey (F) 2 Tissue
Ramsbottom, U.K. 3 Tissue
Mid-Glamorgan (Bridgend), U.K. (C) 3 Tissue
Larne, U.K. (C) 2 Tissue
North Sheffield (Oughtibridge), U.K. (C) 2 Tissue
Packaging:
- ---------
Pennington, Alabama (Naheola) (B) 2 Bleached paperboard
Kalamazoo, Michigan (C) 2 Recycled paperboard
Communications Papers and Fiber:
- -------------------------------
Clatskanie, Oregon (Wauna) (B)(D) 2 Uncoated groundwood & freesheet
Camas, Washington (B) 6 Uncoated freesheet
Marathon, Canada - Kraft pulp
---
Total 86
===
</TABLE>
(A) The locations listed for Fort James' consolidated subsidiaries are held in
fee by the Company.
(B) Includes one kraft/chemical pulp facility.
(C) Includes one deinked/secondary fiber facility.
(D) Includes one groundwood/mechanical pulp facility.
(E) Includes two deinked/secondary fiber facilities.
(F) Unconsolidated subsidiary.
Fort James' network of manufacturing facilities provide annual virgin
and recycled pulp capacity of approximately 4.1 million tons and annual paper
and paperboard capacity of approximately 4.7 million tons. The Company believes
that its production facilities are suitable for their purposes and are adequate
to support their businesses. The extent of utilization of individual facilities
varies. During 1998, Fort James' paper and paperboard mills generally had
production levels of more than 90% of capacity.
11
<PAGE>
Fort James also operates converting plants which perform a variety of
converting operations. These converting plants (excluding converting operations
which may be performed at pulp and papermaking facilities already listed above)
are summarized as follows:
<TABLE>
<CAPTION>
Number of Converting Plants
---------------------------
Principal Products Domestic International Total
- ------------------ -------- ------------- -----
<S> <C> <C> <C>
Tissue and other converting............................... - 12 12
Paper and plastic foodservice products.................... 8 3 11
Folding cartons and other packaging....................... 13 1 14
-- - --
Total............................................. 21 16 37
== == ==
</TABLE>
Fort James' manufacturing and converting facilities are complemented by
an integrated network of sales offices and distribution terminals. The Company
also operates a warehouse and terminal service that provides freight interchange
and other services in the Pacific Northwest.
ITEM 3. LEGAL PROCEEDINGS
Other than the Fox River proceedings discussed under the heading
"Environmental Matters" on pages 9 and 10 of Part I of this Form 10-K Annual
Report and the information set forth in Note 13 of Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report, which information is
incorporated herein by reference, the Company is not involved in any litigation
the outcome of which management believes would have a material adverse effect on
the Company's results of operations, financial condition or competitive
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange.
Information with respect to quarterly high and low sales prices for Fort James'
common stock, quarterly dividends and other quarterly information related to
common shares is contained in Note 16 of Notes to Consolidated Financial
Statements in the 1998 Annual Report, which information is incorporated herein
by reference. The payment of dividends and the amounts thereof will be dependent
upon Fort James' earnings, financial position, cash requirements and other
relevant factors. Common shares of the Company reserved for issuance are
described in Note 10 of Notes to Consolidated Financial Statements in the 1998
Annual Report, which information is incorporated herein by reference. In
addition, covenants of certain of the Company's senior note agreements impose
restrictions on the amount of net worth which, in turn, may limit the funds
available for the payment of dividends; these covenants are discussed in Note 8
of Notes to Consolidated Financial Statements in the 1998 Annual Report, which
information is incorporated herein by reference. On February 24, 1999, there
were approximately 11,000 shareholders of record of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
See Selected Financial Data on page 62 of the 1998 Annual Report, which
information for fiscal years 1994 through 1998 is incorporated herein by
reference. The Merger was accounted for as a pooling-of-interests; accordingly,
the Company's consolidated financial data has been restated for all periods
prior to the business combination to include the combined results of James River
and Fort Howard. For all other acquisitions, the data presented for each period
reflects operations acquired from the respective acquisition dates.
Acquisitions, dispositions and other transactions from 1996 through 1998 are
described in Note 2 of Notes to Consolidated Financial Statements in the 1998
Annual Report, which information is incorporated herein by reference.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 23 through 35 of the 1998 Annual Report, which
information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financing Activities" on pages 28 through 29 of the
1998 Annual Report, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements and selected quarterly
financial information, under the headings "Consolidated Statements of Operations
and Comprehensive Income", "Consolidated Balance Sheets", "Consolidated
Statements of Cash Flows", "Consolidated Statements of Changes in Capital
Accounts" and "Notes to Consolidated Financial Statements" on pages 36 through
60 of the 1998 Annual Report, which information is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting and financial disclosures prior to the date of the most recent
financial statements included herein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the Company's Directors, see
"Information on Nominees" on pages 3 and 4 and "Section 16(a) Beneficial
Ownership Reporting Compliance" on page 19 of the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on April 22, 1999 (the "1999 Proxy
Statement"), which information is incorporated herein by reference.
The following table reflects the name, age, length of service as an
officer of Fort James, and current position for each of the current executive
officers of the Company. Previous positions and areas of responsibility over the
past five years are included in "Executive Officers" on pages 64 and 65 of the
1998 Annual Report, which information is incorporated herein by reference. Each
officer is elected by the Board of Directors to serve a one-year term. There is
no family relationship between any of these officers or between any such officer
and any director of the Company; nor is there any arrangement or understanding
between any officer and any other person pursuant to which the officer was
selected.
<TABLE>
<CAPTION>
Calendar
Year First
Elected as
Name Age an Officer Current Position
- ---- --- ---------- ----------------
<S> <C> <C> <C>
Miles L. Marsh 51 1995 Chairman of the Board of Directors,
Chief Executive Officer, President
Clifford A. Cutchins, IV 50 1990 Senior Vice President, General Counsel,
Corporate Secretary
Francis J. Florido 50 1998 President, North American Consumer Products
Daniel J. Girvan 50 1993 Senior Vice President, Human Resources and Administration
Alan R. Guibord 52 1998 Vice President and Chief Information Officer
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
Ernst A. Haberli 50 1996 Executive Vice President and Chief Financial Officer
George F. Hartmann, Jr. 56 1998 Senior Vice President, Sales - North American Commercial Business
Gary Kurlancheek 45 1998 Vice President, Marketing
R. Michael Lempke 46 1997 Senior Vice President and Treasurer
John F. Lundgren 47 1995 President, European Consumer Products
Daniel J. McCarty 47 1998 President, North American Commercial Business
Joseph W. McGarr 47 1996 Senior Vice President, Planning and Strategy
Andrei A. Mikhalevsky 44 1998 Senior Vice President, Sales - North American Consumer Products
Joe R. Neil 60 1996 President, Communications Papers
William A. Paterson 55 1996 Senior Vice President and Controller
William Schultz 37 1998 Executive Vice President, Dixie
B. Gregory Stroh 51 1997 President, North America Towel and Tissue
Operations & Logistics and Packaging
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Directors" on pages 4 and 5, "Executive
Compensation" on pages 8 through 15, and "Performance Graph" on page 16, of the
Company's 1999 Proxy Statement, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Stock Ownership of Directors and Executive Officers" and "Principal
Shareholders" on pages 6 and 7, respectively, of the Company's 1999 Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Information on Nominees" on pages 3 and 4 of the Company's 1999
Proxy Statement, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1) FINANCIAL STATEMENTS:
The Consolidated Financial Statements of Fort James Corporation, the Notes
to Consolidated Financial Statements, and the Report of Independent
Accountants listed below are incorporated herein by reference from pages
36 through 61 of the Company's 1998 Annual Report. With the exception of
the aforementioned information and the information incorporated by
reference in numbered Items 1, 3, 5, 6, 7, 7a, 8, and 10, no other data
appearing in the 1998 Annual Report is deemed to be "filed" as part of
this Form 10-K Annual Report.
"Consolidated Statements of Operations and Comprehensive Income" for each
of the three fiscal years in the period ended December 27, 1998 (see page
36 of the 1998 Annual Report)
"Consolidated Balance Sheets" as of December 27, 1998 and December 28,
1997 (see page 37 of the 1998 Annual Report)
14
<PAGE>
"Consolidated Statements of Cash Flows" for each of the three fiscal years
in the period ended December 27, 1998 (see page 38 of the 1998 Annual
Report)
"Consolidated Statements of Changes in Capital Accounts" for each of the
three fiscal years in the period ended December 27, 1998 (see page 39 of
the 1998 Annual Report)
"Notes to Consolidated Financial Statements" (see pages 40 through 60 of
the 1998 Annual Report)
"Report of Independent Accountants" with respect to the financial
statements listed above (see page 61 of the 1998 Annual Report)
2) FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants
The following information is filed as part of this Form 10-K and should
be read in conjunction with the financial statements contained in the
1998 Annual Report to Shareholders.
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because they were not applicable or
because the required information has been included in the financial
statements or notes thereto.
3) EXHIBITS:
Each Exhibit is listed according to the number assigned to it in the
Exhibit Table of Item 601 of Regulation S-K. The Exhibits identified with
an asterisk (*) are management contracts or compensatory plans available
to certain key employees or directors.
<TABLE>
<CAPTION>
Exhibit
Number Description Section
- ------ ----------- -------
<S> <C> <C>
3(a) Articles of Amendment to the Amended and Restated Articles of
Incorporation as of August 13, 1997 (incorporated by reference to
Exhibit 3(d) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 28, 1997).
3(b) James River Corporation of Virginia Articles of Amendment to the
Amended and Restated Articles of Incorporation Designating the Series
O 8 1/4% Cumulative Preferred Stock ($10.00 par value), effective
October 1, 1992 (incorporated by reference to Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended December 26,
1993).
3(c) Articles of Amendment to the Amended and Restated Articles of
Incorporation of James River Corporation of Virginia Designating the
Series P 9% Cumulative Convertible Preferred Stock ($10.00 par value)
(incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K dated June 29, 1994).
3(d) Amended and Restated Bylaws of Fort James Corporation as of April 23,
1998 (incorporated by reference to Exhibit 3(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 29, 1998).
4(a) Rights Agreement dated February 26, 1999, between Fort James
Corporation and Norwest Bank of Minnesota, N.A., as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's Form 8A-12B
dated February 26, 1999).
4(b) Fort James Corporation $2,500,000,000 Credit Agreement dated as of
August 13, 1997, amended and restated as of October 31, 1997
(incorporated by reference to Exhibit 10(g) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 28, 1997).
4(c) In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K, various
other instruments defining the rights of holders of long-term debt of
the Registrant and its subsidiaries are not being filed because the
total amount of securities authorized and outstanding under each such
instrument does not exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. The Registrant hereby
agrees to furnish a copy of any such instrument to the Commission upon
request.
10(a)* James River Corporation of Virginia Deferred Compensation Plan for
Outside Directors, amended and restated effective as of July 1, 1989
(incorporated by reference to Exhibit 10(c) to the Company's Annual
Report on Form 10-K for the year ended April 30, 1989).
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
10(b)* Fort James Corporation Stock Option Plan for Outside Directors,
amended and restated February 18, 1999, filed herewith.
10(c)* James River Corporation of Virginia Director Stock Ownership Plan,
effective April 25, 1996 (incorporated by reference to Exhibit B to
the Company's Proxy Statement dated March 13, 1996).
10(d)* James River Corporation of Virginia 1987 Stock Option Plan, 1993
Amendment and Restatement, effective as of December 16, 1993
(incorporated by reference to Exhibit 10(j) to the Company's Annual
Report on Form 10-K for the year ended December 26, 1993).
10(e)* Fort James Corporation 1996 Stock Incentive Plan, effective April 25,
1996 (incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (No. 333-02217) filed April 3,
1996).
10(f)* Amendment to Fort James Corporation 1996 Stock Incentive Plan, dated
as of August 12, 1997 (incorporated by reference to Exhibit 99.2 to
the Company's Registration Statement on Form S-8 (No. 333-35013) filed
September 5, 1997).
10(g)* James River Corporation of Virginia Supplemental Deferral Plan, 1993
Amendment and Restatement, effective as of January 1, 1994
(incorporated by reference to Exhibit 10(m) to the Company's Annual
Report on Form 10-K for the year ended December 26, 1993).
10(h)* James River Corporation of Virginia Management Incentive Plan,
effective as of January 25, 1996 (incorporated by reference to Exhibit
10(l) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10(i)* Fort James Corporation MIP Bonus Deferral Plan effective as of
September 1, 1998 (incorporated by reference to Exhibit 99.1 to the
Company's filing of Form S-8 dated November 8, 1998).
10(j)* James River Corporation of Virginia Supplemental Benefit Plan, amended
and restated effective June 1, 1991 (incorporated by reference to
Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year
ended December 29, 1991).
10(k)* 1994 Amendment to the James River Corporation of Virginia Supplemental
Benefit Plan, dated March 1, 1994 (incorporated by reference to
Exhibit 10(q) to the Company's Annual Report on Form 10-K for the year
ended December 25, 1994).
10(l)* Fort James Corporation Supplemental Retirement Plan for Miles L.
Marsh, (incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 28, 1998).
10(m)* Form of Employment Agreement between the Registrant and executive
officers of the Registrant (incorporated by reference to Exhibit 10.6
to the Company's filing of Form S-4 dated June 26, 1997).
10(n)* Separation Agreement and Mutual Release between Fort James Corporation
and Michael T. Riordan (incorporated by reference to Exhibit 10(a) to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
28, 1998).
10(o)* Separation Agreement and Mutual Release between Fort James Corporation
and James K. Goodwin (incorporated by reference to Exhibit 10(a) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 27, 1998).
10(p)* Separation Agreement between Fort James Operating Company and Timothy
G. Reilly, filed herewith.
10(q)* Separation Agreement between Fort James Operating Company and John F.
Rowley, filed herewith.
12 Computation of Ratio of Earnings to Fixed Charges, filed herewith. E-1
13 Certain sections of the Fort James Corporation Annual report to
Shareholders for the year ended December 27, 1998, filed herewith. E-2
21 Subsidiaries of the Company as of December 27, 1998, filed herewith. E-3
23 Consent of Independent Accountants, filed herewith. E-4
27 Financial Data Schedules for the year ended December 27, 1998 (filed
electronically only). E-5
</TABLE>
(B) REPORTS ON FORM 8-K:
The Company filed no Current Reports on Form 8-K during the last quarter
of 1998 and subsequent thereto.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Signature and Title
-------------------
FORT JAMES CORPORATION
----------------------------------------------
Registrant
Date: March 19, 1999 By: /s/ ERNST A. HABERLI
----------------------------------------------
Ernst A. Haberli
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: March 19, 1999 By: /s/ WILLIAM A. PATERSON
----------------------------------------------
William A. Paterson
Senior Vice President and Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature and Title
-------------------
Date: March 19, 1999 By: /s/ MILES L. MARSH
---------------------------------------------
Miles L. Marsh
Chairman and
Chief Executive Officer
Date: March 19, 1999 By: /s/ ERNST A. HABERLI
---------------------------------------------
Ernst A. Haberli
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: March 19, 1999 By: /s/ WILLIAM A. PATERSON
---------------------------------------------
William A. Paterson
Senior Vice President and Controller
(Principal Accounting Officer)
Pursuant to General Instruction D to Form 10-K, this report has been
signed below by a majority of the Board of Directors:
/s/ BARBARA L. BOWLES March 19, 1999
- ------- --------------------------------------
Barbara L. Bowles
/s/ WILLIAM T. BURGIN March 19, 1999
- ------- --------------------------------------
William T. Burgin
/s/ DR. JAMES L. BURKE March 19, 1999
- ------- --------------------------------------
Dr. James L. Burke
/s/ WORLEY H. CLARK, JR March 19, 1999
- ------- --------------------------------------
Worley H. Clark, Jr.
17
<PAGE>
/s/ GARY P. COUGHLAN March 19, 1999
- ------- --------------------------------------
Gary P. Coughlan
/s/ WILLIAM V. DANIEL March 19, 1999
- ------- --------------------------------------
William V. Daniel
/s/ ERNST A. HABERLI March 19, 1999
- ------- --------------------------------------
Ernst A. Haberli
/s/ MILES L. MARSH March 19, 1999
- ------- --------------------------------------
Miles L. Marsh
/s/ ROBERT M. O'NEIL March 15, 1999
- ------- --------------------------------------
Robert M. O'Neil
/s/ RICHARD L. SHARP March 19, 1999
- ------- --------------------------------------
Richard L. Sharp
/s/ ANNE MARIE WHITTEMORE March 19, 1999
- ------- --------------------------------------
Anne Marie Whittemore
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Fort James Corporation
Our report on the consolidated financial statements of Fort James Corporation as
of December 27, 1998 and December 28, 1997 and for each of the three fiscal
years in the period ended December 27, 1998, has been incorporated by reference
in this Form 10-K from page 61 of the 1998 Annual Report to Shareholders of Fort
James Corporation. In connection with our audits of such financial statements,
we have also audited the related financial statement schedule listed in Item 14
(a)(2) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 4, 1999
19
<PAGE>
SCHEDULE II
FORT JAMES CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997, AND DECEMBER 29, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER CASH END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (a) PAYMENTS PERIOD
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 27, 1998:
Restructure accrual $ 263.2 $ (37.3) $ (61.3) $ (85.0) $ 79.6
December 28, 1997:
Restructure accrual
- 263.2 - - 263.2
December 29, 1996:
Restructure accrual
- - - - -
=======================================================================================
</TABLE>
(a) Reclassifications to more appropriately reflect the carrying amounts of
assets and liabilities in the balance sheet
20
FORT JAMES CORPORATION
STOCK OPTION PLAN
FOR OUTSIDE DIRECTORS
Amended and Restated as of February 18, 1999
FORT JAMES CORPORATION, a Virginia corporation (the "Company"), hereby
amends and restates its Stock Option Plan for Outside Directors, effective as of
February 18, 1999.
1. Purpose. This Stock Option Plan for Outside Directors (the "Plan") is
intended to advance the interests of the Company by providing directors of the
Company who are not full-time employees of the Company or a subsidiary
("Directors") with an opportunity to acquire a proprietary interest in the
Company and an additional incentive to promote its success. Stock options
("Options") granted under the Plan are non-statutory options. The Plan conforms
to the provisions of Rule 16b-3 ("Rule 16b-3") of the Securities Exchange Act of
1934 (the "'34 Act"), as presently in effect.
2. Eligibility and Grant of Options.
(a) Each person who first becomes a member of the Company's
Board of Directors (the "Board of Directors"), as a Director after
February 18, 1999 shall receive an Option to purchase 5,000 shares of
Common Stock of the Company ("Common Stock") as of the date on which he
or she first becomes a Director.
(b) As of each April 15, beginning April 15, 1999, each Director
who has been a Director for at least nine months shall receive an Option
to purchase 2,500 shares of Common Stock.
<PAGE>
The option price for each Option shall be determined as of the date of grant,
pursuant to Section 4 below. The Company shall effect the grant of Options under
the Plan by the execution and delivery of written option agreements between the
Company and the Directors receiving the Options ("Optionees").
3. Stock. The Company has reserved an aggregate of 225,000 shares of
Common Stock for issuance pursuant to the exercise of Options granted under the
Plan. The aggregate number is subject to future adjustments as hereinafter
provided in Section 7. The aggregate number of shares of Common Stock reserved
shall be reduced by the issuance of shares upon the exercise of Options, but it
shall not be reduced if Options, for any reason, expire or terminate
unexercised. The Company shall not be required to issue or deliver any
certificate for shares of its Common Stock purchased upon the exercise of any
part of an Option before (i) the admission of such shares to listing on any
stock exchange on which the Common Stock may then be listed, (ii) receipt of any
required registration or other qualification of such shares under any state or
federal law or regulation that the Company's counsel shall determine is
necessary or advisable, and (iii) the Company shall have been advised by counsel
that all applicable legal requirements have been complied with.
4. Price. The purchase price of each share of Common Stock covered by an
Option (the "Option Price") shall be equal to the fair market value, as
hereinafter defined, of one share of Common Stock on the date the Option is
granted. If the Common Stock is traded in the over-the-counter market, its fair
market value on a given day shall be the average between the closing bid and
asked prices on such day as reported by the Nasdaq Stock Market. If the Common
Stock is traded on an exchange, its fair market value on a
2
<PAGE>
given day shall be the mean of the highest and lowest prices at which it is
traded on such day on the exchange on which it generally has the greatest
trading volume.
Payment of the Option Price may be made in cash, in shares of Common
Stock, or in any combination thereof. Shares of Common Stock used to make any
such payment shall be valued at the fair market value thereof on the date of
exercise.
5. Terms and Limitations on Exercise. Options may be exercised, in whole
or in part, but only with respect to whole shares of Common Stock, as outlined
below, by giving timely written notice to the Company.
(a) The term of any Option shall be ten years from the date it
is granted. No Option may be exercised after the expiration of its term
or after the date set forth in subsection (b), (c) or (d) below, if
earlier.
(b) If an Optionee ceases to be a member of the Board of
Directors after he or she attains age sixty-five or on account of his or
her death or disability (as determined under the Federal Social Security
Act), the Optionee (or his or her legatees or distributees or the
personal representatives of his or her estate, in the event of his or
her death) may exercise his or her outstanding options at any time until
the first to occur of (x) the date that is two years after the Optionee
ceases to be a member of the Board of Directors or (y) the date on which
the Options expire according to their terms.
(c) If an Optionee ceases to be a member of the Board of
Directors for any reason other than described in subsection (b) above,
the Optionee may exercise his or her outstanding Options at any time
until the first to occur of (x) the date
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<PAGE>
that is three months after the Optionee ceases to be a member of the
Board of Directors or (y) the date on which the Options expire according
to their terms.
(d) If an Optionee dies after he ceases to be a member of the
Board of Directors, but within the time period during which his
outstanding Options are still exercisable, the Optionee's outstanding
Options may be exercised by his or her legatees or distributees or the
personal representative of his or her estate. These Options may be
exercised at any time until the first to occur of (x) the date that is
two years after the Optionee ceases to be a member of the Board of
Directors or (y) the date on which the Options expire according to their
terms.
(e) Notwithstanding anything herein to the contrary, Options
shall always be granted and exercised in such a manner as to conform to
the provisions of Rule 16b-3, or any replacement rule adopted pursuant
to the provisions of the '34 Act, as the same now exists or may, from
time to time, be amended.
(f) The exercise of any Option and delivery of the optioned
shares shall be contingent upon the receipt by the Company of the full
purchase price in cash or shares of Common Stock as provided in Section
4.
6. Non-transferability of Options.
(a) In general, Options, by their terms, shall not be
transferable other than by will or the laws of descent and distribution,
or as described below. Options shall be exercisable, during the lifetime
of the Optionee, only by the Optionee or the Optionee's guardian or
legal representative.
(b) Notwithstanding the provisions of subsection (a) and subject
to applicable securities laws, an Optionee may transfer any Options that
have been
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<PAGE>
or will be granted to the Optionee under this Plan to one or more of the
Optionee's immediate family members, to a trust or trusts for the
benefit of any one or more of the Optionee's immediate family members,
or to a partnership, limited liability company or other entity the only
partners, members or interest holders of which are among the Optionee's
immediate family members. No consideration may be paid for the transfer
of any Option. The transferor shall be subject to all conditions
applicable to the Option prior to its transfer. Notwithstanding the
provisions of Section 8, the Board of Directors may impose on any
Option, and on Common Stock issued upon exercise of an Option, such
limitations and conditions as the Board of Directors deems appropriate,
and may amend the agreement granting the Option to set forth such
limitations and conditions.
7. Effect of Stock Dividends and Other Changes. Appropriate adjustments
shall be made automatically to the price of the shares and the number of shares
subject to option if there are any changes in the Common Stock by reason of
stock dividends, stock splits, reverse stock splits, recapitalizations, mergers,
or consolidations.
8. Administration of the Plan. The Board of Directors shall be
responsible for the proper implementation of the Plan, but the Board of
Directors shall not exercise any discretion with respect to the administration
of the Plan.
9. Expiration and Termination of the Plan. Options may be granted under
the Plan at any time until the Plan is terminated by the Board of Directors or
until such earlier date when termination of the Plan shall be required by law.
If not sooner terminated, the Plan shall terminate automatically on June 8,
2004.
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<PAGE>
10. Amendments. The Board of Directors may from time to time make such
changes in and additions to the Plan as it may deem proper. The termination of
the Plan or any change or addition to the Plan shall not, without consent of any
Optionee who is adversely affected thereby, alter any options previously granted
to the Optionee pursuant to the Plan.
11. Effective Date. The amendment and restatement of the Plan shall be
effective as of February 18, 1999.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed.
FORT JAMES CORPORATION
By:_________________________________
SEPARATION AGREEMENT
This is a Separation Agreement dated as of December 31, 1998 between
Fort James Operating Company, its parent, affiliates, subsidiaries,
predecessors, successors and assigns (collectively "Fort James" or the
"Company") and Timothy G. Reilly ("Reilly").
A. Reilly has been employed by Fort James as President, North American
Commercial business under his employment agreement dated as of June 5, 1997 (the
"Employment Agreement") and wishes to resign that employment. Fort James and
Reilly have agreed on the terms under which he will terminate his employment
with the Company. The parties desire to resolve matters involving Reilly's
employment, the Employment Agreement and Reilly's separation from employment
with Fort James.
B. Reilly 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 Reilly may have with Fort James in
exchange for Fort James' agreement to provide Reilly certain compensation and
benefits to which he otherwise he may not be entitled.
C. Fort James also desires to provide Reilly with additional
compensation over the next two (2) years in return for Reilly agreeing (i) not
to compete against Fort James, (ii) not to hire former Fort James employees who
worked with Reilly in the Consumer Products Business of Fort James and (iii) to
cooperate with Fort James.
THEREFORE, in consideration of the above premises and the mutual
covenants and promises contained herein, Reilly and Fort James agree as follows:
1. TERMINATION OF EMPLOYMENT. Reilly agrees to voluntarily
terminate his employment effective at the close of business on December 31, 1998
(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
December 31, 1998.
<PAGE>
2. SEVERANCE PAYMENTS. Fort James shall pay Reilly in a lump sum,
the amount of $1,845,000 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. In addition, Fort James shall pay
Reilly $63,001.34 representing three (3) times the Company's 1998 401(k) and
related SERP contributions for the benefit of Reilly.
3. 1998 MIP BONUS PAYMENT. Fort James shall pay Reilly $300,000
representing his bonus under the 1998 Management Incentive Plan.
4. PENSION AND OTHER BENEFITS.
(a) All Company provided medical, prescription and dental
coverage, life insurance, accidental death and dismemberment and long term
disability benefits shall be provided to Reilly and members of his family for
three (3) years following his Date of Termination, to the extent provided in his
Employment Agreement.
(b) Reilly is the beneficiary of 12,933 restricted shares
and 14,550 performance shares issued pursuant to the 1996 Stock Incentive Plan
(the "Plan"). Reilly agrees to relinquish all right to the restricted and
performance shares as of December 31, 1998. In return, the Company agrees to pay
Reilly on or before January 29, 1999, an amount equivalent to the value on
December 31, 1998 of 27,483 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 $13,095,
representing the accrued dividends on such shares.
(c) Reilly's existing stock options shall be amended
effective December 31, 1998 as set forth in Exhibit A hereto.
(d) Nothing herein shall forfeit or otherwise affect
Reilly's right to vested benefits in the Fort Howard 401(k) Plan and related
SERP, which benefits shall be paid to Reilly according to such plan.
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<PAGE>
(e) Reilly 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 Reilly $21,000 for tax advice
and tax preparation expenses for calendar years 1999 through 2001.
(h) The Company will pay Reilly $38,169.14 representing
the mortgage buydown on his Lake Forest, Illinois residence for three (3) years
commencing 1/1/99.
(i) The Company will pay the cost of the $1,500,000 life
insurance policy provided to Reilly under the split-dollar insurance program for
the years 1999 through 2001. Thereafter, Reilly will be responsible for the
payments should he elect to continue the policy.
(j) The Company will reimburse Reilly for reasonable legal
expenses in connection with the negotiation of this Separation Agreement, not to
exceed $6,000. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which Reilly may reasonably incur
as a result of any contest (regardless of the outcome thereof) by the Company,
Reilly 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 Reilly
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").
5. METHOD OF PAYMENT. All cash payments required by this
Agreement shall be made by wire transfer to Reilly's account or accounts which
he shall designate in writing
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<PAGE>
to the Company's Senior Vice President, General Counsel. Such transfers shall be
authorized and released in advance so as to arrive in Reilly's account(s) by
January 29, 1999, (the "Payment Date").
6. COMPANY CAR. Fort James agrees to transfer to Reilly no later
than January 29, 1999, the certificate of title to the automobile previously
provided him for his personal and business use. Reilly 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. RELOCATION. The Company will arrange for and pay the cost of
moving Reilly's household and personal property to Green Bay, Wisconsin and will
guarantee the original purchase price and improvements of $923,480 paid by
Reilly for his home in Lake Forest, Illinois.
8. GENERAL RELEASE. In consideration of all payments due him
hereunder or under the Employment Agreement, Reilly 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 Reilly's employment or termination of employment with Fort James. Reilly
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
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<PAGE>
Age Discrimination in Employment Act, the Americans with Disabilities Act or any
other law.
It is acknowledged that this Separation Agreement does not
release Reilly's right to any vested benefits in the Fort James Corporation
StockPLUS Plan (the "StockPLUS Plan"). Reilly's eligibility for benefits in the
StockPLUS Plan will be controlled by the terms of the plan.
9. 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, Reilly
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 Reilly 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.
10. POST EMPLOYMENT RESTRICTIONS, OBLIGATIONS
(a) Reilly 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), Reilly 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
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<PAGE>
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. Reilly 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) Reilly 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, who worked in the North American Commercial
business as of December 31, 1998, without the written consent of the Senior Vice
President, Human Resources for the Company, which shall not be unreasonably
withheld or delayed. Further, Reilly 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 Reilly works.
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<PAGE>
(d) Reilly agrees that as President of the Company's North
American Commercial business, 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 Reilly violates any of his obligations under
this paragraph 10, the Company shall have no further obligation to him under
this Agreement as on the date of breach. Reilly 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.
11. INDEMNITY. Fort James agrees to continue to indemnify and
save Reilly 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 Reilly's alleged actions or
failure to act during the period in which he was employed by the Company. In
addition, the Company agrees to reimburse Reilly for any federal excise tax
pursuant to Internal Revenue Code Section 4999, which may be imposed on any
payments made to Reilly pursuant to this Separation Agreement and will provide
Reilly the benefits of Paragraph 8 of the Employment Agreement.
12. FUTURE COOPERATION. Reilly 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
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<PAGE>
of Termination. Fort James will reimburse Reilly for any reasonable expenses
incurred in this regard.
13. RESIGNATION. By his signature hereto, Reilly hereby resigns
his position as President, North American Commercial business and any and all
other positions with the Company, its subsidiaries, its parent and its
affiliates.
14. CONFIDENTIALITY. Reilly agrees that he will not divulge the
contents of this Separation Agreement which are agreed to be confidential in
nature except (a) Reilly 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 Reilly that if it is
necessary that this Agreement or a significant portion be disclosed to those
listed above, Reilly 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 Reilly materially breaches this provision, the Company will
have no further obligation to him under this Agreement.
15. ENTIRE AGREEMENT. Reilly 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 Reilly may have.
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<PAGE>
16. 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.
17. 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.
18. 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.
19. 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:
/s/ TIMOTHY G. REILLY
---------------------
Timothy G. Reilly
FORT JAMES OPERATING COMPANY
By: /s/ DANIEL J. GIRVAN
---------------------
Daniel J. Girvan
Senior Vice President
9
<PAGE>
FORT JAMES CORPORATION
AMENDMENT TO STOCK OPTIONS
FORT JAMES CORPORATION (the "Company") and Timothy G. Reilly (the
"Participant") hereby agree to this Amendment to Stock Options as of December
31, 1998.
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. The options granted to the Participant on January 6, 1998 for 80,000
shares (the "1998 Options") shall be vested and exercisable as of
December 31, 1998:
2. The 1998 Options and the options for 46,750 shares granted to
Participant on December 6, 1995 and December 9, 1996 (the "1995 and
1996 Options") may be exercised at any time on or before December
31, 2000. Options for 8,938 shares granted to Participant on June
27, 1990 (the "1990 Options") may be exercised at anytime on or
before June 26, 2000. Options for 16,088 shares granted to
Participant on April 30, 1991 (the "1991 Options") may be exercised
at anytime on or before April 29, 2001. To the extent not previously
exercised, the 1995, 1996 and 1998 Options shall expire and cease to
be exercisable on January 1, 2001. The 1990 Options shall expire and
cease to be exercisable on June 27, 2000. The 1991 Options shall
expire and cease to be exercisable on April 30, 2001.
3. Any provisions of the options relating to the time for vesting or
the period to exercise the 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
-1-
<PAGE>
to Stock Options or other decision of the Committee shall be final
and conclusive.
6. If the Participant dies before an option expires, 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.
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 12/31/98 By /s/ MILES L. MARSH
------------------------------
Chairman of the Board and CEO
TIMOTHY G. REILLY
Date 12/31/98 Signature /s/ TIMOTHY G. REILLY
-----------------------
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EXHIBIT 10(Q)
SEPARATION AGREEMENT
This is a Separation Agreement dated as of March 12, 1999 between Fort
James Operating Company, its parent, affiliates, subsidiaries, predecessors,
successors and assigns (collectively "Fort James" or the "Company") and John F.
Rowley ("Rowley").
A. Rowley has been employed by Fort James as Executive Vice President,
Operations and Logistics under his employment agreement dated as of June 5, 1997
(the "Employment Agreement") and wishes to resign that employment on March 12,
1999 and retire effective July 17, 1999. Fort James and Rowley have agreed on
the terms under which he will retire from the Company. The parties desire to
resolve matters involving Rowley's employment, the Employment Agreement and
Rowley's separation from employment with Fort James.
B. Rowley 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 Rowley may have with Fort James in
exchange for Fort James' agreement to provide Rowley certain compensation and
benefits to which he otherwise may not be entitled.
C. Fort James also desires to provide Rowley with additional
compensation over the next two (2) years in return for Rowley agreeing (i) not
to compete against Fort James as provided in Section 8(b) (ii) not to hire
former Fort James employees who worked for Fort James on February 1, 1999 as
provided in Section 8(c) and (iii) to cooperate with Fort James as provided in
Section 10.
<PAGE>
THEREFORE, in consideration of the above premises and the mutual
covenants and promises contained herein, Rowley and Fort James agree as follows:
1. TERMINATION OF EMPLOYMENT. Rowley agrees to retire on July 17, 1999
(his "Retirement Date"). He will be paid all of his regular compensation and
benefits through March 12, 1999 and will be on a non-paid leave of absence until
July 16, 1999. His last day of work and responsibilities shall be March 12,
1999.
2. SEVERANCE PAYMENTS. Fort James shall pay Rowley two (2) payments of
$200,000 each by April 1, 1999 and April 1, 2000, less authorized deductions and
deductions for required taxes. In addition, Fort James will pay Rowley $49,565
representing his pro rata MIP bonus for l999 by April 1, 1999.
3. PENSION AND OTHER BENEFITS.
(a) All Company provided medical, prescription and dental
coverage, life insurance, accidental death and dismemberment and long term
disability benefits in which he is enrolled shall be provided to Rowley and
members of his family for two (2) years beginning March 13, 1999 to the extent
provided in his Employment Agreement; and thereafter, until he turns age 65,
Rowley shall be eligible to participate in such plans as provided for employees
who retired from Fort Howard Company between the ages of 55 to 65. Effective
March 13, 2001, as a retiree, Rowley may purchase medical, prescription and
dental insurance until the age of 65, the same as other employees who retied
from Fort Howard. Notwithstanding the above, if Rowley becomes entitled to such
benefits in connection with other employment, the benefits provided from March
13, 1999 through March 13, 2001 hereby shall cease.
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<PAGE>
(b) Rowley is the beneficiary of restricted shares and
performance shares issued pursuant to the 1996 Stock Incentive Plan (the
"Plan"). Rowley agrees that pursuant to the terms thereof he shall relinquish
all rights to the restricted and performance shares as of March 12, 1999.
(c) Rowley's existing stock options shall be amended effective
March 12, 1999 as set forth in Exhibit A hereto.
(d) Nothing herein shall forfeit or otherwise affect Rowley's
right to vested benefits in the Fort Howard 401(k) Plan and related SERP, which
benefits shall be paid to Rowley according to such plan including Fort James
contributions for calendar year 1998. A statement of Rowley's 401(k) and SERP
balances including 1998 contributions shall be provided to Rowley by March 30,
1999.
(e) Rowley shall not be entitled to participate in the Fort James
Retirement Plan beyond March 12, 1999. He will receive a lump sum payout of his
qualified benefit, less authorized deductions and deductions for required taxes.
From January 1, 1999 through March 12, 1999, Rowley has contributed to the Fort
James 401(k) plan. Rowley's contribution, along with Fort James' matching
contributions, will remain vested in Rowley's 401(k).
(f) Rowley shall not be entitled to any other bonus payments or
profit sharing awards including any payments under the Management Incentive
Plan.
(g) 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.
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(h) The Company shall pay for the professional preparation of
Rowley's 1998 State and Federal taxes and pay Rowley $10,000 representing
payment for future financial and tax advice.
(i) The Company will purchase Rowley's Illinois home for
$844,441, by assuming the mortgage thereon and paying the difference in cash to
Rowley. The closing with respect to the home sale shall be at such time as
Rowley and the Company mutually agree.
(j) The Company will pay the cost of the $1,500,000 life
insurance policy provided to Rowley under the split-dollar insurance program for
the years 1999 through 2016. Rowley will continue to be responsible for the tax
on the imputed income value of this benefit. Thereafter, Rowley will be
responsible for the payments should he elect to continue the policy.
(k) The Company will reimburse Rowley 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 Rowley may reasonably incur
as a result of any contest (regardless of the outcome thereof) by the Company,
Rowley 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 Rowley
about the amount of any payment pursuant to this Separation 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").
(l) Rowley will have access to voicemail message service at
extension number 6200 at the Deerfield, IL offices through May 14, 1999.
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<PAGE>
(m) The Company will exercise reasonable efforts to see to it
that requests for employment references for Rowley received by the Company will
be directed only to Daniel J. Girvan, Senior Vice President Human Resources, for
response.
4. METHOD OF PAYMENT. The cash payments required by Section 2 and
Section 3(e),(h) and (i) of this Separation Agreement shall be made by wire
transfers to Rowley's account which he shall designate in writing to the
Company's Senior Vice President, General Counsel. All other payments shall be by
Company check.
5. COMPANY CAR. Fort James agrees to transfer to Rowley no later than
April 15, 1999, the certificate of title to the automobile previously provided
him for his personal and business use. Rowley 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.
6. GENERAL RELEASE. In consideration of all payments due him hereunder
or under the Employment Agreement, Rowley 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
Rowley's employment or termination of employment with Fort James. Rowley
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.
5
<PAGE>
It is acknowledged that this Separation Agreement does not release
Rowley's rights created by this Separation Agreement, applicable law related to
his vested rights and benefits, nor Rowley's right to any vested benefits in the
Fort James Corporation StockPLUS Plan (the "StockPLUS Plan"). Rowley's
eligibility for benefits in the StockPLUS Plan will be controlled by the terms
of the plan.
In consideration of Rowley's entering into this Separation Agreement,
Fort James hereby agrees, for itself, its affiliates, subsidiaries, parents,
predecessors, successors and assigns and their respective directors, officers,
employees and agents thereof, to release and forever discharge Rowley from any
and all claims, debts, responsibilities and liabilities of every kind and
character whatsoever, known or unknown, suspected or unsuspected, which it or
they had or may have against Rowley, including but not limited to, any and all
claims arising out of Rowley's employment or termination of employment with Fort
James. It is acknowledged that this Separation Agreement does not release Fort
James' rights created by this Separation Agreement.
6
<PAGE>
7. 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, Rowley 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 Rowley 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.
8. POST EMPLOYMENT RESTRICTIONS, OBLIGATIONS.
(a) Rowley 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
Confidentiality Agreement is attached as Exhibit B.
(b) In return for the extension of the option exercise period,
the payment in lieu of the restricted shares and the performance shares as set
forth in Paragraph 3(b), Rowley 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
from March 12, 1999 with the Company for whatever reason, without first
7
<PAGE>
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. Rowley 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) Rowley agrees for a period of two (2) years from March 12,
1999 not to solicit directly or indirectly for employment any employee or former
employee of Fort James or its affiliates, who worked for Fort James on February
1, 1999 without the written consent of the Senior Vice President, Human
Resources for the Company, which shall not be unreasonably withheld or delayed.
Further, Rowley 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 Rowley works.
8
<PAGE>
(d) Rowley agrees that as Executive Vice President, Operations
and Logistics, 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 a court of competent jurisdiction determines
that Rowley has materially breached any of his obligations under this paragraph
8, the Company shall have no further obligation to him under this Separation
Agreement as of the date of such judicial determination. Rowley agrees that the
Company will be irreparably harmed and will be entitled to immediate injunctive
relief in the event of such material 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.
9. INDEMNITY. Fort James agrees to continue to indemnify and save Rowley
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 Rowley's alleged actions or
failure to act during the period in which he was employed by the Company and in
conjunction with any future cooperation he affords the Company. In addition, the
9
<PAGE>
Company agrees to reimburse Rowley for any federal excise tax pursuant to
Internal Revenue Code Section 4999, which may be imposed on any payments made to
Rowley pursuant to this Separation Agreement and will provide Rowley the
benefits of Paragraph 8 of the Employment Agreement.
10. FUTURE COOPERATION. Rowley 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 March 12, 1999. Fort James will reimburse
Rowley for any reasonable expenses incurred in this regard.
11. RESIGNATION. By his signature hereto, Rowley hereby resigns his
position as Executive Vice President, Operations and Logistics and any and all
other positions with the Company, its subsidiaries, its parent and its
affiliates.
12. CONFIDENTIALITY. The parties agree that they will not divulge the
contents of this Separation Agreement which are agreed to be confidential in
nature except (a) Rowley may divulge the contents to his spouse, attorney,
prospective employer, financial advisor and income tax preparer; (b) the Company
may divulge the contents to its employees, directors or attorneys on a
need-to-know basis only; or (c) except as may be required to comply with legal
process. It is further agreed by the parties that if it is necessary that this
Separation Agreement or a significant portion be disclosed to those listed
above, the parties agree to instruct and request each of them, or use such other
efforts as may be reasonable, to keep any information so disclosed confidential.
If either party materially breaches this provision, the nonbreaching party will
have no further obligation to the other party under this Separation Agreement.
10
<PAGE>
13. ENTIRE AGREEMENT. The parties understand and agree 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 each may have.
14. 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.
15. 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.
16. 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.
11
<PAGE>
17. GOVERNING LAW. This Agreement shall be governed and construed
according to the laws of the Commonwealth of Virginia, except to the extent
superseded by applicable federal law.
18. NOTICES. Any notice to be given by one party hereunder to another
shall be in writing and shall be delivered personally, by recognized national
overnight courier service, or by United States registered or certified mail,
postage prepaid, return receipt requested, and shall be addressed to:
If to the Company: Fort James Operating Company
1650 Lake Cook Road
Deerfield, IL 60015-0089
Attention: Clifford A. Cutchins, IV
Senior Vice President and General Counsel
If to Rowley: Mr. John F. Rowley
15172 W. Old School Road
Libertyville, IL 60048
or such other address as one party shall advise the other party by notice.
19. AMENDMENT. This Separation Agreement may be amended only in
writing signed by both parties.
20. SUCCESSORS. This Separation Agreement shall be binding upon and
accrue to the benefit of Rowley and the Company as well as their respective
heirs, estates, successors and assigns. This Separation Agreement may not be
assigned by one party without the prior express written consent of the other
party.
21. CONSTRUCTION. The language of all parts of this Separation Agreement
shall in all cases be construed as a whole, according to its fair meaning, and
not strictly for or against either party. The headings of each paragraph are for
convenience only and are not part of the Separation Agreement.
12
<PAGE>
22. DEATH OF ROWLEY. In the event of Rowley's death, the Company's
obligations under this Separation Agreement shall remain in full force and
effect and Rowley's rights and obligations under this Separation Agreement shall
remain with the legal representative of Rowley's estate.
23. COUNTERPARTS. This Separation Agreement may be executed and
delivered in two or more counterparts each of which when so executed and
delivered shall be the original, but such counterparts together shall constitute
but one and the same instrument.
IN WITNESS WHEREOF, the parties have affixed their signatures:
/s/ JOHN F. ROWLEY
------------------------------------
John F. Rowley
FORT JAMES OPERATING COMPANY
By: /s/ DANIEL J. GIRVAN
---------------------------------
Daniel J. Girvan
Senior Vice President
13
<PAGE>
-1-
FORT JAMES CORPORATION
AMENDMENT TO STOCK OPTIONS
FORT JAMES CORPORATION (the "Company") and John F. Rowley (the
"Participant") hereby agree to this Amendment to Stock Options as of March 12,
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 Board of Directors of Fort James Corporation (the "Board").
THEREFORE, in consideration of the foregoing and the mutual covenants
hereinafter, the Company and the Participant agree as follows:
1. All options granted to the Participant on January 6, 1998 for 75,000
shares (the "1998 Options") shall be vested and exercisable as of
March 12, 1999:
2. The 1998 Options may be exercised at any time before July 17, 2002.
To the extent not previously exercised, the 1998 Options shall
expire and cease to be exercisable on July 17, 2002.
3. Any provisions of the options relating to the time for vesting or
the period to exercise the 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 Board as it deems proper, and any interpretation of
this Amendment to Stock Options or other decision of the Board shall
be final and conclusive.
6. If the Participant dies before an option expires, 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.
1
<PAGE>
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 Board
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 Board (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.
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 3/12/99 By /s/ MILES L. MARSH
-----------------------------------
Chairman of the Board and CEO
JOHN F. ROWLEY
Date 3/12/99 Signature /s/ JOHN F. ROWLEY
------------------------------
EXHIBIT 12
FORT JAMES CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (A)
YEAR ENDED DECEMBER 27, 1998
(DOLLAR AMOUNTS IN MILLIONS)
Pretax income from continuing operations,
before minority interest and extraordinary $ 765.8
items
Add:
Interest charged to operations
297.1
Portion of rental expense representative of
interest factor (assumed to be one-third)
21.2
-----------------------------------------------------------
Total earnings, as adjusted $ 1,084.1
===========================================================
Fixed Charges:
Interest charged to operations $ 297.1
Capitalized interest
9.9
Portion of rental expense representative of
interest factor (assumed to be one-third)
21.2
-----------------------------------------------------------
Total fixed charges $ 328.2
===========================================================
Ratio of earnings to fixed charges 3.30
===========================================================
(a) In computing the ratio of earnings to fixed charges, earnings consist of
income before income taxes, minority interests, extraordinary item, and
fixed charges excluding capitalized interest. Fixed charges consist of
interest expense, capitalized interest and that portion of rental
expense (one-third) deemed representative of the interest factor.
Earnings and fixed charges also include the Company's proportionate
share of such amounts for unconsolidated affiliates which are owned 50%
or more and distributed income from less than 50% owned affiliates.
21
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Management believes that the following commentary and tables appropriately
discuss and analyze the comparative results of operations and the financial
condition of Fort James Corporation ("Fort James" or the "Company") for the
periods covered. Certain events occurring in the last three years represent
significant unusual or non-recurring items. These nonrecurring events are
discussed in greater detail later in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Results for the three years ended December 27, 1998 are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
(in millions, except per share data)Reported Recurring Reported Recurring Reported Recurring
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from operations $1,060.7 $1,161.5 $602.7 $1,056.9 $909.3 $920.0
Income before income taxes 766.0 866.8 269.7 723.9 499.0 509.7
Net income (loss) 497.6 550.4 (27.0) 439.5 319.9 304.9
Diluted earnings (loss) per share $ 2.26 $ 2.51 $ (.28) $ 1.97 $ 1.43 $ 1.35
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Excluding non-recurring items, earnings per share increased 27% to $2.51 per
diluted share during fiscal 1998 from $1.97 per diluted share in 1997 and net
income increased 25% to $550.4 million during fiscal 1998 from $439.5 million in
fiscal 1997. Excluding non-recurring items, income from operations during 1998
increased 10% to $1.162 billion. Operating margins rose to 15.9% in 1998 from
14.6% in 1997. Net sales of $7.301 billion in 1998 were essentially flat with
the $7.259 billion reported in 1997, having been adversely affected by changes
in foreign currency translation and divestitures. Excluding these factors, net
sales would have increased approximately 1%.
Segment Reporting
During 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way public companies report information
about operating segments in both interim and annual financial statements,
including related disclosures about products and services, geographic areas, and
major customers. As a result, the Company's segments, which are organized based
on the products it offers, have been restated as follows: (i) Tissue--North
America, which manufactures and markets paper-based consumer towel and tissue
products; (ii) Tissue--Europe, which also manufactures and markets paper-based
consumer towel and tissue products, as well as feminine hygiene products and
health care and pharmacy items; (iii) Dixie, which manufactures and markets
disposable plates, cups and cutlery principally under its DIXIE brand; (iv)
Packaging, which manufactures folding cartons and paperboard principally for
food and other consumer products manufacturers; and (v) Communications Papers,
which manufactures and markets uncoated business and printing papers serving the
commercial printing and office markets, and Fiber, which includes the Harmon
Associates wastepaper brokerage business and market pulp sales to both
intercompany and third-party customers. The Communications Papers and Fiber
businesses, for which separate reporting is not required, have been aggregated.
Both the Dixie and Fiber businesses were previously included in the Consumer
Products--North America business.
Net Sales by Segment
[graph]
FORT JAMES CORPORATION 23
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations--1998 Compared to 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
Income from Income from Income from
(in millions) Sales operations Sales operations Sales operations
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tissue--North America $3,440.9 $ 864.8 $3,314.4 $ 783.0 $3,352.7 $ 707.4
Tissue--Europe 1,869.4 236.2 1,828.1 202.4 1,980.2 177.1
Dixie 775.5 89.1 780.8 67.5 796.6 64.1
Packaging 717.7 56.6 782.9 81.3 1,139.9 91.9
Communications Papers and Fiber 796.6 2.4 859.0 14.7 829.5 4.0
Intercompany and Corporate (299.0) (87.6) (306.2) (92.0) (391.8) (124.5)
Restructure and Other
Unusual Items -- (100.8) -- (454.2) -- (10.7)
- -----------------------------------------------------------------------------------------------------
Consolidated $7,301.1 $1,060.7 $7,259.0 $ 602.7 $7,707.1 $ 909.3
=====================================================================================================
</TABLE>
Tissue--North America
The Tissue--North America business reported both improved sales and income from
operations during 1998. Sales increased $126.5 million or 4% over prior year
sales. Income from operations increased $81.8 million, or 10%, to $864.8
million. Segment operating margins increased to 25.1% in 1998 versus 23.6% in
1997. The improved profitability was primarily the result of merger synergies
and other cost reductions, strong retail tissue volumes and moderately higher
retail pricing.
Excluding the effects of divested operations, retail tissue sales increased
7% over the prior year and operating results improved 21%. A 3% increase in
volume and a 4% increase in average prices were the primary drivers of the sales
improvement. The improvement in income from operations was primarily the result
of higher sales and merger synergies and other cost reductions, partially offset
by raw material inflation.
Competitive market conditions for away-from-home products continue to
negatively impact the business. Year over year, both sales and operating margins
were essentially unchanged reflecting flat volumes and prices.
In 1998, the Company unveiled several improvements to its tissue products,
including QUILTED NORTHERN bathroom tissue with significantly greater quilted
thickness, and continued to expand distribution of its retail products.
Additional product improvements are anticipated in 1999 and 2000.
The Company believes that domestic tissue capacity growth, net of capacity
closures, will not exceed demand growth, which should allow supply and demand to
remain in approximate balance in 1999 and 2000; however, competitive market
conditions may result in minimal price growth and increased marketing
expenditures in the near term.
Tissue--Europe
The Tissue--Europe business reported a 17% improvement in income from operations
on a 2% sales increase. Income from operations increased $33.8 million to $236.2
million and sales increased $41.3 million to $1.869 billion. Segment operating
margins increased to 12.6% in 1998 versus 11.1% in 1997. The benefits of cost
reduction initiatives and strong finished goods volume growth were the primary
drivers of the improvements, but were partially offset by lower average prices
resulting from increased promotional activities.
Finished goods volumes, which account for 90% of shipments, increased in
all countries. Semi-finished goods volumes, which primarily consist of
unconverted tissue parent rolls, decreased 11% reflecting increased finished
goods sales. In addition, new product offerings contributed to volume growth.
The net effect was a 4% increase in volume.
Operating Income Tissue-North America
[graph]
24 FORT JAMES CORPORATION
<PAGE>
Prices, which were negatively impacted by competitive conditions, were 1%
lower in 1998 than in 1997. Prices for finished goods declined in most
countries. Prices for semi-finished goods increased 9% as a result of
improvements in all countries except Italy.
Operating profits, led by a 35% improvement in France, increased in
substantially all countries. The improvements were primarily the result of
successful cost reduction programs and strong finished goods volume growth,
slightly offset by other cost inflation.
During 1998, the Company introduced or completed the rollout of new
products into selected European markets, including improved 2-ply and 3-ply
bathroom tissues and uniquely embossed kitchen roll towels. The Company also
improved LOTUS handkerchiefs, expanded the LOTUS professional away-from-home
line, repositioned existing lines and introduced regional products in new
markets.
The Company expects pricing in European tissue markets to remain
competitive in the near term, as additional industry capacity is anticipated to
come on-line at rates greater than expected demand growth. While the capacity
increases are spread across Europe, the most significant additions are expected
in Italy and the United Kingdom. Much of the Italian capacity has historically
been exported to Germany. Therefore, it is expected that the Italian and German
markets, where the Company's exposure is currently limited, will remain among
the most price competitive in Europe.
Dixie
The Dixie business reported a 32% improvement in income from operations despite
flat sales. Segment operating margins increased to 11.5% in 1998 versus 8.6% in
1997 primarily due to significant progress in cost reduction programs. Continued
product rationalization activities have resulted in lower away-from-home
volumes, but improved average pricing.
Pricing for retail tabletop, which accounts for just over half of the
segment's sales, improved 3% while volumes were flat. In the away-from-home
foodservice business, pricing improved 2% while product rationalization lowered
volume 6%. Volume on the innovative PERFECTOUCH hot cup doubled.
During 1998, the Company introduced new DIXIE designs and products. New
designs, such as Quick-drink cups with "Save the Children" graphics, helped
increase the consumer appeal and household reach of the brand. New products,
such as value packs, larger bowls, and serving platters, help busy consumers
avoid time-consuming clean-up after meals.
Though competitive initiatives have increased, management believes that
recent new product launches, combined with continued cost savings, will result
in modest increases in sales and operating results in 1999.
Packaging
The Packaging business reported decreases in both sales and income from
operations for the year. For 1998, sales decreased $65.2 million, or 8% and
income from operations decreased $24.7 million, or 30%. Segment operating
margins decreased to 7.9% in 1998 versus 10.4% in 1997. The business continues
to replace volume lost following a turnover in its customer base. This
replacement volume, however, is at lower average prices and combined with
pricing pressure due to lower market prices for board, resulted in the
unfavorable year-over-year sales comparison. The volume and price declines were
partially offset by cost reductions. During 1998, folding carton prices declined
2% and volumes decreased 9%. Board prices and volumes for 1998 were also below
1997 levels.
The purchase of Beckett Technologies in 1998 gave the Company a new and
improved form of microwave packaging technology.
The Company believes that weak board prices and competitive market
conditions will have a negative effect on this business through at least the
first half of 1999 resulting in flat year-over-year operating results.
Operating Income Tissue-Europe
[graph]
Operating Income Dixie
[graph]
FORT JAMES CORPORATION 25
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Communications Papers and Fiber
Sales and income from operations decreased by 7% and $12.3
million, respectively, for the Communications Papers and
Fiber businesses. The decreases were primarily the result
of a 7% decrease in market pulp prices in the Fiber
business, partially offset by a 7% increase in groundwood
paper prices in the Communications Papers business.
Declines in market pulp, business papers and groundwood
paper volumes were partially offset by increased
wastepaper volumes.
Other Income and Expense Items
Interest expense decreased $63.3 million, or 18%, from
$351.8 million in 1997 to $288.5 million in 1998. Lower
average borrowing costs and reduced debt levels continue
to positively affect interest costs. Despite approximately
$150 million of merger-related payments, total debt
declined by $302.7 million during 1998, from $4.2 billion
at the beginning of the year to $3.9 billion at the end of
the year.
The Company reported other expenses of $6.2 million in
1998 compared to other income of $18.8 million in 1997.
The decrease is primarily due to lower earnings of
unconsolidated subsidiaries and interest and investment
income and to increased foreign currency exchange losses.
The Company's effective income tax rate, excluding tax
effects of restructure and other unusual items, was 36.5%
in 1998 compared to 39.3% in 1997. The decrease in the
effective tax rate from the prior year was primarily the
result of the benefits of tax planning actions. Including
restructure and other unusual items, the effective tax
rate was 34.7% in 1998 compared to 61.3% in 1997. The
reported effective tax rates were impacted by
non-deductible merger costs in 1997 and the reversal in
1998 of merger-related tax reserves which were established
in 1997 in accordance with temporary IRS regulations,
which have since been rescinded.
Non-Recurring Items
The components of the non-recurring items and their effect
on reported results for the past three years are
summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
(in millions) Pretax Net Pretax Net Pretax Net
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Restructure and other unusual items:
Merger restructuring (charges)/
reversals $ 58.2 $ 35.3 $(523.8) $(363.5)
Non-accruable merger-related
costs (74.4) (47.1)
Gain on divestitures 69.6 42.5 $ 89.2 $49.1
Non-accruable severance costs (31.1) (19.0) (40.6) (25.3)
Asset write-downs and
plant closures (19.7) (12.7) (59.3) (36.7)
Permanent impairment of a
non-operating asset (26.2) (16.0)
Other (7.6) (4.7)
- -------------------------------------------------------------------------------------------------------
Subtotal (100.8) (64.2) (454.2) (321.0) (10.7) (12.9)
Extraordinary loss on
debt extinguishment (2.6) (131.5) (8.1)
Merger-related tax reserves 14.0 (14.0)
U.S. Tax Court settlement 36.0
- -------------------------------------------------------------------------------------------------------
Total non-recurring $(100.8) $(52.8) $(454.2) $(466.5) $(10.7) $15.0
=======================================================================================================
</TABLE>
Effective August 13, 1997, the Company completed the merger of a wholly-owned
subsidiary of James River Corporation of Virginia ("James River") with and into
Fort Howard Corporation ("Fort Howard") (the "Merger"). During 1998, the Company
made significant progress in implementing the 1997 merger integration
Operating Income Packaging
[graph]
Interest Expense
[graph]
26 FORT JAMES CORPORATION
<PAGE>
plan, closing five facilities in North America and Europe. Seven additional
facility closures are in progress and a planned closure has been cancelled.
Staffing has been reduced by 1,300 employees, or approximately 5% of the
Company's combined worldwide workforce. A reduction of approximately 400
employees will occur in 1999. The North American and European corporate
headquarters and the Packaging business headquarters have been relocated;
however, the former Packaging business headquarters building has not been sold.
Costs associated with the headquarter relocation efforts were expensed as
incurred. Additionally, during 1998 the Company terminated various contracts and
other long-term agreements; one of which was settled on terms more favorable
than anticipated. Payments for restructure and other merger-related expenditures
were $153.4 million in 1998 and $87.8 million in 1997.
During 1998, the Company recorded net non-recurring pre-tax expenses of
$100.8 million. Included in this total is $74.4 million for merger-related costs
and $31.1 million of severance costs that were not accruable in 1997; $26.2
million for the permanent impairment of a non-operating asset; $19.7 million for
asset write-downs and plant closures; and other net miscellaneous expenses of
$7.6 million. These costs were partially offset by a net reversal of $58.2
million of accruals due to revisions of estimates resulting from changes in
circumstances or settlement of such liabilities on terms more favorable than
anticipated. In addition, the Company reversed $14.0 million of merger-related
tax reserves established in 1997 in accordance with temporary IRS regulations,
which have since been rescinded.
During 1997, the Company recorded net non-recurring pre-tax expenses of
$454.2 million. Included in this total were amounts for facility closures and
write-downs of redundant property, plant and equipment ($234.5 million);
employee severance and other employee-related costs ($103.1 million); costs of
terminating contracts and other long-term agreements ($82.8 million); investment
banking, legal, accounting and other merger-related transaction costs ($54.2
million); and other costs ($49.2 million). These charges were offset by a gain
on the sale of timberlands of $69.6 million.
During 1996, the Company recorded net non-recurring pre-tax expenses of
$10.7 million which included $40.6 million of severance charges and $59.3
million of asset write-downs offset by $89.2 million in net gains on business
dispositions. Severance charges were related to the termination of 870 employees
at the Company's Tissue--North America business, Tissue--Europe business, and
other domestic manufacturing and corporate facilities. Asset write-downs were
related to the phase-out of certain equipment and asset consolidations.
Additionally, the Company recorded a $36.0 million tax benefit as a result of a
U.S. Tax Court decision allowing the Company to deduct certain expenses relating
to Fort Howard's 1988 leveraged buy-out.
Extraordinary charges of $4.2 million ($2.6 million net of taxes, or $0.01
per diluted share), $215.0 million ($131.5 million net of taxes, or $0.63 per
diluted share) and $13.4 million ($8.1 million net of taxes or $0.04 per diluted
share) associated with debt refinancings were recorded in 1998, 1997 and 1996,
respectively.
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities totaled $924.8 million in 1998 compared to
$764.2 million in 1997. Working capital increased from $332.6 at December 28,
1997 to $338.8 million at December 27, 1998. The increase is primarily
attributable to increases in accounts receivable, offset by a comparable
increase in the current portion of long-term debt. During 1998, the Company
spent $153.4 million, excluding tax benefits, on one-time merger-related items.
Synergy and cost-related savings during 1998 were approximately $230 million. In
addition, productivity improvements to the Company's paper machines resulted in
approximately 86,000 tons of incremental tissue production.
Working Capital
[graph]
FORT JAMES CORPORATION 27
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Investing Activities
Net cash used for investing activities totaled $544.4 million in 1998 and
included $545.8 million of capital expenditures, offset by $1.4 million of net
cash provided by miscellaneous investing activities. Net cash used
for investing activities totaled $297.7 million in 1997 and included $490.2
million of capital expenditures, net of $190.1 million of cash proceeds from
asset sales and $2.4 million of miscellaneous cash proceeds. The increase in
capital spending was primarily attributable to construction of a new tissue
machine at the Savannah River Mill. The Company currently expects 1999 capital
spending to approximate 1998 levels. Contractual capital commitments as of
December 27, 1998 were not material.
Financing Activities
Total indebtedness decreased by $302.7 million in 1998, principally from the use
of free cash flows. During 1998, new borrowings totaled $466.3 million and debt
payments, including the net decrease in revolving debt, totaled $767.9 million.
At December 27, 1998, Fort James had committed revolving credit agreements
with various domestic and foreign banks providing for unsecured borrowings of up
to $2.1 billion. These facilities allow the Company to borrow at competitive
interest rates for general corporate purposes. At December 27, 1998, the Company
had unused credit facilities of approximately $1.2 billion.
At December 27, 1998, Fort James' weighted-average interest rate was 6.96%
(including the impact of interest rate swaps), compared to 7.19% as of the end
of 1997. The Company's total debt portfolio is sensitive to changes in interest
rates. Changes in interest rates result in unrealized gains or losses in the
market value of the Company's debt portfolio due to differences between market
interest rates and rates at the inception of the debt agreements. Based on the
Company's total indebtedness at December 27, 1998, a 100 basis point interest
rate change would impact the fair value of the total debt portfolio by
approximately $104 million. This exposure would be offset by a $3 million change
in the fair value of the interest rate swap portfolio. See Note 9 for additional
information.
The Company manages its ratio of fixed to floating rate debt with the
objective of achieving a mix that management believes is appropriate. To manage
this mix in a cost-effective manner, the Company enters into interest rate swap
agreements, in which it agrees to various combinations of fixed and/or variable
interest rates based on agreed upon notional amounts. Total outstanding debt of
$3.9 billion at December 27, 1998 included approximately $2.8 billion of fixed
rate and $1.1 billion of floating rate obligations (including the effect of
interest rate swaps). The Company had $0.9 billion and $1.1 billion in notional
amounts of interest rate swap agreements in effect at December 27, 1998, and
December 28, 1997, respectively. The strategy employed by the Company to manage
its exposure to interest rate fluctuations is consistent with that of prior
years. Management does not foresee or expect any significant changes in its
exposure to interest rate fluctuations or in how such exposure is managed in the
near future. Additional information on interest rate management activities is
provided in Note 9.
As of December 27, 1998, the Company's debt ratings were investment grade
and were as follows:
- -------------------------------------------------------------------------------
Outlook Senior Debt Commercial Paper
- -------------------------------------------------------------------------------
Moody's Investor Services Stable Baa2 Prime-2
Standard & Poor's Positive BBB- A3
===============================================================================
In April 1998, the Company completed the redemption and conversion of its Series
K $3.375 Cumulative Convertible Exchangeable Preferred Stock, its Series L
$14.00 Cumulative Convertible Exchangeable Preferred Stock and its Series N
$14.00 Cumulative Convertible Exchangeable Preferred Stock (the "Preferred
Stock"). Substantially all of the outstanding preferred stock was converted into
9.5 million shares of common stock in a non-cash financing transaction of $350.9
million. The balance was redeemed for $1.8 million in cash. The conversion
reduced net dividend payments by approximately $19 million.
Capital Expenditures and Cash Flow From Operations
[graph]
Total Debt
[graph]
28 FORT JAMES CORPORATION
<PAGE>
During 1997, the Company converted its Series P 9% preferred stock into
15.3 million shares of common stock and redeemed its Series O 8 1/4% preferred
stock for $98.1 million. The conversion and redemption of the Series P and
Series O preferred stocks reduced annual net dividend payments by approximately
$25 million.
Dividends paid on common and preferred stock increased to $139.5 million in
1998, compared to $121.6 million in 1997, due to an increase in common stock
dividends, partially offset by reduced preferred stock dividends. Prior to the
Merger, Fort Howard did not pay common stock dividends. The decrease in
preferred stock dividends was due to the redemption and conversion of
outstanding preferred shares.
The Company's international operations create exposure to foreign currency
exchange rate risks. To manage these risks, the Company utilizes foreign
exchange contracts. As of December 27, 1998, and December 28, 1997, the Company
had outstanding foreign exchange contracts with notional amounts of $20 million
and $304 million, respectively, to hedge firm and anticipated purchase
commitments and firm sales commitments denominated in foreign currencies. The
use of these derivative financial instruments allows the Company to reduce its
overall exposure to exchange rate movements, since the gains and losses on these
contracts substantially offset losses and gains on the assets, liabilities and
transactions being hedged. As of December 27, 1998 and December 28, 1997, Fort
James had net unrealized gains on foreign exchange contracts of $0.1 million and
$0.5 million, respectively. A 10% change from the prevailing market rates of
these foreign currencies would not have a material effect on the results of
operations.
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 has made and will continue to make substantial capital
investments and operating expenditures, as well as production adjustments, to
comply with increasingly stringent standards for air, water, and solid and
hazardous waste regulations. Capital expenditures totaling approximately $31
million and $15 million were made for pollution control facilities and equipment
in 1998 and 1997, respectively.
In 1997, the U.S. Environmental Protection Agency published regulations,
commonly referred to as the "Cluster Rules," affecting pulp and paper industry
discharges of wastewater and gaseous emissions. These rules require changes in
the pulping and bleaching processes presently used in some U.S. pulp mills,
including several of the Company's mills. Based on its evaluation of the rules,
the Company believes that capital expenditures of approximately $100 million may
be required to comply with the Cluster Rules, the majority of which will be
spent in the next three to four years.
Fort James, along with others, has been identified as a "potentially
responsible party" under federal or state laws with respect to various sites
where hazardous substances or other contaminants are located. Note 13 provides
information on the Company's accrued remediation liabilities.
Contingent Liabilities
During 1997, civil actions were filed in several jurisdictions against Fort
James and various other manufacturers of sanitary paper products alleging
violations of federal and state antitrust and unfair competition laws. The
Company believes these cases are without merit and intends to defend the
litigation vigorously. Further information on Fort James' legal matters is
included in Note 13.
Total Capitalization
[graph]
Annual Rate of Cash Dividends per Common Share
[graph]
FORT JAMES CORPORATION 29
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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.
To coordinate its Y2K efforts, the Company established a Y2K Project
Office. The Y2K Project Office is comprised of representatives from a variety of
departments throughout the Company, including manufacturing, legal, and
corporate communications. The Y2K Project Office 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 Plan (the "Y2K Project") is comprised of four phases.
o Phase I--High Level Inventory and Assessment, includes the initial
inventory of company-wide systems; the deployment of analytical software
tools; and project and high-level scope definition.
o Phase II--Detailed Inventory and Assessment, includes system assessment and
determination of renovation strategy (repair, retire or replace); the
design of solutions for application work packets; and development of
detailed plans and cost estimates.
o Phase III--Analysis, Conversion, Testing and Redeployment, includes the
implementation of a renovation strategy for each application; testing for
functionality and Y2K compliance; and redeployment into production.
o Phase IV--Business Continuity Plan, includes procedures to identify,
categorize, and prioritize business functions; risk assessment of system
failures; a plan for reasonably foreseeable failures that could result from
non-compliant information and embedded systems; and development of a
disaster recovery plan to respond to unanticipated systems failures.
To assist with management of the Y2K Project, work is organized into
various work categories. Where appropriate, each category includes specific work
plans, contingency plans, schedules and goals. A separate Methodology and
Quality Control group (MQC) was established to oversee work category remediation
and testing and to provide general project management support. 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, system tested and returned to production. Other applications that
are being remediated will be tested in conjunction with the Company's business
systems merger activity. All plans are proceeding on schedule for anticipated
completion during the second quarter of 1999.
30 FORT JAMES CORPORATION
<PAGE>
Midrange: The Company utilizes vendor supplied client-server products to
perform key business functions. Vendor code within these systems is represented
to be Y2K ready while Company created custom code requires examination. 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 planned for the third quarter of 1999. Remediation
of custom code for accounts receivable is in the planning stage, with completion
estimated for the second quarter of 1999. Y2K testing and documentation of
Company created code have been incorporated into the project plans for other
vendor supplied software to be installed during 1999.
Plants & Mills--(Distributed Systems): A detailed inventory of software
applications at the Company's plants and mills has been completed. Project
plans, detailing specific activities by application, have been completed for
each facility. More than 40% 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): Fort James communicates with many of its
trading partners electronically through a system known as EDI. To maintain these
relationships, the Company has developed a two-tiered strategy. The Company has
installed software that allows it to send and receive Y2K ready EDI
transmissions. As a result, the Company has the ability to communicate with
customers and suppliers who are Y2K ready and also with those who have not
upgraded to Y2K ready systems. The Company will use Y2K ready data transmissions
to communicate with trading partners as they migrate to Y2K ready environments.
Process Control (Manufacturing Operations): Fort James is currently
remediating process control equipment at its manufacturing facilities worldwide.
Process and instrumentation engineers at each site have completed detailed
inventories of all process equipment and are now engaged in verification of Y2K
compliance and the appropriate remediation and testing efforts. More than 17,000
distinct Programmable Logic Controllers (PLCs) and Distributed Control Systems
(DCS) have been identified. Over 9,000 items have already been either repaired
or verified as being Y2K ready. Before accepting vendor representations that a
PLC is Y2K ready, the Company tests the downstream use of the data and the
custom code in the application. The target date for completion of process
control remediation and testing is the third quarter of 1999.
Infrastructure: All sites completed an inventory of intelligent devices in
the first quarter of 1998. Research into 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 third quarter of 1999.
Desktop--includes Local Area Network (LAN) and Wide Area Network (WAN): A
detailed inventory of approximately 10,000 personal computers (PCs) and more
than 80 LANs has been completed. PCs that are not Y2K ready have been identified
and are scheduled to be upgraded or replaced before the end of the third quarter
of 1999. In general, the vast majority of the Company's PCs are loaded with
standard corporate software suites from IBM and Microsoft. The Company has
created a comprehensive database to record Y2K compliance information for
software resident on its PCs. This information is based on assurance statements
retrieved from vendor web sites. Additional vendor support to address the
remaining Y2K issues has been contracted.
Value Chain: The Company has surveyed its customers and suppliers to assess
potential Y2K risks presented by trading partners. In addition, the Company has
identified materially significant suppliers and customers. Materially
significant suppliers, for this purpose, are defined as suppliers who provide
(i) significant dollar amounts of goods or services, (ii) goods and services
that are critical to uninterrupted production or (iii) the sole-source for goods
and services. Material customers are those to whom the Company sells a
significant dollar amount of product. 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 will be evaluated in Business Continuity
Planning as described below. The Value Chain assessment will be completed during
the second quarter of 1999.
FORT JAMES CORPORATION 31
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Legal: Legal counsel is responsible for assuring that the Company's legal
rights are protected during the course of the Y2K Project. Key tasks include
ensuring proper documentation and records management; monitoring communications
with third parties to ensure the delivery of accurate, timely information while
minimizing the potential for liability; and advising management of Y2K related
legal developments. In addition, legal counsel may also pursue recovery from
vendors who may have supplied the Company with Y2K defective products.
Business Continuity Planning: The Business Continuity Planning project
consists of three components: risk management, contingency planning, and
disaster recovery. Risk management efforts are focused on determining the
internal functions and supporting systems that are mission critical; analyzing
the risk exposures; prioritizing the work; and ensuring that the most efficient
allocation of resources is used toward remediation efforts. In addition,
responses provided to the Value Chain assessment will be used to evaluate
material external exposures. All business units are actively involved in this
project including those focused on key services supplied by third party vendors
such as the distribution of energy used in the production process and the
delivery of finished product to customers. The contingency planning and disaster
recovery efforts, which will follow completion of the risk management component,
are scheduled to be substantially complete by October 1999.
The Company spent approximately $35 million during 1998 and $8 million
during 1997 on the Y2K Project. The Company currently estimates additional
spending of approximately $45 million to $55 million in 1999 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 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 year 2000 capable from having a material adverse
effect on the Company's financial condition or results of operations.
Euro Conversion
On January 1, 1999, eleven of the fifteen members of the European Union (the
"Participating Countries") established fixed conversion rates between their
existing sovereign currencies (the "Legacy Currencies") and a single new
currency (the "Euro"). For a three-year transition period, transactions can be
conducted in both the Euro and the Legacy Currencies. After June 30, 2002, the
Euro will be the sole legal tender of the participating countries. The adoption
of the Euro will affect a multitude of financial systems and business
applications.
32 FORT JAMES CORPORATION
<PAGE>
The Company has operations in seven of the Participating Countries and has
product sales in all of the Participating Countries. The Company's European
businesses affected by the Euro conversion are establishing plans to address the
information system issues and the potential business implications of converting
to a common currency. As part of this process, the Company is evaluating its
information technology systems. The Company believes it will be able to modify
its financial systems and business activities to accommodate the conversion and
transition to the Euro. The Company is unable to determine the financial impact
of the conversion on its operations, if any, given that the impact will depend
on the competitive situations which exist in the various regional markets in
which the Company participates and potential actions which may or may not be
taken by the Company's competitors and suppliers.
Effect of New Accounting Standards
During 1998, new accounting standards were issued, which will be effective for
the Company's 1999 and 2000 fiscal years. These new standards are described in
Note 1.
Results of Operations--1997 Compared to 1996
Tissue--North America
Net sales declined slightly between 1996 and 1997, while income from operations
increased $75.6 million, or 11%. Impacting the sales comparison was the loss of
three days of Fort Howard shipments in fiscal 1997, resulting from the
conversion to the Fort James fiscal year. Operating results for 1996 included an
$18 million charge for revised estimates of costs of certain environmental
matters.
Net sales of retail products decreased approximately 2% in 1997 compared to
1996, on higher volumes and slightly lower average pricing. Retail tissue unit
volumes increased by approximately 2% over the prior year, but pricing declined
approximately 2%, reflecting the effect of list price reductions put into effect
in the spring of 1996. Additionally, promotional spending for retail towel and
tissue products increased moderately in the second half of 1997, in response to
competitive activity.
Net sales of away-from-home products were flat in 1997 compared to 1996, as
improved product volumes were essentially offset by marginally lower average
prices. Away-from-home tissue unit volumes increased by approximately 4% over
the prior year.
Tissue--Europe
Net sales declined $152.1 million, or 8%, in 1997 compared to 1996. For the same
period, income from operations increased $25.3 million, or 14%. Segment
operating margins continued to improve, rising to 11.1% in 1997 from 8.9% in
1996. Sales and operating profits were both negatively affected by changes in
foreign currency translation associated with the strengthening of the U.S.
dollar. Absent these changes, the Company estimates 1997 sales would have been
similar to the prior year levels and operating profits would have increased by
20%.
Selling prices for European tissue products averaged between 2% and 3%
lower in 1997 compared to 1996; however, pricing trends varied significantly by
country. Finished goods pricing trends were weakest in Italy, where aggressive
industry capacity additions have made the market more price competitive, while
pricing in other countries generally ranged from level with the prior year to a
decline of approximately 5%.
FORT JAMES CORPORATION 33
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Finished goods unit volumes increased more than 2% in 1997 versus 1996, as
the Company was able to consolidate the strong volume gains achieved in 1996.
Unconverted tissue parent roll volumes, which accounted for approximately 8% of
the tons sold in Europe, declined by more than 2%, reflecting increased sales of
converted tissue products.
Dixie
Net sales declined $15.8 million, or 2%, in 1997 compared to 1996 while income
from operations increased $3.4 million, or 5%, for the same period. Retail
tabletop volumes increased nearly 5% year-over-year while average pricing in
1997 was fairly comparable to 1996 levels. Foodservice volumes decreased by
approximately 9% compared to 1996 due to product rationalization efforts, while
average pricing improved modestly compared to the prior year. The increase in
income from operations was primarily due to cost reductions, although some of
the gain was invested in increased retail advertising and promotion spending.
Packaging
Net sales declined $357.0 million, or 31%, in 1997 compared to 1996. For the
same period, income from operations declined $10.6 million, or 12%, while
segment operating margins improved to 10.4% in 1997 versus 8.1% in 1996. The
decline in sales was principally attributable to the 1996 sale of the Flexible
Packaging and related Inks divisions, while the decline in operating profits was
primarily the result of lower average pricing. On a pro forma basis, excluding
the Flexible Packaging division, sales decreased by $72 million, from $855
million in 1996 to $783 million in 1997 and operating profits decreased by $9
million, from $90 million to $81 million, respectively.
The decline in pro forma sales and profits was primarily the result of
lower average selling prices for the Company's folding cartons and coated
recycled board, partially offset by improved volumes. Average carton and
recycled board prices declined approximately 5% versus the prior year, as
declines in raw material costs created a more competitive pricing environment.
Folding carton unit volumes improved approximately 5% in 1997 compared to 1996,
while recycled board volumes increased by more than 10%, reflecting improvements
in productivity and efficiency at the Company's Kalamazoo, Michigan, recycled
board mill. Operating profits were also affected by a modest increase in
wastepaper and other raw material costs.
Communications Papers and Fiber
Net sales in the Communications Papers and Fiber businesses increased 3.6% in
1997 compared to 1996. For the same period, income from operations increased
$10.7 million. Sales and income from operations were favorably affected by
higher uncoated free sheet, groundwood paper and market pulp volumes, and lower
wood costs. These factors were partially offset by declines in average selling
prices for uncoated free sheets, uncoated groundwood papers and market pulp.
34 FORT JAMES CORPORATION
<PAGE>
Other Income and Expense Items
Interest expense decreased $72.6 million, or 17%, from $424.4 million in 1996 to
$351.8 million in 1997. The decline resulted from lower average debt levels,
combined with the benefits from the Company's refinancing activities. Total debt
declined by $244.3 million during 1997, from $4.4 billion at the beginning of
the year to $4.2 billion at the end of the year.
Other income increased to $18.8 million in 1997 from $14.1 million in 1996,
reflecting an increase in gains on the sale of miscellaneous assets, partially
offset by increased foreign currency exchange losses.
The Company's reported effective tax rate increased to 61.3% in 1997 versus
34.3% in 1996, principally due to non-deductible merger costs. Excluding
restructuring and other unusual items and the 1996 tax deduction of 1988 LBO
expenses, the effective tax rate declined to 39.3% in 1997 compared to 40.2% in
the prior year. The recurring effective tax rate declined primarily due to the
decreased relative size of non-deductible items.
General corporate expenses declined $32.5 million, or 26% in 1997 compared
to 1996, as a result of reduced spending on new, integrated management
information systems.
Information Concerning Forward-Looking Statements
Certain sections of this annual report contain forward-looking statements, which
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are made based upon
management's expectations and beliefs concerning future events impacting the
Company. Such forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that could cause actual
results and Company plans and objectives to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, general
business and economic conditions; competitive pricing pressures for the
Company's products; changes in raw material, energy and other costs;
opportunities that may be presented to and pursued by the Company;
determinations by regulatory and governmental authorities; the ability to
achieve synergistic and other cost reductions and efficiencies; and the ability
to successfully remediate Year 2000 problems.
FORT JAMES CORPORATION 35
<PAGE>
Consolidated Statements of Operations and Comprehensive Income
<TABLE>
<CAPTION>
For the years ended
- ---------------------------------------------------------------------------------------------------------------------------
December 27, December 28, December 29,
(in millions, except per share amounts) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $7,301.1 $7,259.0 $7,707.1
Cost of goods sold 4,965.1 5,077.7 5,564.2
Selling and administrative expenses 1,174.5 1,124.4 1,222.9
Restructure and other unusual items 100.8 454.2 10.7
- ---------------------------------------------------------------------------------------------------------------------------
Income from operations 1,060.7 602.7 909.3
Interest expense (288.5) (351.8) (424.4)
Other income (expense), net (6.2) 18.8 14.1
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary items 766.0 269.7 499.0
Income tax expense (265.8) (165.2) (171.0)
- ---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items 500.2 104.5 328.0
Extraordinary loss on early extinguishment of debt, net of taxes of
$1.6 million in 1998, $83.5 million in 1997 and $5.3 million in 1996 (2.6) (131.5) (8.1)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) 497.6 (27.0) 319.9
===========================================================================================================================
Preferred dividend requirements (4.4) (43.4) (58.5)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common stockholders $ 493.2 $ (70.4) $ 261.4
===========================================================================================================================
Comprehensive Income:
Net income (loss) $ 497.6 $ (27.0) $ 319.9
Other comprehensive income:
Minimum pension liability adjustment 1.9 4.9 18.9
Foreign currency translation adjustments 59.8 (139.4) (11.7)
Unrealized gains (losses) on available-for-sale securities (20.0) 22.8 7.0
Net tax (expense) benefit 7.1 (13.8) (13.8)
- ---------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (expense) 48.8 (125.5) .4
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 546.4 $ (152.5) $ 320.3
===========================================================================================================================
Basic earnings per share:
Income before extraordinary items $ 2.29 $ .31 $ 1.49
Extraordinary loss on early extinguishment of debt (.01) (.67) (.05)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.28 $ (.36) $ 1.44
===========================================================================================================================
Weighted average common shares outstanding 216.1 195.5 181.4
===========================================================================================================================
Diluted earnings per share:
Income before extraordinary items $ 2.27 $ .35 $ 1.47
Extraordinary loss on early extinguishment of debt (.01) (.63) (.04)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.26 $ (.28) $ 1.43
===========================================================================================================================
Weighted average common shares and
common share equivalents outstanding 217.9 207.6 183.1
===========================================================================================================================
Cash dividends per common share $ .60 $ .60 $ .60
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36 FORT JAMES CORPORATION
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of
- ---------------------------------------------------------------------------------------------------------------------------
December 27, December 28,
(in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5.3 $ 33.6
Accounts receivable 891.5 787.8
Inventories 869.5 854.3
Deferred income taxes 162.7 214.4
Prepaid expenses and other current assets 25.1 26.4
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 1,954.1 1,916.5
- ---------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 4,654.3 4,565.3
Goodwill 628.7 636.9
Other assets 555.2 614.5
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $7,792.3 $7,733.2
===========================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 702.8 $ 636.5
Accrued liabilities 672.5 913.0
Current portion of long-term debt 240.0 34.4
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,615.3 1,583.9
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt 3,647.2 4,155.5
Deferred income taxes 756.5 650.8
Accrued postretirement benefits other than pensions 458.8 474.8
Other long-term liabilities 263.1 283.9
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,740.9 7,148.9
- ---------------------------------------------------------------------------------------------------------------------------
Preferred stock, $10 par value, 5.0 million shares authorized, issuable in series;
3.3 million shares outstanding December 28, 1997 -- 352.7
Common stock, $0.10 par value, 500.0 million shares authorized;
shares outstanding, 1998--220.5 million and 1997--209.3 million 22.1 20.9
Additional paid-in capital 3,215.6 2,807.9
Accumulated comprehensive loss (88.8) (137.6)
Accumulated deficit (2,097.5) (2,459.6)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,051.4 584.3
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,792.3 $7,733.2
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FORT JAMES CORPORATION 37
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended
- ---------------------------------------------------------------------------------------------------------------------------
December 27, December 28, December 29,
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used for) operating activities:
Net income (loss) $ 497.6 $ (27.0) $ 319.9
Depreciation expense 471.1 474.7 502.5
Amortization of goodwill 19.7 20.1 21.4
Deferred income tax provision (benefit) 148.1 (41.4) 53.7
Restructure and other unusual items 34.6 366.4 10.7
Loss on early extinguishment of debt, net of tax 2.6 131.5 8.1
Change in current assets and liabilities, net of effects
of acquisitions and dispositions:
Accounts receivable (89.1) (88.8) 96.1
Inventories (25.8) (79.7) 82.5
Other current assets (1.6) 23.5 (2.1)
Accounts payable and accrued liabilities (89.4) 69.4 53.8
Foreign currency hedge -- (31.5) --
Other, net (43.0) (53.0) (62.0)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 924.8 764.2 1,084.6
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities:
Expenditures for property, plant and equipment (545.8) (490.2) (484.9)
Cash paid for acquisitions, net -- -- (199.9)
Proceeds from sale of assets 5.9 190.1 496.6
Other, net (4.5) 2.4 (4.3)
- ---------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (544.4) (297.7) (192.5)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities:
Additions to long-term debt 466.3 2,200.9 4.2
Payments of long-term debt (767.9) (2,378.4) (1,049.2)
Common and preferred stock cash dividends paid (139.5) (121.6) (97.2)
Premiums paid on early extinguishment of debt (3.2) (152.3) (1.5)
Redemption of preferred stock (6.6) (98.1) (1.9)
Proceeds from exercise of stock options 30.4 82.0 16.1
Common stock issued, net of offering costs -- -- 203.8
Other, net 11.8 -- 1.2
- ---------------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (408.7) (467.5) (924.5)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (28.3) (1.0) (32.4)
Cash and cash equivalents, beginning of year 33.6 34.6 67.0
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5.3 $ 33.6 $ 34.6
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
38 FORT JAMES CORPORATION
<PAGE>
Consolidated Statements of Changes in Capital Accounts
<TABLE>
<CAPTION>
For the years ended
- ---------------------------------------------------------------------------------------------------------------------------
December 27, December 28, December 29,
(in millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stock
Balance, beginning of year $ 352.7 $ 738.4 $ 740.3
Conversion of preferred stock (350.9) (287.6) --
Redemption of preferred stock (1.8) (98.1) (1.9)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ -- $ 352.7 $ 738.4
- ---------------------------------------------------------------------------------------------------------------------------
Common shareholders' equity
Common stock:
Balance, beginning of year $ 20.9 $ 18.9 $ 17.2
Conversion of preferred stock 1.0 1.5 --
Exercise of stock options and awards .2 .4 .1
Common stock offerings -- -- 1.5
Other -- .1 .1
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year 22.1 20.9 18.9
- ---------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance, beginning of year 2,807.9 2,407.0 2,181.7
Conversion of preferred stock 349.9 286.1 --
Exercise of stock options and awards 53.3 103.7 18.8
Restricted stock compensation earned 9.3 13.1 3.0
Common stock offerings -- -- 202.3
Other (4.8) (2.0) 1.2
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,215.6 2,807.9 2,407.0
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income:
Balance, beginning of year (137.6) (12.1) (12.5)
Other comprehensive income 48.8 (125.5) .4
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year (88.8) (137.6) (12.1)
- ---------------------------------------------------------------------------------------------------------------------------
Retained deficit:
Balance, beginning of year (2,459.6) (2,300.7) (2,510.9)
Net income (loss) 497.6 (27.0) 319.9
Common stock cash dividends declared (131.1) (88.5) (51.2)
Preferred stock cash dividends declared (4.4) (43.4) (58.5)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year (2,097.5) (2,459.6) (2,300.7)
- ---------------------------------------------------------------------------------------------------------------------------
Common shareholders' equity, end of year $1,051.4 $ 231.6 $ 113.1
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FORT JAMES CORPORATION 39
<PAGE>
Notes to Consolidated Financial Statements
1
Summary of
Significant
Accounting Policies
Basis of Presentation
The consolidated financial statements of Fort James Corporation ("Fort James"
or the "Company") have been prepared to give retroactive effect to the merger
of a wholly-owned subsidiary of James River Corporation of Virginia ("James
River") with and into Fort Howard Corporation ("Fort Howard") on August 13,
1997. The merger was accounted for as a pooling of interests (see Note 2). In
connection with the merger, James River was renamed Fort James Corporation.
Principles of Consolidation
The consolidated financial statements present the operating results and
financial position of Fort James and its majority owned subsidiaries.
Significant intercompany balances and transactions have been eliminated.
Investments in unconsolidated affiliates which are at least 20% owned are
accounted for using the equity method and are stated at cost plus the
Company's share of undistributed earnings and foreign currency translation
adjustments, as applicable, since acquisition.
Fiscal Year
Fort James' fiscal year includes the 52 or 53 weeks ending on the last Sunday
in December. The years ended December 27, 1998, December 28, 1997 and December
29, 1996 each included 52 weeks.
Use of Estimates
Financial statements prepared in conformity with generally accepted accounting
principles require management to make estimates and assumptions that affect
the amounts reported therein. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company invests cash in marketable securities, including commercial paper,
government repurchase agreements, and time deposits, with original maturities
of three months or less. The carrying value of cash and cash equivalents
approximates fair value because of the short maturity of these investments.
Inventories
Inventories are stated at the lower of cost or market and include the cost of
materials, labor and manufacturing overhead. The last-in, first-out cost flow
assumption is used for valuing substantially all domestic inventories other
than stores and supplies. Other inventories, including substantially all
inventories held by foreign subsidiaries, are valued using first-in, first-out
or average cost assumptions.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, less accumulated
depreciation. Expenditures for improvements which increase asset values or
extend useful lives are capitalized. Maintenance and repair costs are expensed
as incurred. For financial reporting purposes, depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, which range from 20 to 50 years for buildings and generally 5 to 25
years for machinery and equipment. For income tax purposes, depreciation is
calculated using accelerated methods. Certain assets are depreciated using
composite depreciation methods; accordingly, no gain or loss is recognized on
partial sales or retirements of these assets.
Timber and Timberlands
Timber and timberlands are stated at cost less the accumulated cost of timber
harvested. The cost of timber harvested is recorded as timber is cut based on
rates which are determined annually from the relationship of unamortized
timber cost to the estimated volume of recoverable timber.
40 FORT JAMES CORPORATION
<PAGE>
Intangible Assets
The excess of the purchase price over the fair value of identifiable net
assets of acquired companies is allocated to goodwill and amortized over the
estimated useful life, not to exceed 40 years. Goodwill is presented net of
accumulated amortization of $148.5 million as of December 27, 1998 and $128.8
million as of December 28, 1997. Differences between the Company's carrying
value of investments in unconsolidated affiliates and its share of the
underlying net assets of such affiliates are amortized over the estimated
useful life, not to exceed 40 years. The recoverability of goodwill is
periodically evaluated to determine whether current events or circumstances
warrant adjustments to the carrying value. Such evaluation is based upon
whether the goodwill is fully recoverable from the projected undiscounted cash
flows of the businesses to which the goodwill relates.
Interest Costs
The Company capitalizes interest costs as part of the cost of constructing
certain facilities and equipment.
- ----------------------------------------------------------------------------
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------
Total interest costs $298.4 $362.8 $431.0
Interest capitalized (9.9) (11.0) (6.6)
- ----------------------------------------------------------------------------
Net interest expense $288.5 $351.8 $424.4
============================================================================
Interest paid $306.6 $379.2 $417.6
============================================================================
Other Operating Expenses
Research and development expenditures are expensed as incurred. Direct and
readily identifiable indirect research and development costs totaled $40.1
million in 1998, $40.9 million in 1997, and $49.8 million in 1996. Advertising
and other promotional expenses are expensed as incurred and totaled $81.4
million in 1998, $102.9 million in 1997, and $94.4 million in 1996.
Software Development Costs
Software development costs are accounted for in conjunction with Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" which was adopted at the beginning of
fiscal 1998. Third-party costs of materials and services and payroll costs for
employees directly associated with software development are capitalized and
amortized over the expected life of the software. Other development-related
costs are expensed as incurred. In 1998, the effect of adopting SOP 98-1 was
to increase net income and fully diluted earnings per share by approximately
$30.5 million and $0.14, respectively. A substantial portion of the software
development costs relate to conversion of the Tissue--North America segment to
a combined order entry and invoicing system.
Foreign Currency Translation
The accounts of most foreign subsidiaries and affiliates are measured using
local currency as the functional currency. For those entities, assets and
liabilities are translated into U.S. dollars at period-end exchange rates, and
income and expense accounts are translated at average monthly exchange rates.
Net exchange gains or losses resulting from such translation are excluded from
net earnings and accumulated as a component of other comprehensive income.
Gains and losses from foreign currency transactions are included in net income
in the period during which they arise. The U.S. dollar is used as the
functional currency for subsidiaries and affiliates operating in highly
inflationary economies, for which both translation adjustments and gains and
losses on foreign currency transactions are included in net income in the
period during which they arise.
FORT JAMES CORPORATION 41
<PAGE>
Notes to Consolidated Financial Statements
Derivative Financial Instruments
The Company utilizes derivative financial instruments, including interest rate
swaps, caps, options and foreign exchange contracts, to manage its exposure to
interest rate and foreign currency exchange rate risks. The Company does not
hold or issue derivative financial instruments for trading purposes.
Net interest to be paid or received under interest rate hedges is accrued
and recognized as an adjustment to interest expense. The costs of interest
rate hedges, as well as gains or losses on terminated interest rate swap and
cap agreements, are deferred and charged to interest expense over the shorter
of the original term of the agreements or the life of the financial
instruments to which they are matched. Changes in the fair value of interest
rate hedges are not recorded in the Company's financial statements.
Foreign exchange contracts which effectively meet risk reduction and
correlation criteria are accounted for using hedge accounting. Under this
method, gains and losses are recognized in income and offset the foreign
exchange gains and losses on the related transactions. Contracts which do not
meet the risk reduction and correlation criteria are recorded at fair value
with the unrealized gain or loss included in other income. If a foreign
exchange contract hedging a net investment in a foreign subsidiary is
terminated, the gain or loss is recognized in other comprehensive income, net
of tax, consistent with the accounting treatment of the hedged item. If a
transactional hedge is terminated, the gain or loss is recognized in income.
Net Income (Loss) Per Common Share and Common Share Equivalent
Income and share information used in determining earnings per share were
calculated as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------
(in millions) Income Shares Income Shares Income Shares
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item $500.2 $104.5 $328.0
Preferred stock dividends (4.4) (43.4) (58.5)
- --------------------------------------------------------------------------------------------------
Amounts used to compute basic
earnings per share 495.8 216.1 61.1 195.5 269.5 181.4
- --------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Options* -- 1.8 -- 2.5 -- 1.7
Convertible preferred stock* -- -- 12.9 9.6 -- --
- --------------------------------------------------------------------------------------------------
Amounts used to compute diluted
earnings per share $495.8 217.9 $ 74.0 207.6 $269.5 183.1
==================================================================================================
</TABLE>
* Series K, L and N preferred stocks, which were redeemed in the second
quarter of 1998, were antidilutive for all years presented; Series P preferred
stock, which was converted in the fourth quarter of 1997, was antidilutive in
1996. Outstanding options to purchase shares of common stock for which the
exercise price of the option was greater than the average market price of the
common shares were excluded from the computation of diluted earnings per
share.
Prospective Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999 (Fiscal 2000 for the Company). FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded in current-period earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. The
ineffective portion of all hedges will be recognized in current-period
earnings. The Company has not determined what affect FAS 133 will have on the
Company's results of operations or financial position.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP provides guidance on the financial reporting of
start-up and organization costs. It requires such costs to be expensed as
incurred and is effective for the Company's 1999 fiscal year. As a result of
adopting SOP 98-5, the
42 FORT JAMES CORPORATION
<PAGE>
Company estimates that in the first quarter of fiscal 1999 it will
recognize a pre-tax charge of approximately $25-$35 million to write-off
unamortized start-up and organization costs. This charge will be accounted for
as a cumulative effect of an accounting change.
Reclassifications
Certain amounts in the financial statements and supporting footnotes have been
reclassified to conform to the current year's classification.
2
Acquisitions,
Dispositions
and Other
Transactions
Effective August 13, 1997, the Company completed the merger of a wholly-owned
subsidiary of James River with and into Fort Howard. In connection with the
merger, the Company issued 104.8 million shares of its common stock, valued at
$4.6 billion, in exchange for all the outstanding common stock of Fort Howard.
The merger qualified as a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, the Company's consolidated financial
statements have been restated for all periods prior to the business
combination to include the combined financial results of James River and Fort
Howard. There were no significant intercompany transactions between James
River and Fort Howard.
Cash proceeds from asset sales totaled $190.1 million during 1997. The
majority of the proceeds were from the sale of timberlands in the southeastern
U.S. and in Maine, which were sold pursuant to an ongoing timberland
divestiture program.
In September 1996, the Company purchased the remaining 14% minority
interest in Jamont N.V., a European subsidiary, for $199.9 million. The
acquisition of the minority interest, which had a book value of $151 million,
was recorded under the purchase method of accounting. In October 1996, the
Company completed the sale of its Inks division, which included seven plants,
for gross cash proceeds of $27 million. This division, with annual net sales
of approximately $47 million, manufactured and sold high quality inks for
packaging applications. In August 1996, the Company completed the sale of its
Flexible Packaging group for gross proceeds of $373 million. The Flexible
Packaging group had ten manufacturing facilities, annual net sales of $483
million and net assets totaling $336.7 million. In May 1996, the Company
completed the sale of its specialty operations business for cash proceeds of
$30 million and a combination of subordinated long-term notes and preferred
stock. The specialty operations business had annual net sales of approximately
$125 million. The Company sold its Handi-Kup foam cup operations in 1996 for
$52 million. The Handi-Kup operations had annual net sales of approximately
$96 million.
Summary
The purchase prices of acquisitions were allocated to the acquired net assets
based on their respective fair values. Acquisitions and dispositions are
summarized below.
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Cash paid for acquisitions of consolidated entities $-- $ -- $199.9
- --------------------------------------------------------------------------------
Dispositions:
Fair value of assets sold $5.9 $190.1 $508.9
Non-cash consideration received -- -- (12.3)
- --------------------------------------------------------------------------------
Cash received from sale of assets $5.9 $190.1 $496.6
================================================================================
FORT JAMES CORPORATION 43
<PAGE>
Notes to Consolidated Financial Statements
3
Restructure
and Other
Unusual Items
During 1998, the Company recorded net non-recurring pre-tax expenses of $100.8
million. Included in this total is $74.4 million for merger-related costs and
$31.1 million of severance costs that were not accruable in 1997; $26.2
million for the permanent impairment of a non-operating asset; $19.7 million
for asset write-downs and plant closures; and other net miscellaneous expenses
of $7.6 million. These costs were partially offset by a net reversal of $58.2
million of accruals due to revisions of estimates resulting from changes in
circumstances or settlement of such liabilities on terms more favorable than
anticipated.
During 1997, the Company recorded net non-recurring pre-tax expenses of
$454.2 million. Included in this total were amounts for facility closures and
write-downs of redundant property, plant and equipment ($234.5 million);
employee severance and other employee-related costs ($103.1 million); costs of
terminating contracts and other long-term agreements ($82.8 million);
investment banking, legal, accounting and other merger-related transaction
costs ($54.2 million); and other costs ($49.2 million). These charges were
offset by a gain on the sale of timberlands of $69.6 million.
During 1998, the Company made significant progress in implementing the 1997
merger integration plan, closing five facilities in North America and Europe.
Seven additional facility closures are in progress and a planned closure has
been cancelled. Staffing has been reduced by 1,300 employees, or approximately
5% of the Company's combined worldwide workforce. A reduction of approximately
400 employees will occur in 1999. The North American and European corporate
headquarters and the Packaging business headquarters have been relocated;
however, the former Packaging business headquarters building has not been
sold. Costs associated with the headquarter relocation efforts were expensed
as incurred. Additionally, during 1998, the Company terminated various
contracts and other long-term agreements; one of which was settled on terms
more favorable than anticipated. Payments for restructure and other
merger-related expenditures were $153.4 million in 1998 and $87.8 million in
1997.
Accrued liabilities related to restructuring activities decreased during
the year due to the settlement of such liabilities through the payment of
cash; revisions of cost estimates due to changing circumstances and favorable
contract settlements, which were recorded through the income statement; and
reclassifications to more appropriately reflect the carrying amounts of assets
and liabilities in the balance sheet. Changes in accrued restructuring costs
were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Estimate Cash Reclassifi-
(in millions) 1997 Revisions Payments cations 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Facility closures and write-downs of redundant
property, plant and equipment $ 85.2 $ (4.5) $(24.7) $(31.1) $24.9
Severance and other employee-related costs 95.5 0.9 (41.2) (8.3) 46.9
Costs of terminating contracts and other
long-term agreements 82.5 (33.7) (19.1) (21.9) 7.8
- --------------------------------------------------------------------------------------------------------
Accrued restructure costs $263.2 $(37.3) $(85.0) $(61.3) $79.6
========================================================================================================
</TABLE>
During 1996, the Company recorded net non-recurring pre-tax expenses of
$10.7 million which included $40.6 million of severance charges and $59.3
million of asset write-downs offset by $89.2 million in net gains on business
dispositions. Severance charges were related to the termination of 870
employees at the Company's Tissue--North America business, Tissue--Europe
business, and other domestic manufacturing and corporate facilities. Asset
write-downs were related to the phase-out of certain equipment and asset
consolidations.
44 FORT JAMES CORPORATION
<PAGE>
4
Other Income
(Expense)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in earnings (losses) of unconsolidated
affiliates $ (0.8) $ 7.4 $ 7.7
Interest and investment income 2.1 8.6 8.1
Gain on sale of assets 2.8 9.6 3.4
Minority interest (4.0) (2.6) (4.6)
Foreign currency exchange gains (losses) (10.1) (4.8) 0.6
Other, net 3.8 0.6 (1.1)
- ----------------------------------------------------------------------------------------------
Total other income (expense) $ (6.2) $18.8 $14.1
==============================================================================================
</TABLE>
5
Income Taxes
The components of income before taxes and extraordinary items were as follows:
- ----------------------------------------------------------------------------
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------
Domestic $588.4 $192.9 $405.9
Foreign 177.6 76.8 93.1
- ----------------------------------------------------------------------------
Income before income taxes and
extraordinary items $766.0 $269.7 $499.0
============================================================================
Income tax expense excluding income taxes on extraordinary items, consisted of
the following:
- ------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- ------------------------------------------------------------------------------
Current:
Federal $ 48.9 $135.4 $ 67.9
State 15.3 29.2 13.3
Foreign 53.5 42.0 36.1
- ------------------------------------------------------------------------------
Total current income tax provision 117.7 206.6 117.3
- ------------------------------------------------------------------------------
Deferred:
Federal 123.9 (19.4) 42.0
State 15.0 (15.6) 3.8
Foreign 9.2 (6.4) 7.9
- ------------------------------------------------------------------------------
Total deferred income tax provision
(benefit) 148.1 (41.4) 53.7
- ------------------------------------------------------------------------------
Income tax expense $265.8 $165.2 $171.0
==============================================================================
During 1998, 1997 and 1996, tax benefits credited to shareholders' equity,
which primarily related to the exercise of stock options, were $22.1 million,
$35.1 million and $3.0 million, respectively. Cash payments for income taxes
totaled $95.0 million in 1998, $125.9 million in 1997 and $108.0 million in
1996. No provision for income taxes has been made for $178.2 million of
undistributed earnings of certain of the Company's foreign subsidiaries and
affiliates which have been indefinitely reinvested. It is not practicable to
determine the amount of U.S. income tax which would be payable if such
undistributed foreign earnings were repatriated because any U.S. taxes payable
on such repatriation would be offset, at least in part, by foreign tax
credits.
FORT JAMES CORPORATION 45
<PAGE>
Notes to Consolidated Financial Statements
The difference between the federal statutory income tax rate on income
before income taxes and extraordinary items and the Company's effective income
tax rate relates to the following:
- -------------------------------------------------------------------------------
Percent of Pretax Income
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax effect 2.8 3.2 2.5
Restructured operations (1.8) 9.2 --
Nondeductible transaction expenses -- 4.9 --
Goodwill 0.9 4.1 2.3
Federal audit settlement -- -- (7.2)
Other items, net (2.2) 4.9 1.7
- -------------------------------------------------------------------------------
Effective income tax rate 34.7% 61.3% 34.3%
===============================================================================
In 1998, the Company determined that $14.0 million of non-recurring
merger-related tax reserves established in 1997 in accordance with temporary
IRS regulations were no longer required. In December 1996, following a
retroactive amendment to the Internal Revenue Code, the United States Tax
Court issued a favorable decision allowing certain deductions claimed by Fort
Howard in the years 1988 through 1995. As a result of this decision, Fort
James realized a $36.0 million tax benefit representing the reversal of taxes
previously accrued for these years. The Internal Revenue Service is currently
reviewing Fort James' federal income tax returns for the years 1990 through
1996. In the opinion of management, potential adjustments resulting from these
examinations will not have a material effect on the Company's results of
operations or financial condition.
The income tax effects of temporary differences that gave rise to the net
deferred tax liability as of December 27, 1998 and December 28, 1997, were
related to the following:
- ----------------------------------------------------------------------------
(in millions) 1998 1997
- ----------------------------------------------------------------------------
Property, plant and equipment $ 915.3 $ 904.4
Pension benefits 95.5 88.5
Other items 92.8 91.8
- ----------------------------------------------------------------------------
Total deferred tax liabilities 1,103.6 1,084.7
- ----------------------------------------------------------------------------
Accrued liabilities (212.1) (290.2)
Postretirement benefits other than pensions (181.2) (187.0)
Alternative minimum tax credit carryforwards (27.7) (87.7)
Intangibles (22.7) (77.4)
Tax loss carryforwards (26.2) (26.3)
Other items (60.4) (66.1)
- ----------------------------------------------------------------------------
Total deferred tax assets (530.3) (734.7)
- ----------------------------------------------------------------------------
Valuation allowance 20.5 86.4
- ----------------------------------------------------------------------------
Net deferred tax liability $ 593.8 $ 436.4
============================================================================
The deferred tax asset valuation allowance primarily relates to foreign net
operating losses and foreign tax credits. Management believes sufficient
uncertainty exists regarding the realization of these items that a valuation
allowance is required. If realized in the future, $8.8 million of these tax
benefits will be allocated to reduce goodwill of certain acquired
subsidiaries. The decrease in the valuation allowance from December 28, 1997
to December 27, 1998 was primarily due to tax strategies implemented in 1998
which resulted in the elimination of certain deferred tax assets and the
related valuation allowance.
46 FORT JAMES CORPORATION
<PAGE>
As of December 27, 1998, the Company had $68.0 million of foreign net operating
loss carryforwards which expire primarily from 1999 through 2005 and $6.2
million of foreign tax credit carryforwards which expire from 1999 through 2003.
The Company also had alternative minimum tax ("AMT") credit carryforwards of
$27.7 million. In general, AMT credits may be carried forward indefinitely and
used in future years to the extent the Company's regular tax liability exceeds
the AMT liability for such future years.
6
Pension
and Other
Postretirement
Benefit Plans
During 1998, the Company adopted FASB Statement No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits--an amendment to FASB
Statements No. 87, No. 88, and No. 106" which revised the Company's disclosures
about pension and other postretirement benefit plans.
The Company sponsors various pension plans covering certain employees.
Benefits under these plans are based primarily on years of service and
compensation levels. The Company makes contributions to these plans sufficient
to meet the minimum funding requirements of applicable laws and regulations plus
additional discretionary amounts. Contributions to multiemployer plans are
generally based on negotiated labor contracts. Plan assets principally consist
of equity securities and corporate and government obligations.
The Company provides certain health care and life insurance benefits to
eligible retired employees, their covered dependents, and their beneficiaries.
All of the Company's retiree medical plans are unfunded.
The following schedules present changes in, and components of, the
Company's net asset/(liability) for pension and other postretirement benefits at
December 27, 1998 and December 28, 1997:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
(in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation, beginning of year $1,400.0 $1,314.4 $371.5 $353.7
Service cost 23.9 16.8 6.4 6.6
Interest cost 99.3 86.1 26.1 26.9
Participant contributions 2.2 -- 2.9 2.9
Amendments (6.3) 1.4 -- --
Actuarial loss 91.6 74.1 18.2 9.4
Acquisitions/divestitures/transfers -- (.8) -- --
Curtailments (1.9) -- (2.9) --
Special termination benefits 4.7 -- 1.2 --
Benefits paid (100.3) (92.0) (28.5) (28.0)
- ------------------------------------------------------------------------------------
Benefit obligation, end of year $1,513.2 $1,400.0 $394.9 $371.5
====================================================================================
Change in Plan Assets
Fair value of plan assets, beginning
of year $1,773.5 $1,550.6 $ -- $ --
Actual return on plan assets 91.1 303.1 -- --
Employer contributions 12.5 12.7 25.6 25.1
Participant contributions 2.2 -- 2.9 2.9
Acquisitions/divestitures/transfers -- (.9) -- --
Benefits paid (100.3) (92.0) (28.5) (28.0)
- ------------------------------------------------------------------------------------
Fair value of plan assets, end of year $1,779.0 $1,773.5 $ -- $ --
====================================================================================
</TABLE>
FORT JAMES CORPORATION 47
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Funded Status
Funded status at end of year $265.8 $ 373.5 $(394.9) $(371.5)
Unrecognized net transition assets (15.2) (8.3) -- --
Unrecognized prior service cost (gain) 43.5 58.9 (62.9) (73.5)
Unrecognized net actuarial gain (38.9) (184.3) (23.1) (52.3)
- --------------------------------------------------------------------------------
Net amount recognized $255.2 $ 239.8 $(480.9) $(497.3)
================================================================================
Amounts recognized in the statement of
financial position consists of:
Prepaid benefit cost $255.2 $ 239.8 $ -- $ --
Accrued benefit liability (9.2) (22.5) (480.9) (497.3)
Intangible asset 7.6 18.9 -- --
Deferred tax asset .7 1.5 -- --
Accumulated other comprehensive loss .9 2.1 -- --
- --------------------------------------------------------------------------------
Net amount recognized $255.2 $ 239.8 $(480.9) $(497.3)
================================================================================
The Company merged its domestic pension plans into four plans effective as of
the end of the 1998 plan year. The funded status information for 1998 reflects
this merger. The projected benefit obligation, accumulated benefit obligation,
and fair value of plan assets for plans with accumulated benefit obligations in
excess of plan assets were $6.0 million, $3.4 million, and $0.2 million,
respectively, as of December 27, 1998 and $113.8 million, $111.9 million and
$103.2 million, respectively, as of December 28, 1997.
Benefit obligations were determined using the following weighted-average
assumptions:
- --------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.25% 6.75% 7.10%
Expected return on plan assets 10.00% 10.00% -- --
Rate of compensation increase 4.50% 5.00% -- --
================================================================================
The Company utilizes a method for amortizing unrecognized actuarial gains and
losses for other postretirement benefits that accelerates the minimum amount
required to be recognized for the year.
During 1998 and 1996, the Company incurred termination benefit costs as
part of enhanced benefit programs offered to certain employees. Charges of
$5.5 million and $17.3 million were recorded as restructure and other unusual
items for the years ended December 27, 1998 and December 29, 1996.
48 FORT JAMES CORPORATION
<PAGE>
The components of net periodic benefit cost recognized in the Consolidated
Statements of Operations and Comprehensive Income were as follows:
- --------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 23.9 $ 16.8 $ 16.7 $ 6.4 $ 6.6 $ 8.1
Interest cost 99.3 86.1 84.8 26.1 26.9 29.0
Expected return on
plan assets (145.0) (116.2) (103.8) -- -- --
Amortization of:
Transition asset (3.5) (2.4) (2.4) -- -- --
Prior service cost (gain) 6.4 6.6 6.8 (7.4) (7.6) (7.7)
Actuarial loss (gain) .9 1.1 7.5 (7.0) (2.2) --
Curtailment charge (credit) (1.7) 3.8 1.0 .6 (11.4) (12.2)
Contributions to multiemployer
pension plans 4.7 4.5 4.6 -- -- --
- --------------------------------------------------------------------------------
Net periodic benefit
(income) expense $ (15.0) $ .3 $15.2 $18.7 $12.3 $17.2
================================================================================
For purposes of determining the cost and obligation for postretirement medical
benefits, the Company has assumed a health care cost trend rate of 7.0% for
1999, decreasing ratably to 4.5% in 2006 and thereafter. The assumed health
care cost trend rate has a significant effect on the amounts reported for
retiree medical benefits. A one-percentage point change in the assumed health
care cost trend rate would have had the following effects:
- --------------------------------------------------------------------------------
1 Percentage Point
- --------------------------------------------------------------------------------
(in millions) Increase (Decrease)
- --------------------------------------------------------------------------------
Effect on service and interest components
of net periodic cost $ 4.0 $ (3.6)
Effect on accumulated postretirement benefit obligation 42.6 (37.1)
================================================================================
In 1995, the Company transferred certain employee benefit plans to Crown
Vantage, Inc. ("Crown Vantage"). Under certain conditions, including the
inability of Crown Vantage to fund required contributions, the Company has
agreed to assume the liability for any underfunded benefits for these plans.
Management believes that if any amounts were to be funded, they would not have
a material adverse affect on the Company's financial position or results of
operations.
7
Balance Sheet
Information
Inventories
- ----------------------------------------------------------------------------
(in millions) 1998 1997
- ----------------------------------------------------------------------------
Raw materials $185.4 $184.3
Finished goods and work in process 558.2 550.2
Stores and supplies 170.9 159.4
- ----------------------------------------------------------------------------
914.5 893.9
Subtraction to state certain inventories at
last-in, first-out cost (45.0) (39.6)
- ----------------------------------------------------------------------------
Total inventories $869.5 $854.3
============================================================================
Valued at lower of cost or market:
Last-in, first-out $532.1 $507.2
First-in, first-out or average 337.4 347.1
- ----------------------------------------------------------------------------
Total inventories $869.5 $854.3
============================================================================
FORT JAMES CORPORATION 49
<PAGE>
Notes to Consolidated Financial Statements
Property, Plant and Equipment
- --------------------------------------------------------------------------------
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Land and improvements $ 210.3 $ 216.2
Buildings 1,123.1 1,142.5
Machinery and equipment 6,541.9 6,081.5
Construction in progress 268.5 327.4
- --------------------------------------------------------------------------------
8,143.8 7,767.6
Accumulated depreciation (3,503.9) (3,218.8)
- --------------------------------------------------------------------------------
4,639.9 4,548.8
Timber and timberlands, net 14.4 16.5
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 4,654.3 $ 4,565.3
================================================================================
Accrued Liabilities
- --------------------------------------------------------------------------------
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Restructure reserve $ 79.6 $263.2
Taxes payable, other than income taxes 84.2 75.7
Interest payable 56.4 64.6
Employee insurance benefits 70.5 76.8
Compensated absences 57.4 75.5
Other items 324.4 357.2
- --------------------------------------------------------------------------------
Total accrued liabilities $672.5 $913.0
================================================================================
In 1998, the Company adopted FASB Statement No. 130, "Reporting Comprehensive
Income" which requires the reporting of comprehensive income and accumulated
other comprehensive income. Comprehensive income is presented in the
Consolidated Statements of Operations and Comprehensive Income. The components
of other comprehensive income are shown below:
Accumulated Other Comprehensive Loss
- --------------------------------------------------------------------------------
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Minimum pension liability adjustment $ (0.9) $ (2.1)
Foreign currency translation adjustments (87.9) (147.7)
Unrealized gains on available-for-sale securities -- 12.2
- --------------------------------------------------------------------------------
Accumulated other comprehensive loss $(88.8) $(137.6)
================================================================================
50 FORT JAMES CORPORATION
<PAGE>
8
Indebtedness
- ----------------------------------------------------------------------------
Weighted
Average
(in millions) Interest Rate Maturities 1998 1997
- ----------------------------------------------------------------------------
Revolving credit facilities 5.57% 2000-2002 $ 886.5 $1,642.0
6.23% - 8.88% notes 6.62 1999-2011 1,481.3 1,184.1
7.75% - 8.38% notes 8.11 2001-2023 359.5 359.5
9.25% notes 9.25 2001-2021 255.0 255.0
Subordinated notes 9.00 2006 58.8 123.1
Medium-term notes 7.84 2000-2004 106.0 106.0
Revenue bonds 6.58 2001-2023 188.1 107.7
Capital lease obligations 10.26 2004-2017 171.4 180.4
Other 380.6 232.1
- ----------------------------------------------------------------------------
Total 3,887.2 4,189.9
Less current portion 240.0 34.4
- ----------------------------------------------------------------------------
Long-term debt $3,647.2 $4,155.5
============================================================================
Minimum Principal Payments
Minimum principal payments on long-term debt, excluding credit agreements and
revolving credit borrowings, for the next five years are as follows:
- --------------------------------------------------------------------------------
(in millions) 1999 2000 2001 2002 2003
- --------------------------------------------------------------------------------
Scheduled maturities $240.0 $62.3 $294.2 $502.7 $305.6
================================================================================
If the current level of revolving credit agreement borrowings remain
outstanding until the expiration of the underlying or supporting agreements,
additional payments of $158.3 million in 1999, $54.1 million in 2000 and
$832.4 million in 2002 would be required. It is the Company's intention to
refinance or renew such agreements, on a long-term basis, prior to their
expiration.
Revolving Credit Facilities
As of December 27, 1998, Fort James had committed revolving credit agreements
with various domestic and foreign banks providing for unsecured borrowings of
up to $2.1 billion. These facilities allow the Company to borrow at
competitive interest rates for general corporate purposes. At December 27,
1998, the Company had unused credit facilities of approximately $1.2 billion.
Commitment fees relating to credit facilities are not material.
Restrictive Agreements
Certain of the Company's long-term debt agreements contain various restrictive
covenants and require maintenance of certain defined financial ratios with
which the Company is in compliance.
9
Financial
Instruments
The Company employs derivative financial instruments primarily to reduce its
exposure to adverse fluctuations in interest rates and foreign currency
exchange rates. These financial instruments, when entered into, are designated
as hedges of underlying exposures. Because of the high correlation between the
hedging instrument and the exposure being hedged, fluctuations in the value of
the instruments are generally offset by changes in the value of the underlying
exposures. Fort James effectively monitors the use of these derivative
financial instruments through the use of objective measurement systems,
well-defined market and credit risk limits and timely reports to senior
management according to prescribed guidelines. Virtually all of the Company's
derivatives are "over-the-counter" instruments.
FORT JAMES CORPORATION 51
<PAGE>
Notes to Consolidated Financial Statements
The estimated fair values of derivatives used to hedge or modify the
Company's risks fluctuate over time. These fair value amounts should not be
viewed in isolation, but rather in relation to the fair values of the underlying
hedged transactions and investments, and the overall reduction in exposure to
adverse fluctuations in interest rates, foreign currency exchange rates, and
other market risks.
The notional amounts of the derivative financial instruments do not
necessarily represent amounts exchanged by the parties and, therefore, are not a
direct measure of Fort James' exposure through its use of derivatives. The
amounts exchanged are calculated by reference to the notional amounts and by
other terms of the derivatives, such as interest rates, exchange rates or other
financial indices.
Credit Risk
Fort James has established strict counterparty credit guidelines and only
enters into transactions with financial institutions that are investment
grade. Counterparty exposures are monitored and any downgrade in credit rating
receives immediate review. To minimize the concentration of credit risk, the
Company enters into derivative transactions with a portfolio of financial
institutions. As a result, the Company considers the risk of counterparty
default to be minimal.
Interest Rate Management
Fort James has implemented a policy to maintain the percentage of fixed and
variable rate debt within certain parameters. The Company enters into interest
rate swap agreements that maintain the fixed/variable mix within these defined
parameters. These contracts had maturities ranging from one to two years on
December 27, 1998. Variable rates are predominantly linked to the London
Interbank Offering Rate. Additionally, the Company has entered into interest
rate cap agreements that entitle it to receive from a financial institution
the amount by which the interest payments on variable rate debt exceed
pre-specified interest rates through 1999. During 1997, the Company terminated
$648 million in notional amount of interest rate swaps at a cost of $8 million
which was amortized through January 1999.
The fair value of the Company's financial instruments related to its
indebtedness were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------
Carrying Value Carrying Value
or Gross Fair Value: or Gross Fair Value:
Notional Asset Notional Asset
(in millions) Amount (1) (Liability) Amount (1) (Liability)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt, including
current maturities $3,887 $(3,975) $4,190 $(4,291)
Interest rate swaps 940 -- 1,138 (8)
Interest rate caps 500 -- 500 --
===========================================================================================
</TABLE>
(1) Long-term debt amount is carrying value; interest rate swap and cap
amounts are notional amounts.
The estimated fair values of the Company's financial instruments related to
indebtedness are based on quoted market prices of comparable instruments or on
current rates available to the Company for financial instruments with similar
terms and remaining maturities. Based on the Company's total indebtedness at
December 27, 1998, a 100 basis point interest rate change would impact the
fair value of the total debt portfolio by approximately $104 million. This
exposure would be offset by a $3 million change to the fair value of the
interest rate swap portfolio. The weighted-average pay rate exceeded the
weighted-average receive rate under the interest rate contracts by 0.4% and
0.6%, respectively, for the years ended December 27, 1998, and December 28,
1997.
Foreign Currency Management
Most of Fort James' foreign currency exposures are managed on a consolidated
basis, which allow for the netting of certain exposures and thus take
advantage of any natural offsets. The Company enters into forward
52 FORT JAMES CORPORATION
<PAGE>
exchange contracts and purchase currency options which mature in one year or
less (principally European currencies) to hedge firm and anticipated purchase
commitments and firm sales commitments denominated in foreign currencies. As
of December 27, 1998, and December 28, 1997, the Company had net unrealized
gains of $0.1 million and $0.5 million, respectively, on a notional amount of
$20 million and $304 million, respectively, for these instruments.
In 1997, the Company terminated $470 million in notional amount of foreign
exchange contracts, along with related interest rate agreements, at a cost of
$31.5 million, net of tax benefits. These foreign exchange contracts were
designated as hedges of a portion of the Company's net investment in its
European Tissue business. The net termination cost was recorded as a component
of other comprehensive income.
10
Common Stock
Fort James has 500 million authorized shares of common stock, $0.10 par value
("Common Stock"), of which 220,544,203 shares were outstanding as of December
27, 1998. Common shares reserved for issuance as of December 27, 1998, were as
follows:
- ----------------------------------------------------------------------------
1998
- ----------------------------------------------------------------------------
Stock option plans 5,856,198
Incentive stock plan 9,754,997
Director stock ownership plan 64,786
- ----------------------------------------------------------------------------
Total common shares reserved for issuance 15,675,981
============================================================================
During 1996, the Company issued 14.5 million shares of Common Stock at $14.73
per share. The net proceeds to the Company were primarily used to prepay or
redeem a portion of its indebtedness.
Shareholder Rights Plan
Under a shareholder rights plan, preferred stock purchase rights ("Rights")
are issued at the rate of one Right for each share of Common Stock. Each Right
entitles its holder to purchase one one-thousandth of a share of Series M
Cumulative Participating Preferred Stock ("Series M") at an exercise price of
$150, subject to adjustment. The Rights will only be exercisable if a person
or group acquires, has the right to acquire, or has commenced a tender offer
for 15% or more of the outstanding Common Stock. The Rights are nonvoting, pay
no dividends, expire on March 1, 1999, and may be redeemed by the Company for
$0.01 per Right at any time before the tenth day (subject to adjustment) after
a 15% position is acquired. The Rights have no effect on earnings per share
until they become exercisable.
After the Rights are exercisable, if the Company is acquired in a merger or
other business combination, or if 50% or more of the Company's assets are sold,
each Right will entitle its holder (other than the acquiring person or group) to
purchase, at the then-current exercise price, common stock of the acquiring
person having a value of twice the exercise price. In addition, in the event a
15% or greater shareholder (i) acquires the Company through a merger where Fort
James is the surviving corporation, (ii) engages in certain self-dealing
transactions, or (iii) increases his ownership other than through a cash tender
offer providing fair value to all holders of Common Stock, each Right will
entitle its holder (other than the acquiring person or group) to purchase, at
the then-current exercise price, Common Stock having a value of twice the
exercise price.
A new shareholder rights plan was adopted subsequent to year-end. The terms
of the new plan are essentially the same as those of the previous plan with the
following exceptions: (i) the exercise price has been increased to $200, subject
to adjustment; (ii) the expiration date has been extended to March 1, 2009; and
(iii) the ten day period to redeem the Rights after a 15% position is acquired
has been eliminated.
FORT JAMES CORPORATION 53
<PAGE>
Notes to Consolidated Financial Statements
11
Preferred Stock
The Company is authorized to issue up to five million shares of preferred
stock, $10 par value. The preferred shares are issuable in series, each with
varying dividend rates, redemption rights, conversion terms, liquidation
values and voting rights.
In April 1998, the Company completed the redemption and conversion of its
Series K $3.375 Cumulative Convertible Exchangeable Preferred Stock ("Series
K"), its Series L $14.00 Cumulative Convertible Exchangeable Preferred Stock
("Series L") and its Series N $14.00 Cumulative Convertible Exchangeable
Preferred Stock ("Series N"). Substantially all of the outstanding Series K, L
and N preferred stock was converted into 9.5 million shares of Common Stock in a
non-cash financing transaction of $350.9 million. The balance was redeemed for
$1.8 million in cash.
In 1997, the Series O 8 1/4% Cumulative Preferred Stock ("Series O") was
redeemed for $98.1 million and the Series P 9% Cumulative Convertible Preferred
Stock ("Series P") was converted to 15.3 million shares of Common Stock in a
non-cash financing transaction of $287.5 million.
As of December 27, 1998, the Company has reserved 250,000 preferred shares
for the issuance of Series M preferred stock under the Shareholder Rights Plan.
12
Stock Option,
Award and
Purchase Plans
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock-based compensation plans. Had compensation cost for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of FASB Statement 123, "Accounting for Stock-Based Compensation," pro
forma net income (loss) and earnings per share would have been as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
As Reported Pro Forma
- ---------------------------------------------------------------------------------------------
(in millions, except per share amounts) 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $497.6 $(27.0) $319.9 $484.3 $(37.4) $315.2
Earnings per share--basic 2.28 (.36) 1.44 2.22 (.41) 1.42
Earnings per share--diluted 2.26 (.28) 1.43 2.20 (.33) 1.40
=============================================================================================
</TABLE>
Fort James' stock option plans provide for the granting of options to purchase
Common Stock to certain directors, officers and key employees. Options are
granted at exercise prices equal to the fair market value of such stock as of
the date of grant and have terms of ten years. Fort James' options vest in two
equal annual installments. Effective with the merger, Fort Howard's options
were automatically converted into fully vested Fort James options at the
merger exchange ratio. As of December 27, 1998, there were 624 employees and
directors holding options.
54 FORT JAMES CORPORATION
<PAGE>
Stock option activity, including the retroactive effect of converting Fort
Howard's options into Fort James' options, was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
(in thousands, except Exercise Exercise Exercise
per share amounts) Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 6,298 $21.83 10,543 $18.34 9,437 $16.86
Granted 3,155 37.48 354 40.27 2,416 23.90
Forfeited (69) 34.97 (117) 27.41 (150) 23.61
Exercised (1,823) 17.58 (4,373) 14.53 (951) 14.95
Expired (140) 27.67 (109) 20.53 (209) 27.77
- ----------------------------------------------------------------------------------------------------
Balance, end of year 7,421 $29.29 6,298 $21.83 10,543 $18.34
====================================================================================================
Exercisable 4,254 5,026 6,679
Available for grant 2,718 2,692 2,707
Weighted-average fair value of
options granted during the year $11.69 $13.22 $7.26
====================================================================================================
</TABLE>
The fair value of each option grant, including the retroactive effect of
converting Fort Howard's options into Fort James' options, was estimated on
the grant date using the Black-Scholes option-pricing model with the following
assumptions:
- --------------------------------------------------------------------------------
Fort James Fort Howard
- --------------------------------------------------------------------------------
1998 1997 1996 1996
- --------------------------------------------------------------------------------
Dividend yield 1.60% 1.50% 2.00% 0.00%
Volatility rate 29.82 27.56 27.26 19.26
Risk-free interest rate 5.17 6.27 6.18 6.07
Expected option life 5 years 5 years 5 years 5 years
================================================================================
The following table summarizes information about fixed stock options
outstanding, as of December 27, 1998:
<TABLE>
<CAPTION>
(in thousands, except year and per share amounts)
- -------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------------------ -----------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.28-$15.42 1,149 4.3 years $13.87 1,149 $13.87
$15.43-$20.56 979 6.2 years 19.46 979 19.46
$20.57-$25.70 319 4.1 years 23.53 297 23.44
$25.71-$30.84 1,006 6.9 years 26.89 971 26.82
$30.85-$35.98 613 6.7 years 33.34 593 33.34
$35.99-$41.12 2,981 8.5 years 37.26 121 37.36
$41.13-$46.26 358 6.7 years 43.32 136 43.06
$46.27-$51.41 16 9.3 years 50.88 8 51.41
- ------------------------------------------------------------------------------------------------
Total 7,421 4,254
================================================================================================
</TABLE>
FORT JAMES CORPORATION 55
<PAGE>
Restricted and Incentive Stock
Pursuant to the 1996 Stock Incentive Plan and the Director Stock Ownership
Plan, the Company may also grant restricted stock and incentive stock awards
to certain directors, officers and key employees. Restricted and incentive
stock awards were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
Restricted Incentive Restricted Incentive
Stock Stock Stock Stock
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Awarded 198,244 -- 922,907 114,112
Deferred 1,212 -- 2,994 --
- ----------------------------------------------------------------------------
Total Granted 199,456 -- 925,901 114,112
============================================================================
Weighted-Average Fair Value
per Share at Grant Date $40.79 -- $43.57 $43.05
============================================================================
</TABLE>
Awards granted to officers and key employees will vest in three to eight
years, with the potential for earlier vesting of certain awards based on the
Company's performance. Awards granted to directors will vest one year from the
date of grant. Vesting of incentive stock shares is based on the Company's
financial performance. The Company recognized compensation expense related to
restricted and incentive stock awards of $16.6 million in 1998 and $13.1
million in 1997. As of December 27, 1998, there were 5,686,365 shares
available for grant pursuant to the 1996 Stock Incentive Plan which may be
granted as options, restricted stock or incentive stock. The Director Stock
Ownership Plan has 55,238 shares available for grant as of December 27, 1998.
Stock Plans for Employees
The Company's StockPlus Investment Plan is available to substantially all of
the Company's domestic employees except for former Fort Howard employees
covered by separate defined contribution plans. Several alternative investment
funds are available, including an investment fund consisting of Common Stock.
Participating employees may contribute, through periodic payroll deductions,
up to 10% of their compensation. Participant contributions of up to 6% of
compensation are matched by the Company at a 60% rate. Additionally, the
Company may make discretionary contributions of up to 1% of all eligible
employees' base salary to the plan. As of December 27, 1998, there were 15,000
participants in the plan, and the plan held 8.5 million shares of Common Stock
and $164.3 million of other investments. Company contributions to this plan
totaled $12.7 million in 1998, $12.1 million in 1997 and $16.8 million in
1996.
A substantial majority of Fort Howard's employees are covered by defined
contribution plans. Participants may contribute a percentage of their
compensation to the plans. Additionally, the Company makes annual discretionary
contributions under these plans. As of December 27, 1998, there were
approximately 6,000 participants in these plans, and the plans held 1.0 million
shares of Common Stock. Company contributions to these plans totaled $16.0
million in 1998 and $16.3 million in both 1997 and 1996.
Effective January 1, 1999, the StockPlus Investment Plan and the Fort
Howard plans were merged into the new Fort James 401(k) Plan. Under the terms of
the new plan, participants may contribute up to 15% of their annual salary.
Participant contributions of up to 10% of compensation are matched by the
Company at a 60% rate. Also, the Company may no longer make discretionary
contributions.
In addition, the Company maintains a stock purchase plan for the benefit of
certain Canadian employees. As of December 27, 1998, 52,000 shares of Common
Stock were held in this plan.
56 FORT JAMES CORPORATION
<PAGE>
13
Commitments
and Contingent
Liabilities
Operating Leases
The Company leases certain facilities, vehicles and equipment over varying
periods. None of the agreements contain unusual renewal or purchase options.
As of December 27, 1998, future minimum rental payments under noncancelable
operating leases were as follows:
- --------------------------------------------------------------------------------
(in millions) Minimum Rentals
- --------------------------------------------------------------------------------
1999 $ 32.9
2000 30.6
2001 23.9
2002 17.6
2003 16.0
2004 and thereafter 38.7
- --------------------------------------------------------------------------------
Total future minimum rental payments $159.7
================================================================================
Rent expense totaled $63.6 million in 1998, $64.0 million in 1997, and $66.3
million in 1996.
Litigation and Environmental Matters
The Company is party to various legal proceedings generally incidental to its
business and is subject to a variety of environmental and pollution control
laws and regulations. As is the case with other companies in similar
industries, Fort James faces exposure from actual or potential claims and
legal proceedings.
In May 1997, the Attorney General of the State of Florida filed a civil
action against the Company and eight other manufacturers of sanitary paper
products. The complaint alleges violations of federal and state antitrust and
unfair competition laws and seeks civil penalty under Florida law of $1 million
for each alleged violation against each defendant, an unspecified amount of
treble damages and injunctive relief. 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 these cases are without
merit and is vigorously defending both federal and state actions.
Although the ultimate disposition of legal proceedings cannot be predicted
with certainty, it is the opinion of the Company's management that the outcome
of any claim which is pending or threatened, either individually or on a
combined basis, will not have a materially adverse effect on the consolidated
financial condition of Fort James but could materially affect consolidated
results of operations in a given year.
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 conditions of permits and other governmental
authorizations. Future regulations could materially increase the Company's
capital requirements and certain operating expenses in future years.
In 1997, the U.S. Environmental Protection Agency ("EPA") published
regulations, commonly referred to as the "Cluster Rules," affecting pulp and
paper industry discharges of wastewater and gaseous emissions. These rules
require changes in the pulping and bleaching processes presently used in some
U.S. pulp mills, including several of the Company's mills. Based on its
evaluation of the rules, the Company believes that capital expenditures of
approximately $100 million may be required to comply with the Cluster Rules, the
majority of which will be spent during the next three to four years.
FORT JAMES CORPORATION 57
<PAGE>
Notes to Consolidated Financial Statements
Fort James, along with others, has been identified as a potentially responsible
party ("PRP") at various EPA designated superfund sites and is involved in
remedial investigations and actions under federal and state laws. Among these
sites, the Company, along with six other current and former operators of pulp
and paper facilities, has been identified as a PRP by the U.S. Fish and Wildlife
Service and other state and federal agencies, including the EPA, and tribal
entities, regarding contamination of the lower Fox River by certain substances.
These agencies and tribes seek primary restoration of the river and natural
resources damages. The Company, in conjunction with other PRPs, is engaged in
negotiations with federal and state agencies and tribes to resolve outstanding
claims. The Company is also participating in the funding of a remedial
investigation/feasibility study of contamination of the Kalamazoo River by
hazardous substance.
It is the Company's policy to accrue remediation costs on an undiscounted
basis when it is probable that such costs will be incurred and when a range of
loss can be reasonably estimated. Fort James' accrued environmental liabilities,
including remediation and landfill closure costs, totaled $54.1 million as of
December 27, 1998 and $55.4 million as of December 28, 1997. The Company
periodically reviews the status of all significant existing or potential
environmental issues and adjusts its accruals as necessary. The accruals do not
reflect any possible future insurance recoveries. Estimates of costs for future
remediation are necessarily imprecise due to, among other things, the
identification of presently unknown remediation sites and the allocation of
costs among potentially responsible parties. The Company believes that its share
of the costs of cleanup for its current remediation sites will not have a
material adverse impact on its consolidated financial position but could have a
material effect on consolidated results of operations in a given year. As is the
case with most manufacturing and many other entities, there can be no assurance
that the Company will not be named as a PRP at additional previously or
currently owned sites in the future or that the costs associated with such
additional sites would not be material.
14
Segment
Information
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way public companies report
information about operating segments in both interim and annual financial
statements, including related disclosures about products and services,
geographic areas, and major customers. As a result, the Company's segments,
which are organized based on the products it offers, have been restated as
follows: (i) Tissue--North America, which manufactures and markets paper-based
consumer towel and tissue products; (ii) Tissue--Europe, which also
manufactures and markets paper-based consumer towel and tissue products, as
well as feminine hygiene products and health care and pharmacy items; (iii)
Dixie, which manufactures and markets disposable plates, cups and cutlery
principally under its DIXIE brand; (iv) Packaging, which manufactures folding
cartons and paperboard principally for food and other consumer products
manufacturers; and (v) Communications Papers, which manufactures and markets
uncoated business and printing papers serving the commercial printing and
office markets, and Fiber, which includes the Harmon Associates wastepaper
brokerage business and market pulp sales to both intercompany and third-party
customers. The Communications Papers and Fiber businesses, for which separate
reporting is not required, have been aggregated. Both the Dixie and Fiber
businesses were previously included in the Consumer Products-North America
business.
58 FORT JAMES CORPORATION
<PAGE>
<TABLE>
<CAPTION>
Tissue Commu- Inter-
---------------------- nications company
North Papers and
(in millions) America Europe Dixie Packaging and Fiber Corporate Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Sales $ 3,440.9 $ 1,869.4 $ 775.5 $ 717.7 $ 796.6 $ (299.0) $ 7,301.1
Intercompany sales 0.6 -- 3.3 122.1 173.0 -- 299.0
Income from operations,
before nonrecurring
and other unusual items 864.8 236.2 89.1 56.6 2.4 (87.6) 1,161.5
Depreciation expense 207.3 93.6 25.1 58.7 71.9 14.5 471.1
Capital expenditures 258.0 97.8 22.5 60.7 45.9 60.9 545.8
Assets 2,823.4 2,308.8 392.4 656.3 825.0 786.4 7,792.3
===============================================================================================================================
1997
Sales $ 3,314.4 $ 1,828.1 $ 780.8 $ 782.9 $ 859.0 $ (306.2) $ 7,259.0
Intercompany sales 0.5 -- 3.8 129.8 171.4 0.7 306.2
Income from operations,
before nonrecurring
and other unusual items 783.0 202.4 67.5 81.3 14.7 (92.0) 1,056.9
Depreciation expense 224.1 98.3 26.1 51.7 69.4 5.1 474.7
Capital expenditures 247.6 69.0 20.5 55.0 65.6 32.5 490.2
Assets 2,781.7 2,191.1 414.2 612.3 895.6 838.3 7,733.2
===============================================================================================================================
1996
Sales $ 3,352.7 $ 1,980.2 $ 796.6 $1,139.9 $ 829.5 $ (391.8) $ 7,707.1
Intercompany sales 0.7 -- -- 178.0 213.1 -- 391.8
Income from operations,
before nonrecurring
and other unusual items 707.4 177.1 64.1 91.9 4.0 (124.5) 920.0
Depreciation expense 213.3 110.4 26.6 71.2 75.9 5.1 502.5
Capital expenditures 200.4 96.3 16.5 78.6 74.8 18.3 484.9
Assets 2,718.6 2,607.5 398.5 585.2 1,013.8 833.3 8,156.9
===============================================================================================================================
</TABLE>
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Intersegment sales
are recorded at market prices. Income from operations, before nonrecurring and
other unusual items, is used to measure segment profitability. Capital
expenditures and depreciation expense not specifically identifiable to a segment
are allocated to the reportable segments based on property, plant and equipment
used in the production of the segment's products. Segment assets primarily
consist of receivables and inventory generated by the segment; property, plant
and equipment used in the production of the segment's products; and goodwill
resulting from the acquisition of businesses. Assets which can not be
specifically identified to a segment, such as equipment used in the production
of various products, are allocated based on estimated production. Corporate
assets primarily consist of cash and cash equivalents, current deferred income
taxes, investments in unconsolidated affiliates, and the net pension asset.
Sales and long-lived assets by geographic areas are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
Long- Long- Long-
lived lived lived
(in millions) Sales assets Sales assets Sales assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $5,261.2 $3,964.8 $5,247.3 $4,028.6 $5,564.0 $4,225.3
France 802.9 680.4 794.7 716.3 776.9 888.1
Other 1,237.0 1,193.0 1,217.0 1,071.8 1,366.2 1,234.9
- -----------------------------------------------------------------------------------
$7,301.1 $5,838.2 $7,259.0 $5,816.7 $7,707.1 $6,348.3
===================================================================================
</TABLE>
No single customer accounted for more than 10% of consolidated net sales in any
year.
FORT JAMES CORPORATION 59
<PAGE>
15
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 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) 1998 1997 1996
- -------------------------------------------------------------------------------
Condensed income statement information:
Net sales $4,868.8 $4,851.6 $5,179.1
Gross profit 1,507.4 1,435.5 1,384.5
Income before extraordinary items and
nonrecurring and other unusual items 178.7 354.6 207.2
Income (loss) before extraordinary items 121.1 (65.5) 175.3
Net income (loss) 118.5 (167.1) 167.2
===============================================================================
Condensed balance sheet information:
Current assets $ 963.6 $ 928.4
Noncurrent assets 3,521.9 3,292.8
Current liabilities 694.1 861.1
Noncurrent liabilities 5,130.4 4,989.3
Deficit 1,339.0 1,629.2
===============================================================================
16
Selected
Quarterly
Financial
Data
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Income Income
(Loss) (Loss) Per Common Share
Before Before ---------------------------
Extra- Net Extra- Stock Price
(in millions, except Gross ordinary Income ordinary Dividends ---------------
per share amounts) Net Sales Profit Item (Loss) Item(i) Declared High Low
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
1st Quarter(a) $1,795.6 $552.5 $ 117.6 $ 115.0 $ 0.53 $0.15 $48 3/16 $34 5/16
2nd Quarter(b) 1,857.0 589.0 136.2 136.2 0.62 0.15 52 1/4 41 3/8
3rd Quarter(c) 1,841.9 601.7 150.7 150.7 0.69 0.15 45 1/4 27
4th Quarter(d) 1,806.6 592.8 95.7 95.7 0.43 0.15 41 32
- ------------------------------------------------------------------------------------------------------
1997:(h)
1st Quarter $1,817.8 $539.7 $ 97.2 $ 95.9 $ 0.43 $0.15 $36 1/4 $29 1/4
2nd Quarter(e) 1,854.3 568.2 149.7 149.1 0.68 0.15 38 7/8 27 1/4
3rd Quarter(f) 1,825.4 555.0 68.7 23.5 0.29 0.15 45 1/16 36 5/8
4th Quarter(g) 1,761.5 518.4 (211.1) (295.5) (1.05) 0.15 47 1/8 36 1/16
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Results for the first quarter of 1998 included nonrecurring merger-related
relocation and other costs of $7.5 million ($4.6 million net of taxes or
$0.02 per diluted share). Net income for the first quarter of 1998 included
a net charge of $2.6 million (or $0.01 per diluted share) for an
extraordinary loss on early extinguishment of debt.
(b) Results for the second quarter of 1998 included nonrecurring merger-related
relocation and other costs of $9.7 million ($5.9 million net of taxes or
$0.03 per diluted share).
(c) Results for the third quarter of 1998 included nonrecurring costs of $14.5
million ($8.9 million after taxes or $0.04 per diluted share). In addition,
the Company reversed $10.5 million ($0.05 per diluted share) of
merger-related tax reserves.
(d) Results for the fourth quarter of 1998 included nonrecurring costs of $69.1
million ($44.8 million net of taxes or $0.21 per diluted share). In
addition, the Company reversed $3.5 million ($0.01 per diluted share) of
merger-related tax reserves.
(e) Results for the second quarter of 1997 included a nonrecurring gain on the
sale of timberlands of $57.7 million ($35.2 million net of taxes or $0.16
per diluted share).
(f) Results for the third quarter of 1997 included a nonrecurring charge
related to transaction costs of $53.9 million ($0.25 per diluted share).
(g) Results for the fourth quarter of 1997 included a restructure charge of
$458.0 million ($317.6 million net of taxes or $1.53 per diluted share).
(h) Results for the first, second, third and fourth quarters of 1997 included
net extraordinary charges for the early extinguishment of debt of $1.3
million, $0.6 million, $45.2 million ($0.22 per diluted share) and $84.4
million ($0.41 per diluted share), respectively.
(i) Per diluted common share.
60 FORT JAMES CORPORATION
<PAGE>
Report of Independent Accountants
The Board of Directors and Shareholders of Fort James Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, cash flows, and
changes in capital accounts present fairly, in all material respects, the
financial position of Fort James Corporation at December 27, 1998, and December
28, 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 27, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
Chicago, Illinois
February 4, 1999
FORT JAMES CORPORATION 61
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
(in millions, except ratios and
per share amounts) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Net sales $7,301.1 $7,259.0 $7,707.1 $8,887.9 $7,103.7
Costs and expenses 6,139.6 6,202.1 6,787.1 8,052.6 6,670.3
Restructure and other unusual items 100.8 454.2 10.7 51.9 9.6
Interest expense 288.5 351.8 424.4 536.3 523.3
Income (loss) before income taxes
and extraordinary item 766.0 269.7 499.0 287.7 (69.6)
Extraordinary item, net of taxes (2.6) (131.5) (8.1) (18.8) (28.2)
Net income (loss) 497.6 (27.0) 319.9 141.1 (83.3)
Net income (loss) available to
common stockholders 493.2 (70.4) 261.4 82.6 (129.1)
==========================================================================================================
Financial Position, End of Year
Total current assets $1,954.1 $1,916.5 $1,808.6 $2,161.9 $2,255.1
Property, plant and equipment 4,654.3 4,565.3 4,999.3 5,339.3 6,000.9
Other assets 555.2 614.5 619.0 638.4 573.2
Goodwill 628.7 636.9 730.0 771.7 776.0
Total assets 7,792.3 7,733.2 8,156.9 8,911.3 9,605.2
Total current liabilities 1,615.3 1,583.9 1,542.0 1,425.1 1,946.0
Current debt 240.0 34.4 128.9 107.5 562.7
Long-term debt 3,647.2 4,155.5 4,305.3 5,406.3 5,857.6
Minority interests 10.3 10.4 11.3 165.3 154.9
Preferred stock -- 352.7 738.4 740.3 740.3
Common shareholders' equity (deficit) 1,051.4 231.6 113.1 (324.5) (727.1)
==========================================================================================================
Common Stock Information(a)
Per Share of Common Stock (diluted)
Net income (loss) before
extraordinary items $ 2.27 $ .35 $ 1.47 $ .62 $ (.75)
Extraordinary item (.01) (.63) (.04) (.12) (.21)
Net income (loss) 2.26 (.28) 1.43 .50 (.96)
Annual rate of dividends declared .60 .60 .60 .60 .60
Book value 4.77 1.11 .60 (1.89) (5.42)
Common Stock Market Price
High $ 52.25 $ 47.13 $ 34.25 $ 37.38 $ 24.75
Low 27.00 27.25 22.38 20.00 15.63
Year-end 37.69 37.50 34.00 24.13 21.00
Weighted-average of common shares
and common share equivalents 217.9 207.6 183.1 164.1 134.1
==========================================================================================================
Other Data
Capital expenditures (excluding
acquisitions) $ 545.8 $ 490.2 $ 484.9 $ 463.5 $ 435.3
Depreciation and amortization expense 490.8 494.8 523.9 584.7 506.2
Return on average capital employed 18.3% 16.6% 13.0% 11.1% 6.4%
Return on net sales 7.5% 6.1% 4.4% 2.2% (.7)%
Ratio of total debt to total capitalization 78.5% 87.6% 83.7% 90.5% 97.5%
Current ratio 1.21 1.21 1.17 1.52 1.16
Cash dividend payout ratio 27.2% +100% 34.3% 76.9% +100%
Ratio of earnings to interest 3.9 3.0 2.2 1.6 .9
==========================================================================================================
</TABLE>
(a) Reflects effect of a 6.5-for-one Fort Howard stock split in 1995.
Book value per common share:
Common shareholders' equity (deficit) divided by outstanding shares of Common
Stock.
Return on average capital employed:
Income (loss) before restructure charges, extraordinary item, interest expense
and income taxes, divided by average capital employed. Capital employed is
calculated as total assets, excluding assets held for sale, minus non-interest
bearing current liabilities.
Return on net sales:
Income (loss) before after-tax restructure charges and extraordinary item,
divided by net sales.
Ratio of total debt to total capitalization:
Total debt divided by the sum of total debt, minority interests, preferred stock
and common shareholders' equity (deficit).
Current Ratio:
Total current assets divided by total current liabilities.
Cash dividend payout ratio:
The sum of cash common and preferred stock dividends declared, divided by net
income (loss).
Ratio of earnings to interest:
Income (loss) before restructure charges, extraordinary items, interest expense
and income taxes, divided by total interest cost. Total interest cost is
interest expense plus capitalized interest.
62 FORT JAMES CORPORATION
<PAGE>
EXECUTIVE OFFICERS
Miles L. Marsh
Chairman and Chief Executive Officer
Mr. Marsh assumed his current position in 1997 in connection with the merger of
Fort Howard Corporation and James River Corporation. He joined James River in
October 1995 as Chief Executive Officer and was appointed to the position of
Chairman of the Board of Directors of James River in January 1996. From 1991 to
1995, he served as Chairman and Chief Executive Officer of Pet, Inc. He also
served as President and Chief Operating Officer of Pet's former parent company,
Whitman Corporation, from 1989 to 1991. Prior to that, he spent eight years in
executive positions with various divisions of Dart & Kraft Inc., Kraft Inc. and
General Foods USA, all of which are part of Philip Morris Companies, Inc.
Clifford A. Cutchins, IV
Senior Vice President, General Counsel, Corporate Secretary
Mr. Cutchins assumed his current position in 1997 in connection with the merger
of Fort Howard Corporation and James River Corporation. He had served as Senior
Vice President, General Counsel, Corporate Secretary, for James River since he
joined the Company in 1990. From 1982 to 1990, he served as Partner with the law
firm of McGuire, Woods, Battle & Boothe, L.L.P., which he joined in 1975.
Francis J. Florido
President, North American
Consumer Products
Mr. Florido assumed his current position in 1998. He joined James River
Corporation in 1996 as Category Vice President, Tissue/Towel, and was later
named Vice President and General Manager, Retail Tissue for Fort James. Prior to
joining James River, he held a number of general management, strategic planning
and marketing positions at Kellogg Company, H.J.
Heinz Company and Pet, Inc.
Daniel J. Girvan
Senior Vice President, Human Resources and Administration
Mr. Girvan assumed his current position in 1997 in connection with the merger of
Fort Howard Corporation and James River Corporation. He had served as Senior
Vice President, Human Resources, for James River since 1993. He joined James
River in 1986 as Director, Human Resources, Communications Papers, in connection
with the acquisition of Crown Zellerbach Corporation, which he joined in 1977.
Alan R. Guibord
Vice President and
Chief Information Officer
Mr. Guibord assumed his current position in 1997 in connection with the merger
of Fort Howard Corporation and James River Corporation. He had served as Vice
President and Chief Information Officer, for James River, since he joined the
Company in 1996. Prior to joining James River, he held a similar position with
RR Donnelley in Chicago from 1994 to 1996. From 1991 to 1994, he held the
position of Vice President, Information Technology at PicturTel Corporation in
Danvers, Massachusetts.
Ernst A. Haberli
Executive Vice President and
Chief Financial Officer
Mr. Haberli assumed his current position in 1997 in connection with the merger
of Fort Howard Corporation and James River Corporation. He had served as Senior
Vice President, Strategy, for James River, since he joined the Company in 1996.
From 1990 to 1995, he served as President of Pet International. He also held
various executive positions in strategic planning and development and
international business management with Kraft General Foods, Kraft International
and Kraft Inc. since 1985.
George F. Hartmann, Jr.
Senior Vice President, North American Commercial Business
Mr. Hartmann assumed his current position in 1998. Subsequent to the merger of
Fort Howard Corporation and James River Corporation he served as Vice President
of Sales. Prior to the merger, he had served as Vice President of Sales and
Marketing for seven years with Fort Howard.
Gary Kurlancheek
Vice President, Marketing
Mr. Kurlancheek assumed his current position in 1997 in connection with the
merger of Fort Howard Corporation and James River Corporation. He joined James
River in 1996 as Vice President of Market Research. Prior to joining James
River, he was Director of Market Research at Pillsbury. From 1991 to 1995, he
was Director and then Vice President of Market Research at Pet, Inc. From 1978
to 1991 he held various positions at General Mills finishing as Director of
Market Research at Red Lobster from 1988 to 1991.
64 FORT JAMES CORPORATION
<PAGE>
R. Michael Lempke
Senior Vice President and Treasurer
Mr. Lempke assumed his current position in 1997 in connection with the merger of
Fort Howard Corporation and James River Corporation. He had served as Vice
President and Treasurer of Fort Howard since 1994 and as Treasurer since 1989.
He joined Fort Howard in 1987 as Manager of Treasury Operations. Prior to that,
he had spent 10 years in the financial services industry.
John F. Lundgren
President, European Consumer Products
Mr. Lundgren assumed his current position in 1997 in connection with the merger
of Fort Howard Corporation and James River Corporation. He had served as
President, European Consumer Products, for James River since 1995. He joined
James River in 1982 as Director of Marketing, Northern Paper Products, in
connection with the acquisition of American Can Company. He served in various
managerial and executive positions from 1982 to 1995.
Daniel J. McCarty
President, North American
Commercial Business
Mr. McCarty assumed his current position in December 1998. He joined Fort James
in 1998 as President, Dixie. Prior to joining Fort James, he served as President
and Chief Executive Officer of American Crystal Sugar from 1995 to 1998. He held
various management positions with Pet, Inc. from 1992 to 1995 and Del Monte
Foods from 1982 to 1992.
Joseph W. McGarr
Senior Vice President,
Planning and Strategy
Mr. McGarr assumed his current position in 1997 in connection with the merger of
Fort Howard Corporation and James River Corporation. He had served as Vice
President, Cost and Systems Effectiveness, for James River since 1996. He joined
James River in 1982 as Director of Strategy, Consumer Products Business, in
connection with the acquisition of American Can Company. He served in various
managerial and executive positions from 1982 to 1996.
Andrei A. Mikhalevsky
Senior Vice President, Sales
Mr. Mikhalevsky assumed his current position in August 1998. He joined James
River Corporation as Vice President of Sales in 1997. Prior to joining James
River, he was employed for 21 years with Campbell Soup Company where he held
various managerial and executive positions.
Joe R. Neil
President, Communications Papers
Mr. Neil assumed his current position in 1997 in connection with the merger of
Fort Howard Corporation and James River Corporation. He had served as President,
North American Commercial Products, for James River since 1996. He joined James
River in 1986 as Vice President, General Manager, White Papers Business, in
connection with the Crown Zellerbach acquisition. He held various managerial and
executive positions from 1986 to 1996.
William A. Paterson
Senior Vice President and Controller
Mr. Paterson assumed his current position in 1997 in connection with the merger
of Fort Howard Corporation and James River Corporation. He joined James River in
1996 as Vice President, Controller and during that same year was named Senior
Vice President and Controller. Prior to joining James River, he served as Senior
Vice President Finance and Administration, for General Foods Corporation, and
held various executive positions in finance with Hobart Corporation, Dart
Industries and Kraft Inc.
William Schultz
Executive Vice President, Dixie
Mr. Schultz assumed his current position in December 1998. He joined James River
in 1997 as Vice President Retail Tabletop Category. Prior to joining James
River, he held various managerial positions with Mars Inc. and Procter & Gamble
Company from 1985 to 1997.
B. Gregory Stroh
President, Operations & Logistics
and Packaging
Mr. Stroh assumed additional responsibilities for Operations and Logistics in
March 1999. He joined Fort James in 1997 as President, Packaging. Prior to
joining Fort James, he had served as President and Chief Executive Officer of
Custom Industries since 1995. From 1992 to 1995 he served as Executive Vice
President, Operations and Technology, for Pet, Inc. He also held various
executive and operating management positions with Kraft Inc. for over 22 years,
including the position of Vice President and Director of Commercial Operations
and Business Development, from 1989 to 1991.
FORT JAMES CORPORATION 65
<PAGE>
EXHIBIT 13 - APPENDIX A
Net sales by segment ratio bar chart as defined by the following
data points:
1998
-----------------------------------------------------------------------
Tissue - North America 47%
Tissue - Europe 26%
Dixie 11%
Packaging 8%
Communication Papers and Fiber 8%
=======================================================================
Operating income - Tissue - North America bar chart as defined by the
following data points:
(in millions) 1997 1998
-----------------------------------------------------------------------
1st Quarter $ 201.4 $ 201.0
2nd Quarter 207.1 216.7
3rd Quarter 201.5 225.4
4th Quarter 173.0 221.7
=======================================================================
Operating income - Tissue - Europe bar chart as defined by the
following data points:
(in millions) 1997 1998
-----------------------------------------------------------------------
1st Quarter $ 52.4 $ 55.7
2nd Quarter 52.9 57.4
3rd Quarter 48.3 59.3
4th Quarter 48.8 63.8
=======================================================================
Operating income - Dixie bar chart as defined by the following data
points:
(in millions) 1997 1998
-----------------------------------------------------------------------
1st Quarter $ 7.6 $ 17.9
2nd Quarter 27.7 33.2
3rd Quarter 16.0 20.5
4th Quarter 16.2 17.5
=======================================================================
Operating income - Packaging bar chart as defined by the following
data points:
(in millions) 1997 1998
-----------------------------------------------------------------------
1st Quarter $ 21.2 $ 10.3
2nd Quarter 23.8 14.6
3rd Quarter 22.7 16.6
4th Quarter 13.6 15.1
=======================================================================
Interest Expense bar chart as defined by the following data points:
(in millions) 1996 1997 1998
-----------------------------------------------------------------------
Interest expense $ 424 $ 352 $ 289
=======================================================================
22
<PAGE>
Working Capital bar chart as defined by the following data points:
-----------------------------------------------------------------------
(in millions) 1996 1997 1998
-----------------------------------------------------------------------
Working capital $ 267 $ 333 $ 339
=======================================================================
Capital Expenditures and Cash Flow from Operations bar chart as
defined by the following data points:
(in millions) 1996 1997 1998
-----------------------------------------------------------------------
Capital expenditures $ 485 $ 490 $ 546
Cash flow from operations 1,085 764 925
=======================================================================
Total Debt bar chart as defined by the following data points:
(in billions) 1996 1997 1998
-----------------------------------------------------------------------
Total debt $ 4.43 $ 4.19 $ 3.89
=======================================================================
Total Capitalization bar chart as defined by the following data
points:
(in billions) 1996 1997 1998
-----------------------------------------------------------------------
Total debt $ 4.43 $ 4.19 $ 3.89
Minority interests 0.01 0.01 0.01
Total preferred stock 0.74 0.35 -
Common shareholders' equity 0.11 0.23 1.05
=======================================================================
Annual Rate of Cash Dividends Per Common Share bar chart as defined by the
following data points:
(in dollars) 1996 1997 1998
-----------------------------------------------------------------------
Annual rate of cash dividends $ 0.60 $ 0.60 $ 0.60
=======================================================================
23
EXHIBIT 21
FORT JAMES CORPORATION SUBSIDIARIES (a)(b)
AS OF DECEMBER 27, 1998
Fort James Corporation, a corporation organized under the laws of
Virginia, has the following majority-owned subsidiaries:
Name Organized Under the Laws of:
- ---- ---------------------------
Brusara Participacoes, Ltda Brazil
Crown Zellerbach AG Zug Switzerland
Ecosource Corporation Delaware
Fort James Canada Inc. Canada
Fort James Communications Corporation Delaware
Fort James Europe Limited United Kingdom
Fort James Export, Ltd. U.S. Virgin Islands
Fort James Fiber Company Virginia
Fort James France S.A.S. France
Fort James Healthcare Management Delaware
Fort James Hellas S.A. Greece
Fort James International Holdings, Ltd. Virginia
Fort James Ireland Limited Ireland
Fort James Italia S.r.l. Italy
Fort James Maine, Inc. Maine
Fort James-Marathon, Ltd. Ontario
Fort James de Mexico S.A. de C.V. Mexico
Fort James Nederland B.V. Netherlands
Fort James B.V. Netherlands
Fort James Operating Company Virginia
Fort James-Pennington, Inc. Alabama
Fort James S.a.r.1 Luxembourg
Fort James France s.c.a. France
Fort James Services S.N.C. Belgium
Fort James S.P.R.L. Belgium
Fort James S.P.R.L.S. Com. p.A. Spain
Fort James Suomi Oy Finland
Fort James Tredegar, Inc. Virginia
Fort James UK Limited United Kingdom
HAC Holding Corporation Delaware
HARCO Trucking Corporation New York
Harmon Associates Corporation New York
Harmon Associates Ltd. Ontario
James River de Mexico, S.A. de C.V. Mexico
James River Holding de Mexico, S.A. de C.V. Mexico Mexico
Jarapar Participacoes, Ltda. Brazil
St. Francis Insurance Company Ltd. Bermuda
Sodipan S.C.A. France
West Mason, Inc. Delaware
(a) Certain subsidiaries which, if considered in the aggregate, would not
constitute a significant subsidiary are not considered.
(b) Unconsolidated affiliates for which the Company owns, directly or
indirectly, 50% or less of the outstanding voting stock and which are
not controlled by the Company have been excluded from this listing.
24
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference:
(i) in Registration Statement No. 33-54491 on Form S-8 pertaining to the
James River Corporation of Virginia StockPlus Investment Plan;
(ii) in Registration Statement No. 33-57153 on Form S-8 pertaining
to the James River Corporation of Virginia Canadian Employees Stock
Purchase Plan;
(iii) in Registration Statement No. 333-33435 on Form S-8 pertaining
to the Fort Howard Corporation Profit Sharing Retirement Plan and
the Harmon Assoc., Corp. Profit Sharing Plan;
(iv) in Registration Statement No. 33-43894 on Form S-8 pertaining
to the James River Corporation of Virginia Stock Option Plan for Outside
Directors;
(v) in Registration Statement No. 333-02213 on Form S-8 pertaining
to the James River Corporation of Virginia Director Stock Ownership
Plan;
(vi) in Registration Statement No. 33-56657 on Form S-8 pertaining
to James River Corporation of Virginia 1987 Stock Option Plan;
(vii) in Registration Statement No. 333-02217 on Form S-8 pertaining
to the James River Corporation of Virginia Stock Incentive Plan;
(viii) in Registration Statement No. 333-35013 on Form S-8
pertaining to the amendment to the James River Corporation of Virginia
Stock Incentive Plan;
(ix) in Registration Statement No. 333-33431 on Form S-8 pertaining
to the Fort Howard Corporation Management Equity Participation
Agreement, the Fort Howard Corporation Management Equity Plan, and
the Fort Howard Corporation 1995 Stock Incentive Plan;
(x) in Registration Statement No. 333-66715 on Form S-8 pertaining to
the Fort James Corporation MIP Bonus Deferral Plan; and
(xi) in Registration Statement No. 333-47287 on Form S-3 pertaining to
the shelf registration statement of $800,000,000 of debt securities of
Fort James Corporation of our report, dated February 4, 1999, on our
audits of the consolidated financial statements and financial statement
schedule of Fort James Corporation as of December 27, 1998 and December
28, 1997, and for each of the three fiscal years in the period ended
December 27, 1998, which reports are included in the 1998 Annual
Report, which is incorporated herein by reference, or included in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
March 22, 1999
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT
JAMES CORPORATION DECEMBER 27, 1998 FORM 10-K FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000053117
<NAME> FORT JAMES CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> DEC-27-1998
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 892
<ALLOWANCES> 0
<INVENTORY> 870
<CURRENT-ASSETS> 1,954
<PP&E> 8,158
<DEPRECIATION> 3,504
<TOTAL-ASSETS> 7,792
<CURRENT-LIABILITIES> 1,615
<BONDS> 3,647
0
0
<COMMON> 22
<OTHER-SE> 1,029
<TOTAL-LIABILITY-AND-EQUITY> 7,792
<SALES> 7,301
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<CGS> 4,965
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<OTHER-EXPENSES> (101)
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 766
<INCOME-TAX> 266
<INCOME-CONTINUING> 500
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<EPS-DILUTED> 2.26
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