UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 24, 2000 Commission File Number: 1-7911
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FORT JAMES CORPORATION
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(Exact name of registrant as specified in its charter)
Virginia 54-0848173
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1650 Lake Cook Road, Deerfield, IL 60015-4753
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 317-5000
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Not Applicable
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- ----------
Number of shares of $.10 par value common stock outstanding as of October 20,
2000:
204,773,712 shares
<PAGE>
FORT JAMES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
September 24, 2000
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of September 24, 2000
and December 26, 1999 3
Consolidated Statements of Operations for the
quarters and nine months ended September 24,
2000 and September 26, 1999 4
Consolidated Statements of Cash Flows for the nine
months ended September 24, 2000 and
September 26, 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORT JAMES CORPORATION
CONSOLIDATED BALANCE SHEETS
September 24, 2000 and December 26, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
September December
(in millions, except share data) 2000 1999
--------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 9.1 $ 10.3
Accounts receivable 880.9 880.5
Inventories 784.7 790.4
Deferred income taxes 94.1 111.5
Other current assets 28.6 35.7
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Total current assets 1,797.4 1,828.4
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Property, plant and equipment 7,973.4 7,858.0
Accumulated depreciation (3,769.5) (3,505.9)
--------------------------------------------------------------------------------
Net property, plant and equipment 4,203.9 4,352.1
Goodwill, net 463.1 528.8
Other assets 499.1 548.9
--------------------------------------------------------------------------------
Total assets $6,963.5 $ 7,258.2
================================================================================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 599.5 $ 619.1
Accrued liabilities 522.3 568.7
Current portion of long-term debt 59.6 81.9
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Total current liabilities 1,181.4 1,269.7
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Long-term debt 3,269.5 3,432.0
Deferred income taxes 802.3 748.6
Accrued postretirement benefits other than pensions 402.1 417.1
Other long-term liabilities 254.4 263.5
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Total liabilities 5,909.7 6,130.9
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Common stock, $.10 par value, 500 million shares
authorized; 204.8 million shares outstanding at
September 24, 2000 and 214.0 million at
December 26, 1999 20.5 21.4
Additional paid-in capital 2,857.4 3,045.0
Accumulated other comprehensive loss (336.8) (227.1)
Accumulated deficit (1,487.3) (1,712.0)
--------------------------------------------------------------------------------
Total shareholders' equity 1,053.8 1,127.3
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Total liabilities and shareholders' equity $6,963.5 $ 7,258.2
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
FORT JAMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters and Nine Months Ended
September 24, 2000 and September 26, 1999
<TABLE>
<CAPTION>
Quarter Nine Months
--------------------------------------------
<S> <C> <C> <C> <C>
(in millions, except per share data) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------
Net sales $ 1,796.2 $ 1,739.3 $ 5,229.4 $ 5,126.8
Cost of goods sold (1,259.7) (1,207.7) (3,692.7) (3,518.4)
Selling and administrative expenses (306.3) (363.4) (893.5) (951.6)
Restructure and other items (18.9) 13.4 (10.3) 14.5
---------------------------------------------------------------------------------------------------------------
Income from operations 211.3 181.6 632.9 671.3
Interest expense (58.3) (53.6) (173.9) (175.5)
Other income, net 4.8 0.4 16.5 18.5
---------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes,
extraordinary items, and cumulative effect of a change
in accounting principle 157.8 128.4 475.5 514.3
Income tax expense (53.0) (34.3) (157.9) (166.7)
---------------------------------------------------------------------------------------------------------------
Income from continuing operations before extraordinary
items and cumulative effect of a change in accounting principle 104.8 94.1 317.6 347.6
Loss from discontinued operations, net of taxes - (1.5) - (6.4)
---------------------------------------------------------------------------------------------------------------
Income before extraordinary items and cumulative effect
of a change in accounting principle 104.8 92.6 317.6 341.2
Extraordinary loss on early extinguishment of debt, net of taxes - - - (33.2)
Extraordinary gain on sale of discontinued operations, net of taxes - 232.5 - 232.5
Cumulative effect of a change in accounting principle, net of taxes - - - (22.1)
---------------------------------------------------------------------------------------------------------------
Net income $ 104.8 $ 325.1 $ 317.6 $ 518.4
===============================================================================================================
Basic earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 0.52 $ 0.43 $ 1.54 $ 1.58
Loss from discontinued operations, net of taxes - (0.01) - (0.03)
Extraordinary loss on early extinguishment of debt, net of taxes - - - (0.15)
Extraordinary gain on sale of discontinued operations, net of taxes - 1.06 - 1.06
Cumulative effect of a change in accounting principle, net of taxes - - - (0.10)
---------------------------------------------------------------------------------------------------------------
Net income $ 0.52 $ 1.48 $ 1.54 $ 2.36
---------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 204.0 219.2 206.5 219.4
===============================================================================================================
Diluted earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 0.51 $ 0.43 $ 1.53 $ 1.58
Loss from discontinued operations, net of taxes - (0.01) - (0.03)
Extraordinary loss on early extinguishment of debt, net of taxes - - - (0.15)
Extraordinary gain on sale of discontinued operations, net of taxes - 1.05 - 1.05
Cumulative effect of a change in accounting principle, net of taxes - - - (0.10)
---------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 1.47 $ 1.53 $ 2.35
---------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - assuming dilution 205.1 220.2 207.1 220.5
===============================================================================================================
Cash dividends per common share $ 0.15 $ 0.15 $ 0.45 $ 0.45
===============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
FORT JAMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 24, 2000 and September 26, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
(in millions) 2000 1999
--------------------------------------------------------------------------------
Cash provided by (used for) operating activities:
Net income $ 317.6 $ 518.4
Depreciation expense 350.6 332.9
Amortization of goodwill 12.8 14.2
Deferred income tax provision 87.4 52.7
Restructure and other items 10.3 (14.5)
Loss from discontinued operations, net of taxes - 6.4
Gain on sale of discontinued operations, net of taxes - (232.5)
Loss on early extinguishment of debt, net of taxes - 33.2
Cumulative effect of a change in accounting
principle, net of taxes - 22.1
Change in current assets and liabilities, excluding
effects of acquisitions and dispositions:
Accounts receivable (75.1) (125.0)
Inventories (14.3) (16.3)
Other current assets 5.6 (6.1)
Accounts payable and accrued liabilities 3.8 (26.6)
Other, net (52.0) (16.1)
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Cash provided by operating activities 646.7 542.8
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Cash provided by (used for) investing activities:
Expenditures for property, plant and equipment (336.9) (346.5)
Proceeds from sale of assets 93.0 3.9
Cash paid for acquisitions, net - (56.7)
Proceeds from sale of discountinued operations - 825.8
Increase in net assets of discontinued operations - (34.4)
Other, net (1.0) (1.7)
--------------------------------------------------------------------------------
Cash provided by (used for) investing activities (244.9) 390.4
--------------------------------------------------------------------------------
Cash provided by (used for) financing activities:
Additions to long-term debt 4.1 357.3
Payments of long-term debt (49.8) (340.5)
Net decrease in revolving debt (67.6) (764.9)
Premiums paid on early extinguishment of debt and
debt issuance costs - (56.2)
Common stock dividends paid (94.3) (98.9)
Proceeds from exercise of stock options 3.6 15.0
Common stock purchases (198.9) (53.6)
Other, net (0.1) 11.0
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Cash used for financing activities (403.0) (930.8)
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Increase (decrease) in cash and cash equivalents (1.2) 2.4
Cash and cash equivalents, beginning of period 10.3 5.3
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 9.1 $ 7.7
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Basis of Presentation:
In the opinion of management, the accompanying unaudited consolidated
financial statements of Fort James Corporation ("Fort James" or "the
Company") contain all adjustments (including normal recurring accruals)
necessary to present fairly the Company's consolidated financial position as
of September 24, 2000 and its results of operations for the quarters and nine
months ended September 24, 2000 and September 26, 1999 and its cash flows for
the nine months ended September 24, 2000 and September 26, 1999. The balance
sheet as of December 26, 1999 was derived from audited financial statements
as of that date. The results of operations for the quarter and nine months
ended September 24, 2000 are not necessarily indicative of the results to be
expected for the full year.
Prospective Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS No. 133"). This statement requires the recognition of all
derivative instruments in the statement of financial position as either
assets or liabilities and their measurement at fair value. Depending upon
the nature of the derivative, changes in fair value are either recognized in
other comprehensive income or in earnings. Certain sections of FAS No. 133
were amended in June 2000, when the FASB issued Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133" ("FAS No. 138"). FASB
Statement No. 137 defers the Company's required adoption of FAS No. 133 and
FAS No. 138 until fiscal 2001. The Company has a program in place to
evaluate its financial instruments and contracts. The Company believes
that FAS No. 133 and FAS No. 138 will not have a material impact on its
results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company is required to implement SAB 101 in the fourth
quarter of fiscal 2000. The Company believes that SAB 101 will not have a
material effect on its results of operations or financial position.
In May 2000, the Emerging Issues Task Force ("EITF") reached consensus
on Issue No. 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14").
EITF 00-14 requires that certain sales incentives to customers be accounted
for as a reduction of revenue. The Company is required to adopt EITF 00-14 in
the fourth quarter of fiscal 2000. The adoption will require a
reclassification of certain sales incentives from selling expense to a
reduction of revenue. The Company has not determined the magnitude of the
effect EITF 00-14 will have on revenue. However, EITF 00-14 will not affect
the Company's income from operations.
2. Dispositions
In January 2000, the Company completed the sale of Fort James -
Marathon LTD ("Marathon"), a non-integrated pulp mill located in Ontario,
Canada, to a joint venture between Tembec Inc. and Kruger Inc. for $69.1
million. In February 2000, the Company closed its groundwood paper operations
(the "Groundwood Business") at the Wauna mill in Clatskanie, Oregon. Both
Marathon and the Groundwood Business, which had a combined net asset value of
$220.8 million, were included in the Communications Papers and Fiber segment.
Anticipated losses of $149.9 million for asset write-downs and $7.2 million
of other costs related to the sale and closure were originally recorded in
the fourth quarter of 1999 on the "Restructure and other items" line of the
Consolidated Statements of Operations. In the second quarter of 2000, the
Company reversed $8.6 million ($5.6 million after taxes, or $0.03 per diluted
share) originally recorded at the end of 1999, as part of the estimated loss
on the sale of Marathon. The revision was recorded on the "Restructure and
other items" line of the Consolidated Statements of Operations, and
represents the final determination of the purchase price and an adjustment of
estimated transaction costs to reflect actual costs paid. For further
information regarding unusual and non-recurring items, see Note 3, Unusual
and Non-recurring Items.
Net sales and income (loss) from operations of Marathon and the
Groundwood Business for the quarter ended September 26, 1999 and the nine
months ended September 24, 2000 and September 26, 1999 were as follows:
<TABLE>
<CAPTION>
Quarter Nine Months
<S> <C> <C> <C>
--------------- ------------------------------
(in millions) 1999 2000 1999
---------------------------------------------------------------------------------------------------------
Net sales of assets held for disposal $ 31.5 $ 18.3 $ 90.9
Income (loss) from operations of assets held for disposal $ 0.3 $ 1.8 $ (3.8)
</TABLE>
In August 1999, Fort James sold its Packaging business to ACX
Technologies, Inc. for $836.3 million in cash. The sale included the
operations, assets, and liabilities of the Company's folding carton,
healthcare, and microwave packaging manufacturing facilities. The Packaging
business is treated as a discontinued operation. The results of discontinued
operations include the operating results for the Packaging business and an
allocation of interest expense and taxes, for periods prior to the
disposition date.
Results for the Packaging business for the quarter and nine months
ended September 26, 1999 were as follows:
<TABLE>
<CAPTION>
1999
<S> <C> <C>
-----------------------------
(in millions) Quarter Nine Months
----------------------------------------------------------------- --------------
Net sales $ 51.6 $ 330.5
================================================================================
Loss from discontinued operations $ (2.3) $ (9.1)
Tax benefit 0.8 2.7
--------------------------------------------------------------------------------
Loss from discontinued
operations, net of taxes $ (1.5) $ (6.4)
================================================================================
</TABLE>
3. Unusual and Non-Recurring Items
Unusual Items
Income from operations for the third quarter and nine months ended
September 24, 2000 included unusual charges of $24.0 million ($14.8 million
after taxes, or $0.07 per diluted share) for accruals related to the
settlement of certain antitrust litigation claims related to the Tissue -
North America business, as well as charges for legal fees and other costs
associated with the pending sale of Fort James to Georgia-Pacific Corporation
("Georgia-Pacific") (see Note 11, Pending Merger Transaction). The unusual
charges of $24.0 million were recorded in costs of good sold ($12.5 million)
and selling and administrative expenses ($11.5 million).
Income from operations for the third quarter and nine months ended
September 26, 1999, included $46.0 million of unusual items for severance and
other costs related to a reduction-in-force program and for antitrust and
other litigation accruals, of which $17.8 million was included in cost of
goods sold and $28.2 million was included in selling and administrative
expenses.
Restructure and Other Items
Income from operations for the third quarter and nine months ended
September 24, 2000, included non-recurring charges of $18.9 million ($12.0
million after taxes, or $0.06 per diluted share) for the write-off of
remaining unsecured notes receivable and accruals for contingent liabilities
resulting from the bankruptcy of Crown Vantage Inc. ("Crown"), which was spun
off from the Company in 1995. See Note 9, Commitments and Contingent
Liabilities, for further information on Crown. Income from operations for the
nine months ended September 24, 2000 also included non-recurring income of
$8.6 million ($5.6 million after taxes, or $0.03 per diluted share) related
to the Marathon divestiture (see Note 2, Dispositions).
Income from operations for the third quarter and nine months ended
September 26, 1999 included a charge of $30.0 million ($18.4 million after
taxes, or $0.08 per diluted share) for a write-down of notes receivable from
Crown. In addition, income from operations for the third quarter and nine
months ended September 26, 1999 included net non-recurring credits of $43.4
million ($30.4 million after taxes, or $0.14 per diluted share) and $44.5
million ($31.1 million after taxes, or $0.14 per diluted share),
respectively. Non-recurring credits related to the reversal of certain 1997
merger-related restructure accruals, as a result of unexpected and protracted
regulatory reviews that were expected to delay certain initiatives into late
2000. In addition, certain initiatives were cancelled due to changes in
economic circumstances, which indicated that the initiatives would not
provide the economic benefits initially projected. The initiatives that were
delayed or cancelled primarily related to operations of the Company's Tissue
- Europe business.
4. Other Income
The components of other income for the quarters and nine months ended
September 24, 2000 and September 26, 1999 were as follows:
<TABLE>
<CAPTION>
Quarter Nine Months
------------------------ -----------------------------
<S> <C> <C> <C> <C>
(in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates $ 2.5 $ 1.2 $ 6.7 $ 3.7
Foreign currency exchange gains 4.9 0.8 1.6 5.5
Minority interest (3.3) (2.7) (10.1) (7.7)
Gains (losses) on sale of assets 1.6 (0.4) 16.0 0.3
Interest on income tax refunds - - - 9.3
Other, net (0.9) 1.5 2.3 7.4
------------------------------------------------------------------------------------------------------
Total other income $ 4.8 $ 0.4 $ 16.5 $ 18.5
======================================================================================================
</TABLE>
5. Stock Purchase Program
In August 1999, the Company began execution of a $500 million stock
purchase program. For the nine months ended September 24, 2000, the Company
purchased 9.4 million common shares at a cost of $198.9 million. As of
September 24, 2000, the Company had purchased 16.5 million common shares at a
cost of $398.6 million since the inception of the program. As a result of the
pending merger of Fort James with Georgia-Pacific (see Note 11, Pending
Merger Transaction), the Company's stock purchase program has been suspended.
6. Balance Sheet Information
Reduction-in-Force
In the third quarter of 1999, the Company recorded a charge of $25.0
million for the cost of termination benefits for a reduction-in-force program
that has reduced headcount by approximately 1,300 employees. The program was
substantially completed in the first quarter of 2000. As of September 24,
2000, termination benefits of $17.4 million had been paid and approximately
$2.3 million of salary continuation benefits will be paid in the future
according to contract terms.
Inventories
The components of inventories as of September 24, 2000 and December 26,
1999 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
September December
(in millions) 2000 1999
--------------------------------------------------------------------------------
Raw materials $ 183.8 $ 178.3
Finished goods and work in process 472.5 464.8
Stores and supplies 177.4 165.4
--------------------------------------------------------------------------------
833.7 808.5
Reduction to state certain inventories
at last-in, first-out cost (49.0) (18.1)
--------------------------------------------------------------------------------
Total inventories $ 784.7 $ 790.4
================================================================================
</TABLE>
7. Comprehensive Income
Comprehensive income for the quarters ended September 24, 2000 and
September 26, 1999 was $32.4 million and $364.5 million, respectively. For
the nine months ended September 24, 2000 and September 26, 1999,
comprehensive income was $207.9 million and $429.6 million, respectively. The
difference between net income and comprehensive income is due to foreign
currency translation gains and losses.
8. Income Per Common Share and Common Share Equivalent
Income and share information used in determining earnings per share
for the quarters and nine months ended September 24, 2000 and
September 26, 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
-----------------------------------------
<S> <C> <C> <C> <C>
(in millions) Income Shares Income Shares
--------------------------------------------------------------------------------------------------------------
Third Quarter:
Amounts used to compute basic earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 104.8 $94.1
Weighted average common shares outstanding 204.0 219.2
Effect of dilutive securities:
Options (a) 1.1 1.0
--------------------------------------------------------------------------------------------------------------
Amounts used to compute diluted earnings per share $ 104.8 205.1 $94.1 220.2
==============================================================================================================
Nine months:
Amounts used to compute basic earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 317.6 $347.6
Weighted average common shares outstanding 206.5 219.4
Effect of dilutive securities:
Options (a) 0.6 1.1
--------------------------------------------------------------------------------------------------------------
Amounts used to compute diluted earnings per share $ 317.6 207.1 $347.6 220.5
==============================================================================================================
</TABLE>
(a) For the quarter and nine months ended September 24, 2000, outstanding
options to purchase 5.5 million and 8.3 million shares of common stock,
respectively, for which the exercise price was greater than the average
market price of the common shares were excluded from the computation of
diluted earnings per share. For the quarter and nine months ended September
26, 1999, such amounts were 5.6 million and 4.7 million shares of common
stock, respectively.
9. Commitments and Contingent Liabilities
Environmental Matters:
Like its competitors, Fort James is subject to extensive regulation by
various federal, state, provincial, and local agencies concerning compliance
with environmental control statutes and regulations. These regulations impose
limitations, including effluent and emission limitations, on the discharge of
materials into the environment, as well as require the Company to obtain and
operate in compliance with the conditions of permits and other governmental
authorizations. Future regulations could materially increase the Company's
capital requirements and certain operating expenses in future years.
Fort James, along with others, has been identified as a potentially
responsible party ("PRP") at various U.S. Environmental Protection Agency
("EPA") designated Superfund sites and is involved in other remedial
investigations and actions under federal and state laws. These sites include
the Lower Fox River in Wisconsin, where the Company and six other companies
have been identified as PRPs for contamination of the river by hazardous
substances, and the Kalamazoo River in southwestern Michigan, where the
Company, along with other PRPs, is participating in the funding of a remedial
investigation/feasibility study.
In the Fox River matter, various state and federal agencies and tribal
entities are seeking both sediment restoration and natural resources damages.
In February 1999, the Wisconsin Department of Natural Resources ("WDNR")
released for public comment a draft remedial investigation/feasibility study
of the Fox River. While the draft study did not advocate any specific
sediment restoration alternatives, it included estimated total costs ranging
from zero for "no action" to approximately $720 million, depending on the
alternative or combination of alternatives selected. In May 2000, the Company
reached an agreement with the WDNR and the EPA for the voluntary restoration
of one sediment area on the Fox River. In exchange, the Company will receive
a release from future liability for that particular area, provided the
restoration goals are achieved. The project began in August 2000 and is
expected to conclude in the fourth quarter of 2000.
In October 2000, the U. S. Fish and Wildlife Service released for
public comment its Restoration and Compensation Determination Plan (the
"Plan") for natural resources damages in connection with its Lower Fox
River/Green Bay Natural Resource Damage Assessment. According to the Plan,
claims for past damages and present and future losses allegedly resulting
from contamination of the Fox River by hazardous substances range from $176
million to $333 million, depending on the sediment restoration alternative or
combinations of alternatives selected. The actual costs of projects to settle
natural resource damage claims could be significantly lower.
In the Kalamazoo River matter, the PRPs submitted a draft remedial
investigation/feasibility study to the Michigan Department of Environmental
Quality ("DEQ") on October 30, 2000. This draft document identified a number
of remedial restoration alternatives with estimated total costs ranging from
zero for "no action" to approximately $2.6 billion, depending on the
alternative selected. The PRP group's preferred alternative is estimated to
cost approximately $73 million. The DEQ has announced its intention to
publish a Record of Decision, which will contain its proposed remedy,
sometime during 2001.
The final restoration alternatives and the Company's share of the
related costs, for both the Fox River and Kalamazoo River matters, are
unknown at this time.
It is the Company's policy to accrue remediation costs on an
undiscounted basis when such costs are probable and estimable. As of
September 24, 2000, Fort James' accrued environmental liabilities, including
remediation, natural resource damages and landfill closure costs, totaled
$70.7 million. It is reasonably possible, however, that some of the matters
discussed in the foregoing paragraphs could be decided unfavorably to the
Company and could require the Company to pay damages, or make other
expenditures, in amounts or a range of amounts that cannot be estimated.
The Company believes, based on its current analysis, that its share of the
costs for its current remediation sites will not have a material adverse
impact on its consolidated financial position or its cash flows but could
have a material effect on consolidated results of operations in a given
period.
Litigation:
The Company is party to various legal proceedings generally incidental
to its business. As is the case with other companies in similar industries,
Fort James faces exposure from actual or potential claims and legal
proceedings.
Antitrust
In May 1997, the Attorney General of the State of Florida filed a civil
action in the United States District Court for the Northern District of
Florida at Gainesville (the "Florida District Court"), against the
Company and seven other manufacturers of sanitary commercial paper
products alleging violations of federal and state antitrust and unfair
competition laws. The complaint sought damages on behalf of the state
under Florida law of $1 million against each defendant for each
violation, unspecified treble damages and injunctive relief. Four other
state attorneys general brought similar suits. In April 2000, the
defendants settled with the State of Florida and the matter was
dismissed. In June 2000, settlements were reached with the states of
New York, West Virginia, and Maryland. The case filed by the State of
Kansas was dismissed earlier. In no case did the Company admit to
wrongdoing.
Numerous private suits on behalf of an alleged class of direct
purchasers were also filed in federal courts, all seeking similar
damages for similar alleged violations. In July 1998, the private suits
were conditionally certified as a class action in the Florida District
Court. In August 2000, a settlement offer was accepted by the
plaintiffs and preliminarily approved by the Florida District Court.
Fort James' portion of the offer is approximately 49% of the total
settlement, which is generally reflective of the combined market shares
of the former Fort Howard Corporation and the former James River
Corporation. The Company did not admit to wrongdoing.
Private class action suits were also filed in Minnesota, Wisconsin,
California, and Tennessee on behalf of an alleged class of indirect
purchasers, seeking similar damages for similar alleged violations
under state law. The Minnesota court refused to certify a class in that
state, and the case in Wisconsin was voluntarily dismissed prior to
certification. A settlement has been agreed upon in principle with the
California plaintiffs, prior to class certification, and is awaiting
court approval. There has been no significant activity in the Tennessee
case. The Company believes that these outstanding cases are without
merit and is vigorously defending the remaining state actions. In no
case has the Company admitted to wrongdoing.
Crown Vantage, Inc.
In 1995, the Company completed the spin off of certain assets of its
Communications Papers and Packaging businesses to Crown. On March 15,
2000, Crown filed for Chapter 11 bankruptcy protection from its
creditors and secured $100 million of "debtor in possession" financing.
On July 26, 2000, Crown announced the signing of a letter of intent by
its wholly owned subsidiary, Crown Paper Co. ("Crown Paper") providing
for the sale of substantially all of the assets of Crown Paper to Crown
Acquisition Corp. On October 9, 2000, Crown announced that the letter
of intent between Crown Paper and Crown Acquisition Corporation had
been terminated.
In the third quarter of 2000, Fort James obtained a schedule from the
Bankruptcy Court of Crown's assets and liabilities and an initial
indication of amounts of secured and unsecured claims against the
estate. This schedule reported Crown's liabilities in excess of its
assets. Based on this information, Fort James recorded a third quarter
charge of $18.9 million for the write-off of remaining unsecured notes
receivable from Crown and accruals for contingent liabilities resulting
from the bankruptcy. These contingent liabilities primarily relate to
environmental and pension costs at certain Crown facilities.
On October 19, 2000, the official committee of unsecured creditors
assembled by the Crown Bankruptcy Trustee served two motions on the
Company seeking authority to investigate and possibly initiate an
action based upon certain facts surrounding the 1995 spin off
transaction. The first motion seeks authority under Rule 2004 of the
Federal Rules of Bankruptcy Procedure to initiate discovery with
respect to the valuation of property transferred to Crown in relation
to the property received by the Company in the spin off. The second
motion seeks authority to investigate these facts further and possibly
commence a proceeding against the Company if the unsecured creditors
committee concludes that property was transferred to the Company for
other than fair consideration. The first motion is currently pending.
The second motion has been set for hearing on December 1, 2000. As of
the filing date, no claims have been asserted; therefore, the Company
is unable to estimate a range of possible loss regarding this matter,
if any. The Company believes that the actions taken in connection with
the 1995 spin off transaction were entirely proper and appropriate and,
if called upon, will vigorously defend any claims to the contrary.
Although the ultimate disposition of the various legal proceedings to
which the Company is a party cannot be predicted with certainty, it is the
Company's policy to accrue settlement costs when such costs are probable and
estimable. It is reasonably possible, however, that some of the matters
discussed in the foregoing paragraphs could be decided unfavorably to the
Company and could require the Company to make expenditures, in amounts or a
range of amounts that cannot be estimated. The Company believes, based on its
current analysis, that the outcome of any claim which is pending or
threatened, either individually or on a combined basis, will not have a
material adverse effect on the consolidated financial condition of Fort James
but could have a material effect on its cash flows or consolidated results of
operations in a given period.
<PAGE>
10. Segments
The Company's measure of segment profitability is income from operations
excluding corporate restructuring programs, merger-related activities and
other corporate non-operating activities. Segment sales and income from
operations for the quarters and nine months ended September 24, 2000 and
September 26, 1999 and total assets as of September 24, 2000 and September
26, 1999 were as follows:
<TABLE>
<CAPTION>
Tissue Communi- Inter-
----------------------- cations company
North Papers and and
(in millions) America Europe Dixie Fiber Corporate Total
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------
Quarter ended September 2000
Net sales $ 1,026.6 $ 431.9 $ 216.1 $ 239.9 $(118.3) $ 1,796.2
Intercompany sales 32.5 - 0.4 85.4 - 118.3
Income from operations before
restructure and other items (a) 191.9 27.6 30.0 10.9 (30.2) 230.2
Restructure and other items - - - - (18.9) (18.9)
----------------------------------------------------------------------------------------------------------------
Income from operations 191.9 27.6 30.0 10.9 (49.1) 211.3
Interest expense - - - - (58.3) (58.3)
Other income - - - - 4.8 4.8
----------------------------------------------------------------------------------------------------------------
Income before income taxes (b) $ 191.9 $ 27.6 $30.0 $ 10.9 $(102.6) $ 157.8
================================================================================================================
Quarter ended September 1999
Net sales $ 950.3 $ 452.1 $ 195.2 $ 209.3 $(67.6) $ 1,739.3
Intercompany sales 24.2 - 0.8 42.6 - 67.6
Income from operations before
restructure and other items (a) 125.6 50.8 20.3 1.8 (30.3) 168.2
Restructure and other items - - - - 13.4 13.4
----------------------------------------------------------------------------------------------------------------
Income from operations 125.6 50.8 20.3 1.8 (16.9) 181.6
Interest expense - - - - (53.6) (53.6)
Other income - - - - 0.4 0.4
----------------------------------------------------------------------------------------------------------------
Income before income taxes (b) $ 125.6 $ 50.8 $20.3 $ 1.8 $(70.1) $ 128.4
================================================================================================================
Nine months ended September 2000
Net sales $ 2,890.8 $ 1,315.4 $ 635.9 $ 703.9 $(316.6) $ 5,229.4
Intercompany sales 98.1 - 1.2 217.3 - 316.6
Income from operations before
restructure and other items (a) 508.1 81.1 86.7 35.4 (68.1) 643.2
Restructure and other items - - - - (10.3) (10.3)
----------------------------------------------------------------------------------------------------------------
Income from operations 508.1 81.1 86.7 35.4 (78.4) 632.9
Interest expense - - - - (173.9) (173.9)
Other income - - - - 16.5 16.5
----------------------------------------------------------------------------------------------------------------
Income before income taxes (b) $ 508.1 $ 81.1 $86.7 $ 35.4 $(235.8) $ 475.5
================================================================================================================
Total assets $ 3,296.9 $ 1,973.1 $ 462.3 $ 574.5 $656.7 $ 6,963.5
================================================================================================================
Nine months ended September 1999
Net sales $ 2,763.4 $ 1,374.3 $ 591.1 $ 606.2 $(208.2) $ 5,126.8
Intercompany sales 80.1 - 2.4 125.7 - 208.2
Income from operations before
restructure and other items (a) 501.2 169.3 78.2 (21.0) (70.9) 656.8
Restructure and other items - - - - 14.5 14.5
----------------------------------------------------------------------------------------------------------------
Income from operations 501.2 169.3 78.2 (21.0) (56.4) 671.3
Interest expense - - - - (175.5) (175.5)
Other income - - - - 18.5 18.5
----------------------------------------------------------------------------------------------------------------
Income before income taxes (b) $ 501.2 $ 169.3 $78.2 $(21.0) $(213.4) $ 514.3
================================================================================================================
Total assets $ 3,020.3 $ 2,299.1 $ 420.2 $ 804.3 $732.5 $ 7,276.4
================================================================================================================
</TABLE>
(a) Third quarter and year-to-date 2000 income from operations included
unusual charges of $24.0 million for litigation accruals and legal
fees and other costs, of which $12.5 million is included in cost of
goods sold and $11.5 million is included in selling and administrative
expense. Third quarter and year-to-date 1999 income from operations
included unusual charges of $46.0 million for severance and litigation
accruals, of which $17.8 million was included in cost of goods sold
and $28.2 million was included in selling and administrative expenses.
Details by segment are as follows:
<TABLE>
<CAPTION>
Income From Operations Excluding Unusual Items
-----------------------------------------------------------
Unusual Items Third Quarter Year-To-Date
------------------------- ----------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------
Tissue - North America $ 13.3 $ 34.7 $ 205.2 $ 160.3 $ 521.4 $ 535.9
Tissue - Europe - - 27.6 50.8 81.1 169.3
Dixie 0.2 0.9 30.2 21.2 86.9 79.1
Communications Papers and Fiber 0.2 2.1 11.1 3.9 35.6 (18.9)
Corporate 10.3 8.3 (19.9) (22.0) (57.8) (62.6)
------------------------------------------------------------------------------------------------------------------------------
Total $ 24.0 $ 46.0 $ 254.2 $ 214.2 $ 667.2 $ 702.8
==============================================================================================================================
</TABLE>
(b) Income from continuing operations before income taxes, extraordinary
items, and cumulative effect of a change in accounting principle.
11.Pending Merger Transaction
On July 17, 2000, Fort James and Georgia-Pacific announced that the
boards of directors of both companies signed a definitive merger agreement
for Georgia-Pacific to acquire Fort James in a transaction valued at
approximately $11 billion in cash, stock and assumed debt. Under the terms of
the agreement, Georgia-Pacific will acquire all outstanding shares of Fort
James for $29.60 per share in cash and 0.2644 shares of Georgia-Pacific
stock. The maximum value that can be received by Fort James shareholders is
$40 per share (comprised of $29.60 in cash and $10.40 in Georgia-Pacific
stock). Therefore, the 0.2644 shares of Georgia-Pacific included in the offer
is subject to downward adjustment in the event its average share price is
greater than $39.33.
On October 13, 2000, Georgia-Pacific launched its exchange offer for all
outstanding shares of the Company's stock. Subject to regulatory approval,
the transaction is expected to be completed in the fourth quarter of fiscal
2000. For additional information, see the Company's Form 8-K filed on July
17, 2000 and on September 1, 2000 and Forms SC TO-T, SC TO-C and SC 14D9
filed on October 13, 2000, Form SC 14D9A filed on October 16, 2000, Form SC
14D9A filed on October 18, 2000, and Form SC 14D9A filed on October 26, 2000.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
During the quarters and nine months ended September 24, 2000 and
September 26, 1999, the Company recorded certain unusual and non-recurring
items. Results for the quarters and nine months ended September 24, 2000 and
September 26, 1999, as reported and excluding unusual and non-recurring items,
are summarized as follows:
<TABLE>
<CAPTION>
Quarter Nine Months
---------------------------------------------
<S> <C> <C> <C> <C>
(in millions, except per share data) 2000 (a) 1999 (b) 2000 (c) 1999 (d)
----------------------------------------------------------------------------------------------------------
Net sales $ 1,796.2 $ 1,739.3 $ 5,229.4 $ 5,126.8
==========================================================================================================
Income from operations $ 211.3 $ 181.6 $ 632.9 $ 671.3
Adjusted for unusual and non-recurring items:
Cost of goods sold 12.5 17.8 12.5 17.8
Selling and administrative expenses 11.5 28.2 11.5 28.2
Restructure and other items 18.9 (13.4) 10.3 (14.5)
----------------------------------------------------------------------------------------------------------
Income from operations, before unusual and non-recurring items $ 254.2 $ 214.2 $ 667.2 $ 702.8
==========================================================================================================
Net income $ 104.8 $ 325.1 $ 317.6 $ 518.4
Adjusted for unusual and non-recurring items, each net of taxes:
Cost of goods sold 7.7 10.9 7.7 10.9
Selling and administrative expenses 7.1 17.2 7.1 17.2
Restructure and other items 12.0 (12.0) 6.4 (12.7)
Loss from discontinued operations - 1.5 - 6.4
Extraordinary items - (232.5) - (199.3)
Cumulative effect of a change in accounting principle - - - 22.1
----------------------------------------------------------------------------------------------------------
Net earnings, before unusual and non-recurring items $ 131.6 $ 110.2 $ 338.8 $ 363.0
==========================================================================================================
Diluted earnings per share:
Net income $ 0.51 $ 1.47 $ 1.53 $ 2.35
Adjusted for:
Unusual items, net 0.07 0.13 0.07 0.13
Restructure and other items 0.06 (0.06) 0.03 (0.06)
Discontinued operations - 0.01 - 0.03
Extraordinary items, net - (1.05) - (0.90)
Cumulative effect of a change in accounting principle - - - 0.10
----------------------------------------------------------------------------------------------------------
From earnings, before unusual and non-recurring items $ 0.64 $ 0.50 $ 1.63 $ 1.65
==========================================================================================================
</TABLE>
(a) Results for the third quarter of 2000 included unusual charges of $24.0
million ($14.8 million after taxes) for the settlement of certain antitrust
litigation claims related to the Company's Tissue - North America business
as well as charges for legal and other costs associated with the pending
merger. In addition, non-recurring charges of $18.9 million ($12.0 million
after taxes) were recorded for the write-off of remaining notes receivable
and accruals for contingent liabilities resulting from the bankruptcy of
Crown Vantage, which was spun off from the Company in 1995.
(b) Results for the third quarter of 1999 included unusual charges of $46.0
million ($28.1 million after taxes) and non-recurring credits of $13.4
million ($12.0 million after taxes). In addition, net income included a
loss from discontinued operations of $1.5 million and an extraordinary gain
on the sale of the Packaging business of $232.5 million.
(c) Results for the first nine months of 2000 included unusual charges of $24.0
million ($14.8 million after taxes) for the settlement of certain antitrust
litigation claims related to the Company's Tissue - North America business
as well as charges for legal and other costs associated with the pending
merger. In addition, net non-recurring charges of $10.3 million ($6.4
million after taxes) were recorded for the write-off of remaining notes
receivable and accruals for contingent liabilities resulting from the
bankruptcy of Crown Vantage, which was spun off from the Company in 1995,
partially offset by an income adjustment for the final determination of the
net purchase price on the Marathon sale.
(d) Results for the first nine months of 1999 included unusual charges of $46.0
million ($28.1 million after taxes) and non-recurring credits of $14.5
million ($12.7 million after taxes). In addition, net income included a
loss from discontinued operations of $6.4 million, charges of $33.2 million
for an extraordinary loss on early extinguishment of debt, $22.1 million
for the cumulative effect of a change in accounting principle and $232.5
million for an extraordinary gain on the sale of the Packaging business.
Net sales increased more than 2 percent for the quarter and nine months
ended September 24, 2000 compared to a year ago. Excluding the effects of
currency translation and divested operations, net sales increased more than 8
percent and 6 percent, respectively. Third quarter 2000 income from operations,
both excluding and including unusual and non-recurring items, increased compared
to last year's quarter; however, income from operations for the nine months
ended September 24, 2000, was below last year's levels. Significantly improved
performance in all business segments except Tissue - Europe contributed to the
stronger results in the third quarter; however, the decline in income from
operations for the nine months was driven by reduced earnings in the Tissue -
Europe and Tissue - North America businesses as a result of higher raw material
costs, partially offset by increased earnings in the Communications Papers and
Fiber businesses and the Dixie business.
Results by Segment
The Company's measure of segment profitability is income from
operations excluding corporate restructuring programs, merger-related activities
and other corporate non-operating activities.
Tissue - North America
----------------------
<TABLE>
<CAPTION>
Quarter Nine Months
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in millions) 2000 1999 Inc/(Dec) 2000 1999 Inc/(Dec)
--------------------------------------------------------------------------------------------------------------
Net sales $ 1,026.6 $ 950.3 8.0 % $ 2,890.8 $ 2,763.4 4.6 %
Income from operations 191.9 125.6 52.8 % 508.1 501.2 1.4 %
Income from operations, before unusual items 205.2 160.3 28.0 % 521.4 535.9 (2.7)%
==============================================================================================================
</TABLE>
The increase in third quarter net sales and income from operations in
the Tissue - North America business was the result of improved pricing, volume
growth and manufacturing cost reductions partially offset by higher raw material
costs. Distribution and warehousing costs were significantly lower than last
year, with continued improvement from the first half of 2000, despite higher
fuel costs.
In the retail category, pricing was higher than the prior year,
primarily due to list price increases implemented in the second quarter of 2000.
Retail volumes increased more than 4 percent compared to the prior year, with
significant gains in bath tissue and napkins, partially offset by lower towel
volumes.
In the away-from-home category, pricing was higher than in the third
quarter of 1999, but decreased slightly compared to the second quarter of 2000.
Volumes were approximately equal to those of the prior year.
The year-to-date increase in net sales was the result of increased
pricing in both the retail and away-from-home categories. Income from
operations, excluding unusual items, declined in the first nine months of 2000
compared to the prior year as cost reduction benefits and increased pricing were
more than offset by significant inflationary increases in wastepaper.
Tissue - Europe
---------------
<TABLE>
<CAPTION>
Quarter Nine Months
---------------------------------- --------------------------------------
(in millions) 2000 1999 Inc/(Dec) 2000 1999 Inc/(Dec)
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
Net sales $ 431.9 $ 452.1 (4.5)$ 1,315.4 $ 1,374.3 (4.3)%
Income from operations 27.6 50.8 (45.7)% 81.1 169.3 (52.1)%
=======================================================================================================
</TABLE>
Third quarter net sales and income from operations of the Tissue -
Europe business declined compared to the prior year. The weakening of the
European currencies against the U.S. dollar negatively affected sales and
operating profits by approximately $55 million and $6 million, respectively,
compared to last year's quarter. Third quarter 2000 operating profits were also
negatively impacted by almost $40 million of continued fiber inflation,
including the effect of currency movements, which was only partially offset by
increased pricing. Finished goods sales volumes in the third quarter were
slightly ahead of last year's quarter.
During the first nine months of the year, weakening of the European
currencies against the U.S. dollar negatively affected net sales and operating
profits by approximately $143 million and $17 million, respectively. Finished
goods volume increased in most of the Company's European markets, except the
United Kingdom, which was impacted by intense competitive pricing conditions due
in part to the entry of a major new competitor. However income from operations
for the nine months ended September 24, 2000 declined as a result of significant
raw material inflation that was only partially offset by increased selling
prices and cost reduction efforts.
Dixie
-----
<TABLE>
<CAPTION>
Quarter Nine Months
-------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in millions) 2000 1999 Inc/(Dec) 2000 1999 Inc/(Dec)
-------------------------------------------------------------------------------------------------------------------
Net sales $ 216.1 $ 195.2 10.7 % $ 635.9 $ 591.1 7.6 %
Income from operations 30.0 20.3 47.8 % 86.7 78.2 10.9 %
Income from operations, before unusual items 30.2 21.2 42.5 % 86.9 79.1 9.9 %
===================================================================================================================
</TABLE>
Net sales and income from operations, both excluding and
including unusual items, for the third quarter and nine months ended September
24, 2000 increased compared to a year ago. The sales and profit improvements
were driven by the combination of higher prices, which substantially offset
higher plastic resin and other raw material costs, solid volume and mix gains
and continued strong cost reduction benefits. Volumes increased by more than 4
percent in both the retail and foodservice categories, with notable volume gains
reported in retail plates, and foodservice plastic cutlery and cups. In
addition, successful new product introductions such as Winnie the Pooh bath cups
and Rinse & ReUse disposable stoneware continued to enhance volume growth.
During the quarter, Dixie launched PERFECTOUCH To-Go cups into the Retail
channels, which targets commuters by combining, for the first time, the
innovative PERFECTOUCH hot cup and lids in the same package.
On October 2, 2000, Fort James completed the previously announced
purchase of a plastic thermoforming plant in Sandusky, Ohio, from Whirley
Industries, Inc. The plant, which produces plastic cups, lids and food
containers, will provide Dixie with additional plastic, graphic design and
printing capacity to fuel its growth, as well as providing an entry into key
emerging segments such as plastic CARCUPS used for takeout by quick-service
restaurants and convenience stores.
<PAGE>
Communications Papers and Fiber
-------------------------------
<TABLE>
<CAPTION>
Quarter Nine Months
------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in millions) 2000 1999 Inc/(Dec) 2000 1999 Inc/(Dec)
----------------------------------------------------------------------------------------------------------------
Net sales $ 239.9 $ 209.3 14.6 % $ 703.9 $ 606.2 16.1 %
Income (loss) from operations 10.9 1.8 505.6 % 35.4 (21.0) 268.6 %
Income (loss) from operations, before unusual items 11.1 3.9 184.6 % 35.6 (18.9) 288.4 %
================================================================================================================
</TABLE>
The improved net sales and earnings in the Communications Papers and
Fiber businesses were the result of significantly higher market pulp and
uncoated freesheet prices. While uncoated freesheet prices were significantly
higher than in 1999, they declined modestly compared to the second quarter of
2000.
Interest Expense and Other Income
Third quarter 2000 interest expense increased $4.7 million primarily
due to higher interest costs on variable-rate borrowings; however, lower average
debt levels resulted in a $1.6 million decrease in interest expense for the nine
months ended September 24, 2000. Other income for the quarter was $4.8 million
compared to $0.4 million in 1999. This increase was primarily due to foreign
currency gains. Other income for the nine months ended September 24, 2000
decreased to $16.5 million from $18.5 million in 1999. This decrease was
primarily due to higher foreign currency gains in 1999 than in 2000.
Additionally, income related to a land sale recorded in the first quarter of
2000 was comparable to income received in the second quarter of 1999 related to
interest on prior year income tax refunds.
Dispositions
In January 2000, the Company completed the sale of Fort James-Marathon
LTD ("Marathon"), a non-integrated pulp mill located in Ontario, Canada, to a
joint venture between Tembec Inc. and Kruger Inc. for $69.1 million. In February
2000, the Company closed its groundwood paper operations (the "Groundwood
Business") at the Wauna mill in Clatskanie, Oregon. Both Marathon and the
Groundwood Business, which had a combined net asset value of $220.8 million,
were included in the Communications Papers and Fiber segment. Anticipated losses
of $149.9 million for asset write-downs and $7.2 million of other costs related
to the sale and closure were originally recorded in the fourth quarter of 1999
on the "Restructure and other items" line of the Consolidated Statements of
Operations. In the second quarter of 2000, the Company reversed $8.6 million
($5.6 million after taxes, or $0.03 per diluted share) originally recorded at
the end of 1999, as part of the estimated loss on the sale of Marathon. The
revision was recorded on the "Restructure and other items" line of the
Consolidated Statements of Operations, and represents the final determination of
the purchase price and an adjustment of estimated transaction costs to reflect
actual costs paid.
In August 1999, Fort James sold its Packaging business to ACX
Technologies, Inc. for $836.3 million in cash. The sale included the operations,
assets, and liabilities of the Company's folding carton, healthcare, and
microwave packaging manufacturing facilities.
For further information, see Note 2 to the Consolidated Financial
Statements.
Unusual and Non-Recurring Items
Unusual Items
Income from operations for the third quarter and nine months ended
September 24, 2000 included unusual charges of $24.0 million ($14.8 million
after taxes, or $0.07 per diluted share) for accruals related to the settlement
of certain antitrust litigation claims related to the Tissue - North America
business, as well as charges for legal fees and other costs associated with the
pending sale of Fort James to Georgia-Pacific (see Note 11 to the Consolidated
Financial Statements). The unusual charges of $24.0 million were recorded in
costs of good sold($12.5 million) and selling and administrative expenses ($11.5
million).
Income from operations for the third quarter and nine months ended
September 26, 1999, included $46.0 million of unusual items for severance and
other costs related to a reduction-in-force program and for antitrust and other
litigation accruals, of which $17.8 million was included in cost of goods sold
and $28.2 million was included in selling and administrative expenses.
Restructure and Other Items
Income from operations for the third quarter and nine months ended
September 24, 2000, included non-recurring charges of $18.9 million ($12.0
million after taxes, or $0.06 per diluted share) for the write-off of remaining
unsecured notes receivable and accruals for contingent liabilities resulting
from the bankruptcy of Crown, which was spun off from the Company in 1995. See
Note 9 to the Consolidated Financial Statements for further information on
Crown. Income from operations for the nine months ended September 24, 2000 also
included non-recurring income of $8.6 million ($5.6 million after taxes, or
$0.03 per diluted share) related to the Marathon divestiture (see Note 2 to the
Consolidated Financial Statements).
Income from operations for the third quarter and nine months ended
September 26, 1999 included a charge of $30.0 million ($18.4 million after
taxes, or $0.08 per diluted share) for a write-down of notes receivable from
Crown. In addition, income from operations for the third quarter and nine months
ended September 26, 1999 included net non-recurring credits of $43.4 million
($30.4 million after taxes, or $0.14 per diluted share) and $44.5 million ($31.1
million after taxes, or $0.14 per diluted share), respectively. Non-recurring
credits related to the reversal of certain 1997 merger-related restructure
accruals, as a result of unexpected and protracted regulatory reviews that were
expected to delay certain initiatives into late 2000. In addition, certain
initiatives were cancelled due to changes in economic circumstances, which
indicated that the initiatives would not provide the economic benefits initially
projected. The initiatives that were delayed or cancelled primarily related to
operations of the Company's Tissue - Europe business.
Financial Condition
Cash provided by operating activities totaled $646.7 million in the
first nine months of 2000, compared with $542.8 million in the prior year. The
increase was primarily due to lower investments in working capital. Capital
expenditures were $336.9 million for the nine months ended September 2000,
compared to $346.5 million for the same period in the prior year. In the first
nine months of 2000, the Company received cash proceeds of $93.0 million from
the sale of assets, including $69.1 million from the sale of Marathon. The
Company's current ratio was 1.5 as of September 2000 and 1.4 as of December
1999, while working capital increased to $616.0 million from $558.7 million for
the same periods. The increase in working capital was primarily due to lower
accounts payable and a reduction in the current portion of long-term debt. The
lower accounts payable is due to timing of payments.
As of September 2000, total indebtedness was $3.3 billion and,
including the effect of interest rate swaps, included approximately $1.8 billion
of fixed rate and $1.5 billion of floating rate obligations. As of December
1999, total indebtedness was $3.5 billion and, including the effect of interest
rate swaps, included $2.2 billion of fixed rate and $1.3 billion of floating
rate obligations. Outstanding borrowings of $0.9 billion at September 2000 and
December 1999, were supported by commercial paper, revolving credit and money
market facilities. Under the most restrictive provisions of the Company's debt
agreements, the Company had additional borrowing capacity of approximately $1.6
billion as of September 2000.
<PAGE>
Stock Purchase Program
In August 1999, the Company began execution of a $500 million stock
purchase program. For the nine months ended September 24, 2000, the Company
purchased 9.4 million common shares at a cost of $198.9 million. As of September
24, 2000, the Company had purchased 16.5 million common shares at a cost of
$398.6 million since the inception of the program. As a result of the pending
merger of Fort James with Georgia-Pacific (see Note 11 to the Consolidated
Financial Statements), the Company's stock purchase program has been suspended.
Inflation
Beginning in the second half of 1999 and continuing through the first
half of 2000, the Company experienced significant increases in the cost of its
base raw materials, principally wastepaper, purchased pulp and plastic resins.
In the first half of 2000, these costs increased faster than the Company was
able to implement price increases. In the third quarter of 2000, the Company
began to partially recover inflationary increases as a result of higher selling
prices and a moderation of inflationary cost pressures. There can be no
assurance; however, that the Company will be able to maintain current pricing
levels or will be able to increase prices sufficiently in the future to recover
inflationary increases.
Effect of New Accounting Standards
See Note 1 to the Consolidated Financial Statements.
Information Concerning Forward-Looking Statements
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results and Company
plans and objectives to differ materially from those projected. Such risks and
uncertainties include, but are not limited to, general business and economic
conditions; competitive pricing pressures for the Company's products; the
ability to successfully introduce new products; changes in raw material, energy
and other costs; the ability to achieve projected net cost reductions;
opportunities that may be presented to and pursued by the Company; and
determinations by regulatory and governmental authorities.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk since
December 26, 1999. For additional information, refer to pages 30-31 of the
Company's Annual Report to Shareholders for the fiscal year ended December 26,
1999.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
See Note 9 to the Consolidated Financial Statements of this Quarterly
Report on Form 10-Q.
Item 2. CHANGES IN SECURITIES.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The exhibits listed below are filed as part of this quarterly
report. Each exhibit is listed according to the number
assigned to it in the Exhibit Table of Item 601 of Regulation
S-K.
Exhibit
Number
10(a) James River Corporation of Virginia 1987 Stock Option
Plan, (1993 amendment and restatement) and the Fort
James Corporation 1996 Stock Incentive Plan (as
Amended) amendment and restatement effective as of July
13, 2000.
10(b) Fort James Corporation Supplemental Retirement Plan
for Miles Marsh, amendment and restatement effective
January 1, 1999.
27 Financial Data Schedule for the nine months ended
September 24, 2000 (filed electronically only).
(b) Reports on Form 8-K:
Form 8-K was filed on July 17, 2000, announcing that
the boards of Georgia-Pacific and Fort James signed a
definitive merger agreement for Georgia-Pacific to acquire all
outstanding shares of Fort James. The Agreement and Plan of
Merger among the companies, the joint press release of
Georgia-Pacific Corporation and Fort James Corporation, and
Amendment No. 1 to the Rights Agreement between Fort James
Corporation and Wells Fargo Bank Minnesota, N.A. (successor to
Norwest Bank Minnesota, N.A.), as Rights Agent were filed as
exhibits to this Form 8-K.
Form 8-K was filed on July 20, 2000, containing as
an exhibit, the Company's second quarter earnings press
release issued on July 19, 2000.
Form 8-K was filed on September 1, 2000, containing
as an exhibit, a joint press release by the Company and
Georgia-Pacific announcing that they have received a request
from the U.S. Department of Justice for additional information
under the Hart-Scott-Rodino Antitrust Improvements Act
regarding the proposed merger between the two companies.
Form 8-K was filed on October 19, 2000, containing as
an exhibit, the announcement of the Company's fourth quarter
dividend.
Form 8-K was filed on October 26, 2000, containing as
an exhibit, the Company's third quarter earnings press release
issued on October 26, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORT JAMES CORPORATION
By:/s/ Joseph W. McGarr
Joseph W. McGarr
Executive Vice President and Chief Financial Officer
By:/s/ Catherine M. Freeman
Catherine M. Freeman
Vice President and Corporate Controller
(Principal Accounting Officer)
Date: November 2, 2000
