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UNITED STATES
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 26, 1999 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:
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Name of Each Exchange
Title of Each Class on Which Registered
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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
</TABLE>
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 [_]
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. [X]
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<S> <C>
Aggregate market value of voting stock held by non-affiliates of
the registrant, at close of business, February 27, 2000........ $4,134,600,000
Number of shares of $.10 par value common stock outstanding, as
of February 27, 2000........................................... 213,398,208
</TABLE>
Documents Incorporated by Reference:
(1) Portions of the registrant's Annual Report to Shareholders for the year
ended December 26, 1999, 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 27, 2000, incorporated into Part III
hereof.
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FORT JAMES CORPORATION
Annual Report on Form 10-K
December 26, 1999
TABLE OF CONTENTS
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Page
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PART I
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"), incorporated in the
Commonwealth of Virginia, manufactures and markets consumer tissue products,
including bath tissue, facial tissue, paper towels and napkins, and disposable
tabletop products, including cups, plates, bowls and cutlery. Principal
markets for the Company's tissue products include North America and Europe,
while its disposable tabletop products are marketed primarily in North America
under the Dixie name. The Company is the second largest provider of tissue-
based products globally, and holds the leading position in North America. In
disposable cups and plates, the Company has the largest U.S. retail market
share of such products. Additionally, the Company manufactures and markets
business, office and printing papers, primarily in the western United States.
Fort James also sells small amounts of market pulp and recycled paper in
excess of its local needs.
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 Corporation
of Virginia was renamed Fort James Corporation.
Disclosures made herein are as of December 26, 1999, or for the 52-week year
then ended. Portions of the Fort James Annual Report to Shareholders for the
year ended December 26, 1999 (the "1999 Annual Report") are incorporated in
this Form 10-K by specific reference. All reference to "Notes" are to Notes to
Consolidated Financial Statements in the 1999 Annual Report. All references to
tons refer to short tons, unless otherwise specifically indicated.
1999 Developments
1. Dispositions
In December 1999, Fort James signed an agreement to sell its non-
integrated softwood kraft pulp mill in Marathon, Ontario ("Marathon"),
to a joint venture between Tembec Inc. and Kruger Inc. for $69.1
million. In addition, the parties entered into a three-year renewable
supply agreement, largely to provide pulp to the Company's non-
integrated European tissue operations. This sale closed on January 31,
2000. In December 1999, the Company also announced its decision to exit
the groundwood paper business ("the Groundwood Business") by closing
its groundwood paper operations at the Wauna mill in Clatskanie, Oregon
in the first quarter of 2000. The operations of the Groundwood Business
include a whole log chipping operation, a groundwood pulp mill and a
140,000 ton per year paper machine.
In August 1999, the Company 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. As a
result of the sale, the operating results of the Packaging business
have been reported as discontinued operations.
2. Acquisitions
In December 1999, Fort James purchased its partner's 50% interest in
the Naheola Cogeneration Limited Partnership ("the Naheola
Partnership") for $53.6 million and refinanced $141 million of 9%
Naheola Partnership debt on more favorable terms. The Naheola
Partnership provides energy to the Company's Naheola, Alabama mill. The
acquisition of the equity interest was recorded as a purchase.
In July 1999, the Company acquired the operations of the Demak'Up
brand from The Procter & Gamble Company for $56.7 million. Demak'Up is
the leading European brand of make-up removal
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cotton pads. The operations include a cotton product manufacturing
plant in Brionne, France. The acquisition was accounted for as a
purchase.
3. Stock Buy-Back Plan
In August 1999, the Company commenced a $500 million stock purchase
program intended to be completed in 18 months. As of December 26, 1999,
the Company had purchased 7.1 million shares of common stock at a total
cost of $199.7 million.
Additional information on the Company's dispositions and acquisitions is
presented in Note 2 of Notes to Consolidated Financial Statements in the 1999
Annual Report, which information is incorporated herein by reference.
(b) Financial Information About Industry Segments
For financial reporting purposes, Fort James operations are separated into
the following segments:
. Tissue--North America, which manufactures and markets paper-based towel
and tissue products;
. Tissue--Europe, which also manufactures and markets paper-based towel
and tissue products, as well as feminine hygiene products and health
care and pharmacy items;
. Dixie, which manufactures and markets disposable plates, cups and
cutlery principally under its DIXIE brand;
. Communications Papers and Fiber, which manufactures and markets uncoated
business and printing papers for the commercial printing and office
markets, also includes pulp sales to both intercompany and third-party
customers and the Harmon Associates wastepaper brokerage business.
Included in 1999 income from operations for segment results, are unusual
charges for severance and other costs related to a reduction-in-force program
and for antitrust and other litigation accruals of $46.0 million. Income from
operations, before restructure and other items, is used to measure segment
profitability.
Financial information on the Company's segments is presented in Note 14 of
Notes to Consolidated Financial Statements in the 1999 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. Market share and product rankings are based
on U.S. industry statistics for the 52-week period ended January 15, 2000, or
internal Company estimates.
Tissue--North America
In 1999, the Tissue--North America business reported income from operations
of $644.7 million on sales of $3.6 billion (net of intercompany sales),
representing 52% of consolidated net sales. Income from operations, excluding
unusual items, was $679.4 million.
In the retail channel, which accounts for approximately 60% of segment
sales, Fort James produces both branded and private label products. The
Company's principal retail brands include QUILTED NORTHERN bathroom tissue
(the number two bathroom tissue brand), BRAWNY paper towels (the number two
paper towel brand), MARDI GRAS 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.
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Fort James also supplies private label or customer brand products to some of
the best known retailers in the United States including Wal-Mart Stores, Inc.,
Kroger Co., Walgreen Co. and Federated Foods. The Company believes that it is
the leading supplier to the U.S. private label towel and tissue market, with
an estimated market share between 40% and 45%. Additionally, the Company
believes it is the leading supplier of towel, tissue and napkin products to
the warehouse club channel, which includes Costco Wholesale Corporation, Sam's
Clubs and BJ's.
In the away-from-home channel, the Company sells towel and tissue products
to foodservice, janitorial supply and sanitary paper distributors for use in
restaurants, offices, factories, hospitals, schools and hotels. The Company's
principal away-from-home brands include ENVISION, the leading brand of
environmentally positioned 100% recycled tissue, towel and napkin products;
and PREFERENCE ULTRA premium, PREFERENCE near premium, and ACCLAIM economy
tissue, towel and napkin products. With an estimated market share between 35%
and 40%, Fort James believes it is the leading producer of towel and tissue
products for the U.S. away-from-home channel.
Tissue--Europe
In 1999, the Tissue--Europe business reported income from operations of
$210.4 million on sales of $1.8 billion, representing 27% of consolidated net
sales.
The Tissue--Europe business is a leading supplier of paper-based consumer
products in many European countries. Product lines in both the retail and
away- from-home markets include bathroom and facial tissue, paper towels and
napkins. Retail sales include both branded and private label products. The
Company also markets feminine hygiene products and pharmacy supplies in select
countries.
During 1999, tissue-based products accounted for approximately 85% to 90% of
annual sales with the balance comprised of feminine hygiene products,
ancillary products, such as health care and pharmacy items, and unconverted
tissue parent rolls. Fort James sells its towel and tissue products through
both retail and away-from-home distribution channels in Europe. Approximately
75% of European towel and tissue sales were into retail distribution channels
and the remaining 25% were into away-from-home and other channels. Sales into
retail channels are supported by both branded and private label product
offerings.
The Company's principal European brands include LOTUS bathroom tissue and
handkerchiefs (both hold the 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 kitchen towels and bathroom tissue (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 kitchen towels and bathroom tissue (both hold number two positions in
Greece), VANIA feminine hygiene products (the leader in France), SELPAK
premium tissue products (the leader in Turkey) and DEMAK'UP cotton facial pads
(the leader in Europe).
Fort James' largest European operations are in France and the United
Kingdom, which combined, account for approximately 75% of sales. Aggregating
retail branded, private label and away-from-home production, the Company
believes it is the largest producer of tissue products in France, Spain,
Finland, Ireland, and Turkey and the second largest producer in the United
Kingdom and Greece.
Dixie
During 1999, the Dixie business reported income from operations of $105.1
million on sales of $783.9 million (net of intercompany sales), which
represents 12% of consolidated net sales. Income from operations, excluding
unusual items, was $106.0 million. The Dixie business is conducted primarily
in North America.
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The Dixie business, with one of the most recognized names in disposable
plates, cups and cutlery, provides a full range of products for both retail
and foodservice distribution channels. The Company's principal retail tabletop
brand is DIXIE, which has the largest U.S. retail market share for disposable
cups and plates. The Company believes that it is also the leading supplier of
tabletop products to the warehouse club channel. Foodservice customers include
distributors, restaurants, hotels, office buildings, and institutions. The
Company believes that it is one of the largest producers of disposable cups,
plates and related products for the foodservice industry. Approximately 55% of
sales are into retail distribution channels and the remaining 45% are into
foodservice distribution channels.
In 1999, the Company announced the retail launch of new DIXIE Rinse & ReUse
Disposable Stoneware plates and the expansion in foodservice channels of
PERFECTOUCH insulated hot cups.
Communications Papers and Fiber
During 1999, the Communications Papers and Fiber businesses reported a loss
from operations of $8.7 million on sales of $644.8 million (net of
intercompany sales), which represented 9% of consolidated net sales. Excluding
unusual items, the loss from operations was $6.6 million.
The Communications Papers business sells 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 printers and copiers. 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 kraft and deinked pulp operations are fully
integrated with its tissue-making and converting operations, with excess
production sold externally by the Fiber business. Fiber sales also include
both intercompany sales of pulp and third-party sales of wastepaper through
the Harmon Associates wastepaper brokerage business.
Marketing
The Tissue--North America and Dixie businesses have organized their
marketing efforts both along distribution channels and by product line. Fort
James' retail 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, mass merchandisers and warehouse clubs. In addition, the Company has
an away-from-home sales force that markets towel and tissue products primarily
to outside distributors, who generally focus on specific market segments.
Regional distribution centers located throughout the United States and
warehouse space at the Company's production facilities are used to manage
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. The majority of products in
Europe are manufactured and sold within national or regional markets, in part,
to control logistics and distribution costs.
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
paperboards and plastic resins and chemicals. Fort James believes there is
generally a sufficient supply of these or substitutable raw materials.
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.
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The capacity of Fort James' pulping facilities in North America and Europe
(excluding Marathon and the Groundwood Business) is summarized as follows:
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Capacity (thousands of
Pulp Type metric tons per year)
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North America Europe Total
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Kraft/Wood pulp................................. 1,695 -- 1,695
Deinked pulp.................................... 1,575 360 1,935
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Total......................................... 3,270 360 3,630
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In addition to the Company's internal sources, several types of pulp are
purchased from both domestic and international suppliers. Purchased pulp is
used to supply non-integrated paper mills in Europe, to obtain types of pulp
not produced by the Company, and to minimize transportation costs. After the
sale of Marathon and the closure of the Groundwood Business, the Company will
produce approximately 80% of its pulp requirements. On a geographic basis, the
Company will be a net seller in North America of approximately 100,000 metric
tons per year of pulp and will purchase approximately 500,000 metric tons of
pulp in Europe. The Company's paper machines in Europe are supplied through a
combination of purchased chemical pulp, deinked fiber pulp and Fort James'
North American pulp production.
Pulpwood and woodchips used in Fort James' pulp mills are primarily obtained
from leased lands, lands covered by long-term cutting rights agreements,
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 timber
harvesting is generally equal to or less than the average growth rate. Fort
James currently has controlled access of timber supply on approximately
125,000 acres of timberland.
Fort James is an industry leader in developing towel and tissue products
from recycled wastepaper. Currently, the Company recycles approximately 2.5
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 certain communications papers. The Company
obtains deinked and other grades of wastepaper through its Harmon Associates
wastepaper brokerage business.
Bleached paperboard is used in the manufacturing of plates and cups. A
substantial portion of Fort James bleached paperboard needs are manufactured
at its Naheola, Alabama mill. In addition, the Company makes purchases from
outside bleached paperboard producers to obtain grades of paperboard not
produced by the Company or to minimize transportation costs. Such purchases
are made pursuant to long-term contracts with prices approximately equal to
prevailing market prices. In total, the Company is a net seller of a small
amount of bleached paperboard.
Polystyrene and polypropylene plastic resins 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.
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 cogeneration facilities at a number of its major
facilities.
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, ACLAIM, BRAWNY, COLHOGAR, DELICA,
DEMAK'UP, DIXIE, EMBO, ENVISION, EUREKA!, GREEN FOREST, LOTUS,
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MARDI GRAS, MOLTONEL, NORTHERN, OKAY, PERFECTOUCH, PREFERENCE, PREFERENCE
ULTRA, QUILTED NORTHERN, QUILT-RAP, SELPAK, SO-DRI, SOFT'N GENTLE, TENDERLY,
VANIA, VANITY FAIR, 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 strength of the retail DIXIE paper cup and plate business during the
summer months. In addition, the away-from-home tissue channel 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 1999, sales to Fort James' five largest customers in the aggregate
accounted for approximately 22% of consolidated net sales. Sales to the five
largest Tissue--North America customers accounted for approximately 33% of its
sales, sales to the five largest Tissue--Europe customers accounted for
approximately 23% of its sales; sales to the five largest Dixie customers
accounted for approximately 45% of its sales; and sales to the five largest
Communications Papers and Fiber customers accounted for approximately 36% 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.
Order Backlog
In the Tissue-North America, Tissue-Europe and Dixie 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 4 to 17 days as of December 26, 1999 and 5 to 25 days as of
December 27, 1998. The order backlog does not vary substantially on a seasonal
basis.
Competition
Fort James competes in both North America and Europe, with a number of large
diversified paper and consumer product companies, such as The Procter & Gamble
Company, Kimberly-Clark Corporation and Georgia-Pacific Corporation and large
European companies such as Svenska Cellulosa Aktiebolaget (SCA). In addition,
the Company also competes with small regional producers. 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 and new product introductions, 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.
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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; Lehigh Valley, Pennsylvania; 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, manage
major capital projects, and provide technical assistance in adhering to
regulatory standards. In addition, emphasis is placed upon achieving the
Company's cost reduction initiatives for major products through the
application of proprietary deinking, papermaking and converting technologies.
Financial information on the Company's research and development expenditures
is presented in Note 1 of Notes to Consolidated Financial Statements in the
1999 Annual Report, which information is incorporated herein by reference.
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 1999, capital expenditures totaling
approximately $32 million were made by Fort James for pollution control
facilities and equipment. Capital expenditures for such purposes on existing
facilities are estimated to approximate $45 million for 2000 (including
expenditures to comply with the "Cluster Rules"). 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.
In 1998, the U.S. Environmental Protection Agency ("EPA") regulations
affecting pulp and paper industry discharges of wastewater and gaseous
emissions, commonly referred to as the "cluster rules", became effective.
These rules require changes in the pulping and bleaching processes presently
used in some U.S. pulp mills, including several of Fort James' mills. The
majority of the investment required to comply with these regulations is due by
2001, with the possibility of a one-year extension for parts of the program.
In fiscal 2000 and 2001, the Company expects to invest approximately $40
million as part of its compliance program.
Fort James, along with others, has been identified as a potentially
responsible party ("PRP") at 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. Various state and federal agencies and tribal entities
are seeking sediment restoration and natural resources damages. In February
1999, the Wisconsin Department of Natural Resources released for public
comment a draft remedial investigation/feasibility study of the Fox River.
While the draft study did not advocate any specific restoration alternatives,
it included estimated total costs ranging from zero for "no action' to
approximately $720 million, depending on the alternative or combination of
alternatives selected. The final restoration alternative and the Company's
share of the related costs are unknown at this time. The Company, along with
other PRPs, is also participating in the funding of a remedial
investigation/feasibility study of contamination of the Kalamazoo River
located in Michigan. Management does not anticipate selection of a remedy
prior to 2002.
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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 $65.6
million as of December 26, 1999 and $54.1 million as of December 27, 1998. 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 PRPs. The Company believes that its share of the
costs of cleanup for its current remediation sites will not have a material
adverse effect 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 1999 Annual Report, which
information is incorporated herein by reference.
Year 2000 Date Conversion
The Year 2000 (Y2K) issue was the result of computer programs using two
digits rather than four to define the applicable year. The Company's Y2K
remediation efforts were completed in the fourth quarter of 1999. As a result
of these efforts, the Company experienced no significant Y2K related problems.
Fort James spent approximately $26 million in 1999, $35 million in 1998 and $8
million in 1997 on the Y2K project.
Personnel
At December 26, 1999, the Company employed approximately 24,800 people.
Contracts covering approximately 2,500 domestic and Canadian employees are
scheduled for renegotiation in 2000. Such contracts include approximately 800
employees at one facility who are working under the terms of a contract that
expired in 1999. The Company and its unions generally have good working
relationships and management believes its labor agreements contain wage and
fringe benefit programs that are competitive within the applicable industry
segment and geographic region. Although the Company believes that it has
satisfactory relations with its employees, there can be no assurance that the
Company will not have labor disputes in the future.
(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 1999 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.
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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>
Paper
Facility Locations (A) Pulping Machines
- ---------------------- ------- --------
<S> <C> <C> <C> <C>
Tissue--North America:
Pennington, Alabama (C)..................... Kraft 7
Rincon, Georgia............................. Deinked 5
Old Town, Maine............................. Kraft 2
Muskogee, Oklahoma.......................... Deinked 5
Halsey, Oregon.............................. Deinked 2
Clatskanie, Oregon (Wauna).................. Kraft 3
Camas, Washington........................... Kraft 6
Green Bay, Wisconsin (East)................. Deinked 6
Green Bay, Wisconsin (West)................. Deinked 11
Total capacity (in millions of tons)......................... 2.1 Tissue
.3 Bleached
paperboard
Tissue--Europe:
Nokia, Finland.............................. Deinked 3
Gien, France................................ 3
Hondouville, France......................... Deinked 2
Kunheim, France............................. 2
Patras, Greece.............................. 1
Castelnuovo, Italy.......................... 1
Avigliano, Italy............................ 1
Cuijk, Netherlands.......................... Deinked 2
Allo, Spain................................. 2
Karamursel, Turkey (B)...................... 2
Stubbins, U.K............................... Deinked 3
Bridgend, U.K............................... Deinked 3
Oughtibridge, U.K........................... Deinked 2
Total capacity (in millions of tons)......................... .9 Tissue
Communications Papers:
Clatskanie, Oregon (Wauna) (D).............. Kraft 1
Camas, Washington (D)....................... Kraft 6
Total capacity (in millions of tons)......................... .5 Uncoated
freesheets
</TABLE>
- --------
(A) The locations listed for Fort James' consolidated subsidiaries are held
in fee by the Company.
(B) Unconsolidated subsidiary.
(C) Includes bleached paperboard products
(D) Includes uncoated freesheet products
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 1999, Fort James' paper
and paperboard mills generally had production levels of more than 90% of
capacity.
11
<PAGE>
Fort James also operates converting plants that perform a variety of
converting operations. These converting plants (excluding converting
operations performed at pulp and papermaking facilities 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........................ 1 12 13
Dixie Products..................................... 8 4 12
--- --- ---
Total.............................................. 9 16 25
=== === ===
</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 information set forth in Note 13 of Notes to Consolidated
Financial Statements in the Company's 1999 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 1999.
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 1999 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 11 of Notes to Consolidated Financial
Statements in the 1999 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 9 of Notes to Consolidated Financial Statements in the 1999
Annual Report, which information is incorporated herein by reference. On
February 28, 2000, there were approximately 10,000 shareholders of record of
the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
See Selected Financial Data on page 57 of the 1999 Annual Report, which
information for fiscal years 1995 through 1999 is incorporated herein by
reference. The Merger of James River with and into Fort Howard 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 1997 through 1999 are described in
Note 2 of Notes to Consolidated Financial Statements in the 1999 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 25 through 33 of the 1999 Annual Report, which
information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financing Activities" on pages 30 and 31 of the 1999 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",
"Consolidated Balance Sheets", "Consolidated Statements of Cash Flows",
"Consolidated Statements of Shareholders' Equity" and "Notes to Consolidated
Financial Statements" on pages 34 through 55 of the 1999 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 2 and 3 and "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 16 of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on April 27, 2000 (the "2000 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 59 and 60 of the 1999
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.......... 52 1995 Chairman of the Board of Directors, Chief Executive Officer
Clifford A. Cutchins,
IV..................... 51 1990 Senior Vice President, General Counsel, Corporate Secretary
Francis J. Florido...... 51 1998 President, North American Consumer Products
Daniel J. Girvan........ 51 1993 Senior Vice President, Human Resources and Administration
Alan R. Guibord......... 53 1998 Vice President and Chief Information Officer
Ernst A. Hberli......... 51 1996 President, North American Tissue Operations and Technology
George F. Hartmann, Jr.. 57 1998 Senior Vice President--North American Commercial Business
Gary Kurlancheek........ 46 1998 Vice President, Marketing
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Calendar
Year First
Elected as
Name Age an Officer Current Position
- ---- --- ---------- ----------------
<S> <C> <C> <C>
R. Michael Lempke....... 47 1997 Senior Vice President and Treasurer
John F. Lundgren........ 48 1995 President, European Consumer Products
Daniel J. McCarty....... 48 1998 President, North American Commercial Business
Joseph W. McGarr........ 48 1996 Executive Vice President and Chief Financial Officer
Andrei A. Mikhalevsky... 45 1998 Senior Vice President, Sales
Joe R. Neil............. 61 1996 President, Communications Papers
William Schultz......... 38 1998 Executive Vice President, Dixie
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Directors" on page 5, "Executive Compensation" on pages
7 through 14, and "Performance Graph" on page 15, of the Company's 2000 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 2000 Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Information on Nominees" on pages 2 and 3 of the Company's 2000 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 34
through 56 of the Company's 1999 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
1999 Annual Report is deemed to be "filed" as part of this Form 10-K Annual
Report.
"Consolidated Statements of Operations" for each of the three fiscal years
in the period ended December 26, 1999 (see page 34 of the 1999 Annual
Report)
"Consolidated Balance Sheets" as of December 26, 1999 and December 27, 1998
(see page 35 of the 1999 Annual Report)
"Consolidated Statements of Cash Flows" for each of the three fiscal years
in the period ended December 26, 1999 (see page 36 of the 1999 Annual
Report)
14
<PAGE>
"Consolidated Statements of Shareholders' Equity" for each of the three
fiscal years in the period ended December 26, 1999 (see page 37 of the 1999
Annual Report)
"Notes to Consolidated Financial Statements" (see pages 38 through 55 of
the 1999 Annual Report)
"Report of Independent Accountants" with respect to the financial
statements listed above (see page 56 of the 1999 Annual Report)
2) Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule
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 1999
Annual Report to Shareholders.
<TABLE>
<S> <C>
Schedule II Valuation and Qualifying Accounts
</TABLE>
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
------- ----------- -------
<C> <S> <C>
2(a) Asset Purchase Agreement Among Fort James Corporation, ACX
Technologies, Inc. and Graphic Packaging Corporation, dated
April 25, 1999 (schedules omitted). Schedules relating to
assets and liabilities to be transferred financial
statements of the Packaging business; and significant
contracts, leases, and employee benefit and labor
agreements have been omitted, but will be furnished
supplementary to the Securities and Exchange Commission
upon request (incorporated by reference to Exhibit 2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 27, 1999).
3(a) Amended and Restated Articles of Incorporation as of August
25, 1999 as filed herein. E-1
3(b) 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.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Section
------- ----------- -------
<C> <S> <C>
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).
10(b)* Fort James Corporation Stock Option Plan for Outside
Directors, amended and restated February 18, 1999,
(incorporated by reference to Exhibit 10(b) of the
Company's Annual Report on Form 10-K for the year ended
December 27, 1998.
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)* James River Corporation of Virginia 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 Fort James
Corporation and executive officers of the Company
(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 William A. Paterson (incorporated by
reference to Exhibit 10(A) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 26,
1999).
10(o)* Separation Agreement and Mutual Release between Fort James E-2
Corporation and B. Gregory Stroh, filed herewith.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Section
------- ----------- -------
<C> <S> <C>
10(p)* Form of Employment Agreement between Fort James Corporation E-3
and executive officers of the Company, filed herewith.
10(q)* Employment Agreement between Fort James Corporation and E-4
Miles L. Marsh, filed herewith.
12 Computation of Ratio of Earnings to Fixed Charges, filed E-5
herewith.
13 Certain sections of the Fort James Corporation Annual E-6
Report to Shareholders for the year ended December 26,
1999, filed herewith.
21 Subsidiaries of the Company as of December 26, 1999, filed E-7
herewith.
23 Consent of Independent Accountants, filed herewith. E-8
27 Financial Data Schedules for the year ended December 26, E-9
1999 (filed electronically only).
99 Unaudited pro forma condensed consolidated balance sheet as
of June 27, 1999 and the pro forma consolidated statements
of operations for the six months ended June 27, 1999 and
the year ended December 27, 1998 to give pro forma effect
to the sale of the Packaging business (incorporated by
reference to Exhibit 99 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 27, 1999).
</TABLE>
(b) Reports on Form 8-K:
The Company filed no Current Reports on Form 8-K during the last quarter of
1999 and subsequent thereto.
17
<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.
<TABLE>
<CAPTION>
Date Signature and Title
---- -------------------
<S> <C>
/s/ Fort James Corporation
____________________________________
Registrant
March 25, 2000 /s/ Joseph W. McGarr
____________________________________
Joseph W. McGarr
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
March 25, 2000 /s/ Catherine M. Freeman
____________________________________
Catherine M. Freeman
Vice President and Corporate
Controller
(Principal Accounting Officer)
</TABLE>
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.
<TABLE>
<CAPTION>
Date Signature and Title
---- -------------------
<S> <C>
March 25, 2000 /s/ Miles L. Marsh
____________________________________
Miles L. Marsh
Chairman and
Chief Executive Officer
March 25, 2000 /s/ Joseph W. McGarr
____________________________________
Joseph W. McGarr
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
March 25, 2000 /s/ Catherine M. Freeman
____________________________________
Catherine M. Freeman
Vice President and Corporate
Controller
(Principal Accounting Officer)
</TABLE>
18
<PAGE>
Pursuant to General Instruction D to Form 10-K, this report has been signed
below by a majority of the Board of Directors:
<TABLE>
<CAPTION>
Signature Date
--------- ----
<S> <C>
___________________________________________
Barbara L. Bowles
/s/ William E. Bradford March 25, 2000
___________________________________________
William E. Bradford
/s/ William T. Burgin March 25, 2000
___________________________________________
William T. Burgin
/s/ Dr. James L. Burke March 25, 2000
___________________________________________
Dr. James L. Burke
/s/ Worley H. Clark, Jr. March 25, 2000
___________________________________________
Worley H. Clark, Jr.
/s/ Gary P. Coughlan March 25, 2000
___________________________________________
Gary P. Coughlan
/s/ William V. Daniel March 25, 2000
___________________________________________
William V. Daniel
/s/ Ernst A. Haberli March 25, 2000
___________________________________________
Ernst A. Haberli
/s/ Miles L. Marsh March 25, 2000
___________________________________________
Miles L. Marsh
/s/ Robert M. O'Neil March 25, 2000
___________________________________________
Robert M. O'Neil
/s/ Richard L. Sharp March 25, 2000
___________________________________________
Richard L. Sharp
/s/ Anne Marie Whittemore March 25, 2000
___________________________________________
Anne Marie Whittemore
</TABLE>
19
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Shareholders of Fort James Corporation
Our audits of the consolidated financial statements referred to in our
report dated January 26, 2000 appearing in the 1999 Annual Report to
Shareholders of Fort James Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the financial statement schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
January 26, 2000
20
<PAGE>
Schedule II
FORT JAMES CORPORATION and SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997
(in millions)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Cash End of
Description Period Expenses Accounts (a) Payments Period
- ----------- ------------ ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
December 26, 1999:
Restructure accrual... $ 71.9 $(10.4) $(44.4) $(17.1) $ --
December 27, 1998:
Restructure accrual... 263.2 (37.3) (69.0) (85.0) 71.9
December 28, 1997:
Restructure accrual... -- 263.2 -- -- 263.2
</TABLE>
- --------
(a) Reclassifications to more appropriately reflect the carrying amounts of
assets and liabilities in the balance sheet
21
<PAGE>
Exhibit 3(a)
FORT JAMES CORPORATION
AMENDED AND RESTATED ARTICLES OF INCORPORATION
ARTICLE I
NAME
The name of the corporation is Fort James Corporation.
ARTICLE II
PURPOSES AND POWERS
A. Purposes-The purposes for which the Corporation is organized are to
acquire, own, manage and dispose of the capital stock and other securities of
paper manufacturing and all other types of corporations and to render to such
corporations, and to others, such advice and services as may be permitted by
law.
B. Powers-The Corporation shall have those powers conferred by the laws of
the Commonwealth of Virginia. It shall also have the power to transact any
business not prohibited by law or required to be stated in these Articles of
Incorporation.
ARTICLE III
CAPITAL STOCK
A. Authorized Stock-The aggregate number of shares of stock which the
Corporation shall have the authority to issue and the par value per share are
as follows:
<TABLE>
<CAPTION>
Class No. of Shares Par Value
--------- ------------- ---------
<S> <C> <C>
Common 500,000,000 $ .10
Preferred 5,000,000 10.00
</TABLE>
B. Preemptive Rights-No holders of any class of stock of this Corporation
shall have any preemptive or other preferential right to purchase or subscribe
to (i) any shares of any class of stock of the Corporation, whether now or
hereafter authorized, (ii) any warrants, rights or options to purchase any
such stock, or (iii) any obligations convertible into any such stock or into
warrants, rights or options to purchase any such stock.
C. Voting Rights-The holders of the Common Stock shall, to the exclusion of
the holders of any other class of stock of the Corporation, have the sole and
full power to vote for the election of directors and for all other purposes
without limitation except only as otherwise provided in any articles of serial
designation applicable to any series of Preferred Stock, and as otherwise
expressly provided by the then existing statutes of the Commonwealth of
Virginia. The holders of the Common Stock shall have one vote for each share
of Common Stock held by them.
D. Preferred Shares Issuable in Series-Authority is expressly vested in the
Board of Directors to divide the Preferred Stock into, and issue same in,
series and, within the following limitations, to fix and determine the
relative rights and preferences of the shares of any series so established,
and to provide for the issuance thereof. Each series shall be so designated as
to distinguish the shares thereof from the shares of all other series and
classes. All shares of the Preferred Stock shall be identical except as to the
following relative rights and preferences, as to which there may be variations
between different series:
(i) The rate of dividend, the time of payment, whether dividends shall be
cumulative and if so, the dates from which they shall be cumulative, and
the extent of participation rights, if any;
1
<PAGE>
(ii) Any right to vote with holders of shares of any other series or
class and any right to vote as a class, either generally or as a condition
to specified corporate action;
(iii) The price at and the terms and conditions on which shares may be
redeemed;
(iv) The amount payable upon shares in event of involuntary liquidation;
(v) The amount payable upon shares in event of voluntary liquidation;
(vi) Sinking fund provisions for the redemption or purchase of shares;
and
(vii) The terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion.
Prior to the issuance of any shares of a series of Preferred Stock the Board
of Directors shall establish such series by adopting a resolution setting
forth the designation and number of shares of the series and the relative
rights and preferences thereof, to the extent permitted by the provisions
hereof, and the Corporation shall file in the office of the State Corporation
Commission of Virginia articles of serial designation as required by law, and
the Commission shall have issued a certificate of serial designation.
All series of Preferred Stock shall rank on a parity as to dividends and
assets with all other series according to the respective dividend rates and
amounts distributable upon any voluntary or involuntary liquidation of the
Corporation fixed for each such series, and without the preference or priority
of any series over any other series; but all shares of the Preferred Stock
shall be preferred over the Common Stock as to both dividends and amounts
distributable upon any voluntary or involuntary liquidation of the Corporation
to the extent provided in any articles of serial designation applicable
thereto.
Before the date on which the Board of Directors approved these Amended and
Restated Articles of Incorporation, the Corporation had issued the following
listed series of Preferred Stock, namely, the Series A Cumulative Convertible
Preferred Stock, the Series B Cumulative Participating Preferred Stock, the
Series C Cumulative Participating Preferred Stock, the Series D Cumulative
Preferred Stock, the Series E Cumulative Preferred Stock, the Series F
Cumulative Convertible Preferred Stock, the Series G $5.40 Cumulative
Convertible Preferred Stock, the Series H Preferred Stock, the Series I $5.85
Cumulative Convertible Preferred Stock, the Series J Preferred Stock, the
Series K $3.375 Cumulative Convertible Exchangeable Preferred Stock, the
Series L $14.00 Cumulative Convertible Exchangeable Preferred Stock, the
Series N $14.00 Cumulative Convertible Exchangeable Preferred Stock, the
Series O 8 1/4% Cumulative Preferred Stock and the Series P 9% Cumulative
Convertible Preferred Stock. On that date all of the shares of each of the
aforesaid series which had been issued had been redeemed, converted or
otherwise acquired by the Corporation and no share of any such series remained
issued and outstanding. Each such series provided that shares of the series,
when purchased, redeemed or otherwise acquired by the Corporation, would
become authorized but unissued shares of Preferred Stock, undesignated as to
series.
On the date of these Amended and Restated Articles of Incorporation, there
were authorized but unissued 250,000 shares of Series M Cumulative
Participating Preferred Stock. The dates on which such series was authorized
by the Board of Directors and the preferences, limitations and relative rights
of such shares not otherwise set forth in these Amended and Restated Articles
of Incorporation are contained in Article VII.
ARTICLE IV
NUMBER OF DIRECTORS
The number of directors shall be as fixed in the bylaws in accordance with
law, and in the absence of a bylaw fixing the number of directors, the number
shall be eight.
2
<PAGE>
ARTICLE V
VOTE TO AMEND OR RESTATE
As to each voting group entitled to vote on an amendment or restatement of
these Articles of Incorporation the vote required for approval shall be (i)
the vote required by the Virginia Stock Corporation Act (as applied without
regard to the effect of clause (iii) of this Article) if the effect of the
amendment or restatement is (a) to reduce the shareholder vote required to
approve a merger, a statutory share exchange, a sale of all or substantially
all of assets of the Corporation or the dissolution of the Corporation, or (b)
to delete all or any part of this clause (i) of this Article; (ii) the vote
required by the terms of these Articles of Incorporation, as amended or as
restated from time to time, if such terms require the approval of more than a
majority of the votes entitled to be cast thereon by such voting group; or
(iii) a majority of the votes entitled to be cast thereon if neither clause
(i) nor clause (ii) of this Article is applicable.
ARTICLE VI
INDEMNIFICATION AND LIMIT ON LIABILITY
A. Definitions-For purposes of this Article VI the following definitions
shall apply:
(i) "Corporation" means this Corporation only and no predecessor entity
or other legal entity.
(ii) "Expenses" include counsel fees, expert witness fees, and costs of
investigation, litigation and appeal, as well as any amounts expended in
asserting a claim for indemnification.
(iii) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine, or other such obligation, including, without limitation, any
excise tax assessed with respect to an employee benefit plan.
(iv) "Legal Entity" means a corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise.
(v) "Predecessor Entity" means a legal entity the existence of which
ceased upon its acquisition by the Corporation in a merger or otherwise.
(vi) "Proceeding" means any threatened, pending, or completed action,
suit, proceeding or appeal whether civil, criminal, administrative or
investigative and whether formal or informal.
B. Limitation on Liability-In every instance permitted by the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended,
the liability of a director or officer of the Corporation to the Corporation
or its shareholders arising out of a single transaction, occurrence or course
of conduct shall be limited to one dollar.
C. Indemnification of Directors and Officers-The Corporation shall indemnify
any individual who is, was or is threatened to be made a party to a proceeding
(including a proceeding by or in the right of the Corporation) because he is
or was a director or officer of the Corporation or because he is or was
serving the Corporation or any other legal entity in any capacity at the
request of the Corporation while a director or officer of the Corporation,
against all liabilities and reasonable expenses incurred in the proceeding
except such liabilities and expenses as are incurred because of his willful
misconduct or knowing violation of the criminal law. Service as a director or
officer of a legal entity controlled by the Corporation shall be deemed
service at the request of the Corporation. The determination that
indemnification under this Paragraph C is permissible and the evaluation as to
the reasonableness of expenses in a specific case shall be made, in the case
of a director, as provided by law, and in the case of an officer, as provided
in Paragraph D of this Article VI; provided, however, that if a majority of
the directors of the Corporation has changed after the date of the alleged
conduct giving rise to a claim for indemnification, such determination and
evaluation shall, at the option of the person claiming indemnification, be
made by special legal counsel agreed upon by the Board of Directors and such
person. Unless a determination has been made that indemnification is not
permissible, the Corporation shall make advances and reimbursements for
expenses incurred by a director or officer in a proceeding upon receipt of an
undertaking from him to repay
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the same if it is ultimately determined that he is not entitled to
indemnification. Such undertaking shall be an unlimited, unsecured general
obligation of the director or officer and shall be accepted without reference
to his ability to make repayment. The termination of a proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent shall not of itself create a presumption that a director or officer
acted in such a manner as to make him ineligible for indemnification. The
Corporation is authorized to contract in advance to indemnify and make
advances and reimbursements for expenses to any of its directors or officers
to the same extent provided in this Paragraph C.
D. Indemnification of Others-The Corporation may, to a lesser extent or to
the same extent that it is required to provide indemnification and make
advances and reimbursements for expenses to its directors and officers
pursuant to Paragraph C, provide indemnification and make advances and
reimbursements for expenses to its employees and agents, the directors,
officers, employees and agents of its subsidiaries and predecessor entities,
and any person serving any other legal entity in any capacity at the request
of the Corporation, and, if authorized by general or specific action of the
Board of Directors, may contract in advance to do so. The determination that
indemnification under this Paragraph D is permissible, the authorization of
such indemnification and the evaluation as to the reasonableness of expenses
in a specific case shall be made as authorized from time to time by general or
specific action of the Board of Directors, which action may be taken before or
after a claim for indemnification is made, or as otherwise provided by law. No
person's rights under Paragraph C of this Article VI shall be limited by the
provisions of this Paragraph D.
E. Miscellaneous-Every reference in this Article VI to persons who are or
may be entitled to indemnification shall include all persons who formerly
occupied any of the positions referred to and their respective heirs,
executors and administrators. Special legal counsel selected to make
determinations under this Article may be counsel for the Corporation.
Indemnification pursuant to this Article shall not be exclusive of any other
right of indemnification to which any person may be entitled, including
indemnification pursuant to a valid contract, indemnification by legal
entities other than the Corporation and indemnification under policies of
insurance purchased and maintained by the Corporation or others. However, no
person shall be entitled to indemnification by the Corporation to the extent
he is indemnified by another, including an insurer. The Corporation is
authorized to purchase and maintain insurance against any liability it may
have under this Article VI or to protect any of the persons named above
against any liability arising from their service to the Corporation or any
other legal entity at the request of the Corporation regardless of the
Corporation's power to indemnify against such liability. The provisions of
this Article VI shall not be deemed to preclude the Corporation from entering
into contracts otherwise permitted by law with any individuals or legal
entities, including those named above. If any provision of this Article VI or
its application to any person or circumstance is held invalid by a court of
competent jurisdiction, the invalidity shall not affect other provisions or
applications of this Article VI, and to this end the provisions of this
Article VI are severable.
F. Application; Amendments-The provisions of this Article VI shall apply to
indemnification, advances and reimbursement for expenses made after its
adoption whether arising from conduct or events occurring before or after such
adoption. No amendment, modification or repeal of this Article VI shall
diminish the rights provided hereunder to any person arising from conduct or
events occurring before the adoption of such amendment, modification or
repeal.
ARTICLE VII
SERIES M PREFERRED STOCK
Pursuant to resolutions adopted by the Board of Directors of the Corporation
on February 9, 1989 and May 3, 1997, 250,000 shares of Preferred Stock ($10
par value) constitutes a series of Preferred Stock designated as the Series M
Cumulative Participating Preferred Stock (the "Series M Preferred Stock"), the
shares of which have the following voting powers, limitations, rights and
preferences:
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A. Dividends and Distributions
(1) The holders of shares of the Series M Preferred Stock, in preference
to the holders of Common Stock, $.10 par value, of the Corporation (the
"Common Stock") and of any other junior stock, shall be entitled to
receive, if, when and as declared by the Board of Directors of the
Corporation out of funds legally available therefor, quarterly dividends
payable in cash on the fifteenth day (or, if not a business day, the
preceding business day) of January, April, July and October in each year
(each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of the Series M Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the
greater of (a) $1 or (b) subject to the provision for adjustment
hereinafter set forth, 1,000 times the aggregate per share amount of all
cash dividends, and 1,000 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a
dividend payable in shares of Common Stock, or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock since the immediately preceding Quarterly
Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share
of the Series M Preferred Stock. In the event the Corporation shall at any
time after the first issuance of any share or fraction of a share of the
Series M Preferred Stock declare or pay any dividend on Common Stock
payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount per share to which holders of shares of
the Series M Preferred Stock shall be entitled under clause (b) of the
preceding sentence shall be adjusted by multiplying the amount per share to
which holders of shares of the Series M Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence
by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which
is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(2) The Corporation shall declare a dividend or distribution on the
Series M Preferred Stock as provided in paragraph (1) of this Section
immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$1 per share on the Series M Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
(3) Dividends shall begin to accrue and be cumulative on outstanding
shares of the Series M Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issue of such shares of the Series M
Preferred Stock, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of
such shares, or unless the date of issue is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of holders of
shares of the Series M Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from
such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of the Series M Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a share-
by-share basis among all such shares at the time outstanding. The Board of
Directors of the Corporation may fix a record date for the determination of
holders of shares of the Series M Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date
shall be not more than 60 days prior to the date fixed for the payment
thereof.
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B. Voting Rights The holders of shares of the Series M Preferred Stock shall
have the following voting rights:
(1) Subject to the provision for adjustment hereinafter set forth, each
share of the Series M Preferred Stock shall entitle the holder thereof to
1,000 votes on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time after the first
issuance of any share or fraction of a share of the Series M Preferred
Stock declare or pay any dividend on Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the number
of votes per share to which holders of shares of the Series M Preferred
Stock shall be entitled shall be adjusted by multiplying the number of
votes per share to which holders of shares of the Series M Preferred Stock
were entitled immediately prior to such event by a fraction the numerator
of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(2) Except as otherwise provided herein or by law, the holders of shares
of the Series M Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(3) Except as set forth herein, holders of the Series M Preferred Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
C. Certain Restrictions
(1) Whenever quarterly dividends or other dividends or distributions
payable on the Series M Preferred Stock as provided in Section A are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of the Series M Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
(a) declare, set apart or pay dividends on or make any other
distributions on the Common Stock or any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up)
to the Series M Preferred Stock;
(b) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series M Preferred
Stock, except dividends paid ratably on the Series M Preferred Stock
and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such
shares are then entitled; or
(c) redeem or purchase or otherwise acquire for consideration shares
of the Series M Preferred Stock, any such parity stock or any stock
ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) with the Series M Preferred Stock, or set aside for or
pay to any sinking fund therefor.
(2) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (1) of this
Section C, purchase or otherwise acquire such shares at such time and in
such manner.
D. Reacquired Shares-Any shares of the Series M Preferred Stock, purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of
Preferred Stock, $10 par value, and may be reissued as a new series or a part
of a new series of Preferred Stock, $10 par value, to be created by resolution
or resolutions of the Board of Directors.
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E. Consolidation, Merger, etc.-In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case the shares of the Series M
Preferred Stock shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set
forth) equal to 1,000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after the first issuance of any share of the
Series M Preferred Stock declare or pay any dividend on Common Stock payable
in shares of Common Stock, or affect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect
to the exchange or change of shares of the Series M Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
F. Liquidation, Dissolution or Winding Up-Upon any liquidation, dissolution
or winding up of the Corporation, no distribution shall be made (a) to the
holders of shares of Common Stock or of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series M
Preferred Stock unless, prior thereto, the holders of shares of the Series M
Preferred Stock shall have received an amount per share equal to the greater
of (i) $150,000 or (ii) subject to the provision for adjustment hereinafter
set forth, 1,000 times the aggregate amount to be distributed per share to
holders of Common Stock, plus in each such case an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment, or (b) to the holders of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Series M Preferred Stock, except distributions made ratably on the Series
M Preferred Stock and all other such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall at
any time after the first issuance of any share or fraction of a share of the
Series M Preferred Stock declare or pay any dividend on Common Stock payable
in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount per share to which holders of shares of the Series M
Preferred Stock shall be entitled under the provision of clause (a) of the
preceding sentence shall be adjusted by multiplying the amount per share to
which holders of shares of the Series M Preferred Stock would have been
entitled immediately prior to such event under the provision of clause (a) of
the preceding sentence by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
G. No Redemption-The shares of Series M Preferred Stock shall not be
redeemable.
H. Amendment-The Amended and Restated Articles of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series M Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of more than two-thirds of the outstanding shares of the Series M
Preferred Stock, voting together as a single voting group.
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EXHIBIT 10O
SEPARATION AGREEMENT
--------------------
This is a Separation Agreement dated as of January 28, 2000 between Fort
James Operating Company, its parent, affiliates, subsidiaries, predecessors,
successors and assigns (collectively "Fort James" or the "Company") and B.
Gregory Stroh ("Stroh").
A. Stroh has been employed by Fort James as President, North American
Tissue Operations and Technology under his employment agreement dated as of
October 27, 1997 (the "Employment Agreement"). Fort James and Stroh have agreed
on the terms under which he will terminate his employment with the Company. The
parties desire to resolve matters involving Stroh's employment, the Employment
Agreement and Stroh's separation from employment with Fort James.
B. Stroh 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 Stroh may have with Fort James in exchange
for Fort James' agreement to provide Stroh certain compensation and benefits to
which he otherwise may not be entitled.
C. Fort James also desires to provide Stroh with additional compensation
in return for Stroh agreeing (i) not to compete against Fort James, (ii) not to
hire Fort James employees and (iii) to cooperate with Fort James.
THEREFORE, in consideration of the above premises and the mutual covenants
and promises contained herein, Stroh and Fort James agree as follows:
1. Termination of Employment. Stroh agrees to voluntarily terminate
-------------------------
his employment effective at the close of business on January 28, 2000 (his "Date
of Termination"). He will be paid all of his regular compensation and benefits
through that
<PAGE>
date. His last day of work and responsibilities shall be January 28, 2000.
2. Severance Payments. Fort James shall pay Stroh in a lump sum,
------------------
the amount of $2,082,441.00 representing three (3) times the sum of (i) his
current base salary and (ii) his 1998 Management Incentive Bonus plus $79,110.
3. MIP Bonus Payments. Fort James shall pay Stroh $148,667
------------------
representing his bonus under the 1999 Management Incentive Plan and $17,473.30
representing his bonus under the 2000 Management Incentive Plan.
4. Pension and Other Benefits.
--------------------------
(a) All Company provided medical, prescription and dental
coverage and life insurance (including the split dollar life insurance currently
provided to Stroh) in which Stroh is currently enrolled shall be provided to
Stroh and eligible members of his family for three (3) years following January
28, 2000, to the extent provided in his Employment Agreement. In addition, the
Company shall pay Stroh $19,098.14 representing two years of club dues grossed
up.
(b) Stroh is the beneficiary of 7,533 restricted shares and
16,950 performance shares issued pursuant to the 1996 Stock Incentive Plan (the
"Plan"). Stroh agrees to relinquish all right to the restricted and performance
shares as of January 28, 2000. In return, the Company agrees to pay Stroh on or
before February 29, 2000, an amount equivalent to the value on January 28, 2000
of 24,483 shares of Common Stock of the Company determined by calculating the
average of the high and low price of the Common Stock plus an amount equal to
$22,882.50, representing the accrued dividends on such shares.
(c) The Company will pay Stroh in a lump sum $257,309.75 equal
to
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his interest in the Fort James Salaried Employees Supplemental Employee
Retirement Plan and related additional SERP.
(d) Nothing herein shall forfeit or otherwise affect Stroh's
right to vested benefits in the Fort James 401(k) Plan and related SERP, which
benefits shall be paid to Stroh according to such plan.
(e) Stroh shall not be entitled to any other bonus payments or
profit sharing awards including any additional 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 Stroh $21,000 for tax advice and tax
preparation expenses for calendar years 2000 through 2002.
(h) The Company will pay Stroh $98,076.92 representing the
mortgage buydown for three (3) years commencing 1/28/00 on his Lake Forest,
Illinois residence.
(i) The Company will reimburse Stroh 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 Stroh may reasonably incur
as a result of any contest (regardless of the outcome thereof) by the Company,
Stroh 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 Stroh
about the amount of any payment pursuant to this Agreement), plus in each case
interest on any
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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").
(j) Unless exercised, Stroh's options to purchase 75,000 shares
granted on January 6, 1998 and 40,000 shares granted on January 6, 1999 shall
expire on his Date of Termination.
5. Method of Payment. All cash payments required by this Agreement
-----------------
shall be made by wire transfer to Stroh's account or accounts which he shall
designate in writing to the Company's Senior Vice President, General Counsel.
Such transfers shall be authorized and released in advance so as to arrive in
Stroh's account(s) by applicable due dates.
6. Company Car. Fort James agrees to transfer to Stroh no later
-----------
than February 29, 2000, the certificate of title to the automobile previously
provided him for his personal and business use. Stroh acknowledges that after
transfer of the title to the car to him, Fort James will no longer be
responsible for providing insurance or maintenance for the vehicle in any manner
and he shall be responsible for all costs associated with the vehicle from that
date forward.
7. General Release.
---------------
(a) In consideration of all payments due him hereunder or under
the Employment Agreement, Stroh 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,
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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 Stroh's
employment or termination of employment with Fort James. Stroh acknowledges that
this Release includes any and all claims whether in contract or in tort, claims
that may be brought on his behalf by others, claims brought before any court or
administrative agency, or claims under any national, federal, state or local
statute or ordinance, including any claims under Title VII of the Civil Rights
Act of 1964, the Age Discrimination in Employment Act, the Americans with
Disabilities Act or any other law.
It is acknowledged that this Separation Agreement does not release
Stroh's right to any vested benefits in the Fort James Corporation StockPlus
Plan (the "StockPlus Plan") and related SERP. Stroh's eligibility for benefits
in the StockPlus Plan will be controlled by the terms of the plan.
(b) Fort James, including its affiliates, subsidiaries, parents,
predecessors, successors and assigns and their respective directors, officers,
employees and agents thereof hereby release and forever discharge Stroh, his
successors, heirs, representatives, executors, agents and assigns from any and
all claims, which it has ever had or may have against Stroh or any of the
foregoing persons, arising out of (x) Stroh's employment or termination of
employment with Fort James or (y) any event, condition or circumstance that
existed or arose on or prior to the Date of Termination. The foregoing release
will not apply to Stroh's obligations under this Separation Agreement. Fort
James acknowledges that this Release includes all claims whether in contract or
in tort, claims that may be brought on its behalf by others, claims brought
before any court or administrative agency, or claims under any national,
federal, state or local statute or ordinance.
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8. Special Release Notification. This Separation Agreement includes
----------------------------
a release of all claims under the Age Discrimination in Employment Act,
("ADEA"), and, therefore, pursuant to the requirements of the ADEA, Stroh
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 Stroh understands that
he may revoke his acceptance of this Separation Agreement by delivering written
notice to Clifford A. Cutchins, IV, Senior Vice President and General Counsel,
Fort James Corporation, 1650 Lake Cook Road, Deerfield, Illinois 60015.
9. Post Employment Restrictions, Obligations
-----------------------------------------
(a) Stroh agrees to comply with the terms of his Confidentiality
Agreement executed as part of his Employment Agreement and not to otherwise use
or disclose Fort James confidential information in the future.
(b) In return for the payment for the restricted shares and the
performance shares as set forth in Paragraph 4(b), Stroh agrees, in order to
protect the Company's goodwill, trade secrets and confidential information and
thereby help ensure the long-term success and development of the business, not
to engage in competitive activities on behalf of a competitive business for a
period of two (2) years following the Date of
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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 or tissue
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. Stroh 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) Stroh agrees for a period of two (2) years not to solicit directly
or indirectly for employment any employee or former employee of Fort James or
its affiliates, as of January 1, 2000, without the written consent of the Senior
Vice President, Human Resources for the Company, which shall not be unreasonably
withheld or delayed. Further, Stroh 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 Stroh works.
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(d) Stroh agrees that as President, North American Tissue
Operations and Technology, 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 Stroh violates any of his obligations under
this paragraph 9, the Company shall have no further obligation to him under this
Agreement as on the date of breach. Stroh agrees that the Company will be
irreparably harmed and will be entitled to immediate injunctive relief in the
event of such breach in addition to any other monetary remedies.
(e) If any aspect of the above post employment restrictions are
deemed void or unenforceable by any court of competent jurisdiction, the parties
agree that the court should modify these restrictions to a point they would be
enforceable and enforce the restrictions to that extent.
10. Indemnity. Fort James agrees to continue to indemnify and save
---------
Stroh 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 Stroh's alleged actions or
failure to act during the period in which he was employed by the Company.
11. Future Cooperation. Stroh agrees to cooperate in providing
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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
8
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before and after his Date of Termination.
12. Resignation. By his signature hereto, Stroh hereby resigns his
-----------
position as President, North American Tissue Operations and Technology and any
and all other positions with the Company, its subsidiaries, its parent and its
affiliates.
13. Confidentiality. Stroh agrees that he will not divulge the
---------------
contents of this Separation Agreement which are agreed to be confidential in
nature except (a) Stroh 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 Stroh that if it is necessary
that this Agreement or a significant portion be disclosed to those listed above,
Stroh 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 Stroh
materially breaches this provision, the Company will have no further obligation
to him under this Agreement.
14. Entire Agreement. Stroh 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 Stroh may have.
9
<PAGE>
15. Severability. If any portions of this Separation Agreement are
------------
void or deemed unenforceable for any reason, the unenforceable portions shall be
deemed severed from the remaining portions of this Agreement which shall
otherwise remain in full force and effect.
16. No Waiver. The decision of either party not to assert a claim
---------
for breach of the Separation Agreement shall not be construed as a waiver of
that or any subsequent breach which might occur.
17. Corporate Authority. The officer executing this Separation
--------------------
Agreement on behalf of Fort James represents that he has full corporate
authority to do so and to bind the Company, its parents, affiliates,
subsidiaries, predecessors, successors and assigns.
18. Governing Law. This Agreement shall be governed and construed
-------------
according to the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties have affixed their signatures:
/s/ B. Gregory Stroh
-----------------------------
B. Gregory Stroh
FORT JAMES OPERATING COMPANY
10
<PAGE>
By: /s/ Daniel J. Girvan
---------------------
Daniel J. Girvan
Senior Vice President
11
<PAGE>
EXHIBIT 10P
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between Fort James Corporation, a Virginia corporation
(the "Company") and _______________ (the "Executive"), dated as of the 1st day
of January, 2000.
1. Employment Period. The Company hereby agrees to continue the
-----------------
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the date hereof (the "Commencement Date") and ending on the
third anniversary of such date provided, however, that the Employment Period
shall be automatically extended without action by either party for an additional
one year period on each anniversary of the Commencement Date unless, not later
than six months prior to each such anniversary, either party shall give notice
to the other in writing that such party does not intend to extend the Employment
Period. A notice delivered by the Company that it does not intend to extend the
term of this Agreement shall hereinafter be referred to as a "Nonrenewal
Notice." Notwithstanding the foregoing, if the Executive is employed by the
Company on the Effective Date (as defined below), the Employment Period shall be
a three year fixed term from the Effective Date (the "Employment Period").
2. Terms of Employment. (a) Position and Duties. (i) During the
------------------- -------------------
Employment Period, the Executive shall serve in the position set forth on
Exhibit A hereto, provided that from and after the Effective Date (A) the
Executive's position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of those held,
exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 50 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned
<PAGE>
to the Executive hereunder, to use the Executive's reasonable best efforts to
perform faithfully and efficiently such responsibilities. During the Employment
Period it shall not be a violation of this Agreement for the Executive to (A)
serve on corporate, civic or charitable boards or committees, (B) deliver
lectures, fulfill speaking engagements or teach at educational institutions and
(C) manage personal investments, so long as such activities do not significantly
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement. It is expressly
understood and agreed that to the extent that any such activities have been
conducted by the Executive prior to the Effective Date, the continued conduct of
such activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be deemed to
interfere with the performance of the Executive's responsibilities to the
Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
------------ -----------
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid in bi-weekly installments, at least equal to the base salary paid
or payable, including any base salary which has been earned but deferred, to the
Executive by the Company and its affiliated companies immediately preceding the
Commencement Date. Any increase in Annual Base Salary shall not serve to limit
or reduce any other obligation to the Executive under this Agreement. Annual
Base Salary shall not be reduced after any such increase and the term Annual
Base Salary as utilized in this Agreement shall refer to Annual Base Salary as
so increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. During the Employment Period, the Executive
------------
shall have an annual bonus opportunity no less than that provided to peer
executives of the Company. After the Effective Date, the Executive shall be
awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the Executive's highest
bonus under the Company's Management Annual Incentive Plan, or any comparable
bonus under any predecessor or successor plan, for the last five full fiscal
years prior to the Effective Date (annualized in the event that the Executive
was not
2
<PAGE>
employed by the Company for the whole of such fiscal year) (the "Recent Annual
Bonus"). Each such Annual Bonus shall be paid no later than the end of the third
month of the fiscal year next following the fiscal year for which the Annual
Bonus is awarded, unless the Executive shall elect to defer the receipt of such
Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the
---------------------------------------
Employment Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and its affiliated
companies, but, after the Effective Date, in no event shall such plans,
practices, policies and programs provide the Executive with incentive
opportunities (measured with respect to both regular and special incentive
opportunities, to the extent, if any, that such distinction is applicable),
savings opportunities and retirement benefit opportunities, in each case, less
favorable, in the aggregate, than the most favorable of those provided by the
Company and its affiliated companies for the Executive under such plans,
practices, policies and programs as in effect at any time during the 120-day
period immediately preceding the Effective Date or if more favorable to the
Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies. All stock
options held by the Executive shall vest and become immediately exercisable on
the Effective Date. In addition to the foregoing, the Executive shall be
entitled to the Enhanced Early Retirement Benefit described below if the
Executive elects to retire at age 55 or older but prior to normal retirement
age, provided that the Executive provides written notice of the Executive's
intention to retire at least 12 months prior to the Executive's retirement to a
Responsible Officer (the "Retirement Notice"). For purposes of this Agreement,
an "Enhanced Early Retirement Benefit" shall mean:
(A) The addition of 3 years of age (up to a deemed age of 65) and
service for purposes of determining retirement benefits.
3
<PAGE>
(B) Pensionable earnings for purposes of the additional years of
service referred to in clause (A) above shall be determined with reference to,
and shall include, the sum of the Executive's Annual Base Salary and highest
annual bonus paid in any of the five years prior to the year in which the
Executive delivers the Retirement Notice.
(C) Eligibility for the Company's Retiree Medical Plan coverage,
regardless of years of service.
(D) The payment of a lump sum in cash of $50,000.
A "Responsible Officer" shall mean the Chief Executive Officer of the Company,
the Senior Vice President, Human Resources and Administration, or the Senior
Vice President, General Counsel and Corporate Secretary.
(iv) Welfare Benefit Plans. During the Employment Period, the
---------------------
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but, after the Effective
Date, in no event shall such plans, practices, policies and programs provide the
Executive with benefits which are less favorable, in the aggregate, than the
most favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies.
(v) Expenses. During the Employment Period, the Executive
--------
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the policies, practices and
procedures of the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the
---------------
Executive shall be entitled to fringe benefits as in effect generally at any
time thereafter with respect
4
<PAGE>
to other peer executives of the Company and its affiliated companies.
(vii) Vacation. During the Employment Period, the Executive
--------
shall be entitled to paid vacation in accordance with the Vacation Policy as set
forth in the Company's Benefits and Policies Manual, but in no event less than
four weeks per year, as defined in the Benefits and Policies Manual.
(viii) Indemnity. The Executive shall be indemnified by the
---------
Company against claims arising in connection with the Executive's status as an
employee, officer, director or agent of the Company in accordance with the
Company's indemnity policies for its senior executives, subject to applicable
law.
3. Termination of Employment. (a) Death or Disability. The
------------------------- -------------------
Executive's employment shall terminate automatically upon the Executive's death
during the Employment Period. If the Company determines in good faith that the
Disability of the Executive has occurred during the Employment Period (pursuant
to the definition of Disability set forth below), it may give to the Executive
written notice in accordance with Section 11(b) of this Agreement of its
intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the Executive
shall not have returned to full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" shall be set forth in the Company's
Long-Term Disability Plan.
(b) Cause. The Company may terminate the Executive's employment
-----
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean:
(i) intentional gross misconduct by the Executive damaging in a
material way to the Company, or
(ii) a material breach of this Agreement, after the Company has given
the Executive notice thereof and a reasonable opportunity to cure.
5
<PAGE>
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "intentional" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. Following the
Effective Date, the cessation of employment of the Executive shall not be deemed
to be for Cause unless and until there shall have been delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters of the entire membership of the Board at a meeting of
the Board called and held for such purpose (after reasonable notice is provided
to the Executive and the Executive is given an opportunity, together with
counsel, to be heard before the Board), finding that, in the good faith opinion
of the Board, the Executive is guilty of the conduct described in subparagraph
(i) or (ii) above, and specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
-----------
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean a material breach by the Company of this Agreement after the Executive has
given the Company notice thereof and a reasonable opportunity to cure. For
purposes of this Section 3(c), any good faith determination of "Good Reason"
made by the Executive after the Effective Date shall be conclusive. Anything in
this Agreement to the contrary notwithstanding, a termination by the Executive
for any reason during the 30-day period immediately following the first
anniversary of the Effective Date shall be deemed to be a termination for Good
Reason for all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause,
---------------------
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 11(b) of
this Agreement. For purposes of this Agreement, a "Notice of
6
<PAGE>
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated and (iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date (which date
shall be not more than thirty days after the giving of such notice). The failure
by the Executive or the Company to set forth in the Notice of Termination any
fact or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of the Executive or the Company, respectively,
hereunder or preclude the Executive or the Company, respectively, from asserting
such fact or circumstance in enforcing the Executive's or the Company's rights
hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
-------------------
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
4. Obligations of the Company upon Termination. (a) Good Reason;
------------------------------------------- ------------
Other Than for Cause, Death or Disability. If, during the Employment Period, the
- -----------------------------------------
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the highest Annual Bonus paid or payable, including
7
<PAGE>
any bonus or portion thereof which has been earned but deferred (and
annualized for any fiscal year consisting of less than twelve full
months or during which the Executive was employed for less than twelve
full months), in respect of the five most recently completed fiscal
years prior to the Date of Termination (the "Minimum Bonus") and (y) a
fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of
which is 365 and (3) any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) three, or two in the
case of a termination prior to the Effective Date after the third
anniversary of the Commencement Date (a "Nonrenewal Termination") and
(2) the sum of (x) the Executive's Annual Base Salary and (y) the
Minimum Bonus; and
C. in the event that the Executive is less than 55 years old on
the Date of Termination, an amount equal to the excess of (a) the
actuarial equivalent of the benefit under the Company's qualified
defined benefit retirement plan or such other qualified defined benefit
pension plan in which the Executive participates, if any (the
"Retirement Plan") (utilizing actuarial assumptions no less favorable
to the Executive than those in effect under the Company's Retirement
Plan immediately prior to the Commencement Date), and any excess or
supplemental retirement plan in which the Executive participates
(together, the "SERP") which the Executive would receive if the
Executive's employment continued for three years, or two years in the
case of a Nonrenewal Termination, after the Date of Termination
assuming for this purpose that all accrued benefits are fully vested,
and, assuming that the Executive's compensation in each of the three
years, or two years, as the case may be, is the sum of the Annual Base
Salary and Minimum Bonus over (b) the actuarial equivalent of the
Executive's actual
8
<PAGE>
benefit (paid or payable), if any, under the Retirement Plan and the
SERP as of the Date of Termination provided, that the deemed service
credit referred to above shall not apply in determining eligibility for
the Enhanced Early Retirement Benefit; and
(ii) The Executive shall be entitled to the Enhanced Early Retirement
Benefit without regard to the requirement of providing a Retirement Notice,
provided that the Executive is 55 years old or older on the Date of
Termination and provided further that in calculating the Enhanced Early
Retirement Benefit, pensionable earnings shall be determined with reference
to, and shall include, the sum of the Executive's Annual Base Salary and
Minimum Bonus.
(iii) All stock incentive awards, stock options, performance shares and
similar awards ("Stock Awards") shall vest and become exercisable or
payable, as the case may be.
(iv) for three years, two years in the case of a Nonrenewal
Termination, after the Executive's Date of Termination, or such longer
period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue benefits to the Executive
and/or the Executive's family (other than Accidental Death and Dismemberment
benefits, Short Term and Long Term Disability benefits, and Business Travel
Accident Insurance) at least equal to those which would have been provided
to them in accordance with the plans, programs, practices and policies
described in Section 2(b)(iv) of this Agreement if the Executive's
employment had not been terminated or, if more favorable to the Executive,
as in effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies and their families,
provided, however, that if the Executive becomes reemployed with another
employer and is eligible to receive medical or other welfare benefits under
another employer provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other plan
during such applicable period of eligibility. The Executive shall be
entitled to retiree medical benefits as provided in Section 2(b)(iii).
9
<PAGE>
(v) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or agreement
of the Company and its affiliated companies (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of
-----
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations shall be paid
to the Executive's estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the Date of Termination. With respect to the provision of
Other Benefits, the term Other Benefits as utilized in this Section 4(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, death benefits in effect on the date of the
Executive's death with respect to other peer executives of the Company and its
affiliated companies and their beneficiaries. In addition, all Stock Awards
shall vest immediately and/or become exercisable or payable, as the case may be.
(c) Disability. If the Executive's employment is terminated by reason
----------
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 4(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits as in effect at any time thereafter
generally with respect to other peer executives of the Company and its
affiliated companies and their families. In addition, all Stock Awards shall
vest immediately and/or become exercisable or payable, as the case may be.
10
<PAGE>
(d) Cause; Other than for Good Reason. If the Executive's employment
---------------------------------
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, and (y) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the
Employment Period, excluding a termination for Good Reason, this Agreement shall
terminate without further obligations to the Executive, other than for Accrued
Obligations and the timely payment or provision of Other Benefits. In such
case, all Accrued Obligations shall be paid to the Executive in a lump sum in
cash within 30 days of the Date of Termination.
5. Full Settlement. The Company's obligation to make the payments
---------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive 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").
6. Certain Additional Payments by the Company.
------------------------------------------
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by
11
<PAGE>
the Company or its affiliates to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional payments
required under this Section 6) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing
provisions of this Section 6(a), if it shall be determined that the Executive is
entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the
greatest amount (the "Reduced Amount") that could be paid to the Executive such
that the receipt of Payments would not give rise to any Excise Tax, then no
Gross-Up Payment shall be made to the Executive and the Payments, in the
aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 6(c), all determinations
required to be made under this Section 6, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by
PriceWaterhouse Coopers LLC or such other certified public accounting firm as
may be designated by the Executive (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and the Executive within 15
business days of the receipt of notice from the Executive that there has been a
Payment, or such earlier time as is requested by the Company. In the event that
the Accounting Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change of Control, the Executive shall appoint
another nationally recognized accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and
12
<PAGE>
expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-
Up Payment, as determined pursuant to this Section 6, shall be paid by the
Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 6(c) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by the Company,
13
<PAGE>
(iii) cooperate with the Company in good faith in order effectively
to contest such claim, and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 6(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
14
<PAGE>
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 6(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 6(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 6(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
7. Confidential Information/Noncompetition/ Nonsolicitation. (a) The
--------------------------------------------------------
Executive shall hold in a fiduciary capacity for the benefit of the Company all
secret or confidential information, knowledge or data relating to the Company or
any of its affiliated companies, and their respective businesses, which shall
have been obtained by the Executive during the Executive's employment by the
Company or any of its affiliated companies and which shall not be or become
public knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it.
(b) For two years following the Executive's Date of Termination,
Executive agrees not to solicit, influence or entice, either directly or
indirectly, any employee or consultant of the Company or its affiliates to cease
his or her relationship with the Company or any of its affiliates, as the case
may be.
(c) In the event of a termination of the Executive's employment by the
Company for Cause or by the Executive without Good Reason, until the second
anniversary
15
<PAGE>
of the Executive's Date of Termination, the Executive will not directly or
indirectly, own, manage, operate, control or participate in the ownership,
management, operation or control of, or be connected as an officer, employee,
partner, director or otherwise with, or have any financial interest in, any
business which is in competition with the Company or any of its affiliates in
any geographic area where such business is being conducted during such period.
Ownership, for personal investment purposes only of not in excess of 2% of the
voting stock of any publicly held corporation shall not constitute a violation
hereof.
(d) Executive acknowledges that the provisions of this Section 7 are
essential to the Company, that the Company would not enter into this Agreement
if it did not include this Section 7 and that damages sustained by the Company
as a result of a breach of this Section 7 cannot be adequately remedied by
damages, and Executive agrees that the Company, notwithstanding any other
provision of this Agreement, and in addition to any other remedy it may have
under this Agreement or at law, shall be entitled to injunctive and other
equitable relief to prevent or curtail any breach of any provision of this
Agreement, including, without limitation, this Section 7.
8. Successors. (a) This Agreement is personal to the Executive and
----------
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees
16
<PAGE>
to perform this Agreement by operation of law, or otherwise.
9. Certain Definitions. (a) The "Effective Date" shall mean the
-------------------
first date during the Change of Control Period (as defined in Section 9(b)) on
which a Change of Control (as defined in Section 10) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change of Control occurs and if
the Executive's employment with the Company is terminated prior to the date on
which the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate three years from such Renewal Date,
unless at least 60 days prior to the Renewal Date the Company shall give notice
to the Executive that the Change of Control Period shall not be so extended.
10. Change of Control. For the purpose of this Agreement, a "Change
-----------------
of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a),
17
<PAGE>
the following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company or
(iv) any acquisition by any corporation pursuant to a transaction which complies
with clauses (i) and (ii) of subsection (c) of this Section 10; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) no Person (excluding any corporation resulting from such
Business Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (ii) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) Approval by the shareholders of the Company of
18
<PAGE>
a complete liquidation or dissolution of the Company.
11. Miscellaneous. (a) This Agreement shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of Virginia, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
-------------------
[At address on Exhibit A]
If to the Company:
-----------------
Fort James Corporation
1650 Lake Cook Road
Deerfield, IL 60015-0089
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive
19
<PAGE>
or the Company may have hereunder, including, without limitation, the right of
the Executive to terminate employment for Good Reason pursuant to Section 3(c)
of this Agreement, shall not be deemed to be a waiver of such provision or right
or any other provision or right of this Agreement.
(f) From and after the Commencement Date this Agreement shall
supersede any other agreement between the parties with respect to the subject
matter hereof.
20
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
________________________________
[Executive]
FORT JAMES CORPORATION
By______________________________
21
<PAGE>
EXHIBIT A
---------
[ Executives Fill Name ]
------------------------
[EXECUTIVES HOME ADDRESS]
- ------------------------------------------------------------------------------
Title Salary C'00 MIP Target Location
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Responsibilities:
- ----------------
22
<PAGE>
EXHIBIT 10Q
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between Fort James Corporation, a Virginia corporation
(the "Company") and Miles L. Marsh (the "Executive"), dated as of the 1st day
of January, 2000.
1. Employment Period. The Company hereby agrees to continue the
-----------------
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the date hereof (the "Commencement Date") and ending on the
third anniversary of such date provided, however, that the Employment Period
shall be automatically extended without action by either party for an additional
one year period on each anniversary of the Commencement Date unless, not later
than six months prior to each such anniversary, either party shall give notice
to the other in writing that such party does not intend to extend the Employment
Period. A notice delivered by the Company that it does not intend to extend the
term of this Agreement shall hereinafter be referred to as a "Nonrenewal
Notice." Notwithstanding the foregoing, if the Executive is employed by the
Company on the Effective Date (as defined below), the Employment Period shall be
a three year fixed term from the Effective Date (the "Employment Period").
2. Terms of Employment. (a) Position and Duties. (i) During the
------------------- -------------------
Employment Period, the Executive shall serve as Chairman and Chief Executive
Officer of the Company with duties and responsibilities consistent therewith.
The Executive shall be located at the Company's headquarters. During the
Employment Period, the Executive shall serve on the Board of Directors of the
Company, provided that from and after the Effective Date (A) the Executive's
position (including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least commensurate in all
material respects with the most significant of those held, exercised and
assigned at any time during the 120-day period immediately preceding the
Effective Date and (B) the Executive's services shall be performed at the
location where the Executive was employed immediately preceding the Effective
Date or any office or location less than 50 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which
<PAGE>
the Executive is entitled, the Executive agrees to devote reasonable attention
and time during normal business hours to the business and affairs of the Company
and, to the extent necessary to discharge the responsibilities assigned to the
Executive hereunder, to use the Executive's reasonable best efforts to perform
faithfully and efficiently such responsibilities. During the Employment Period
it shall not be a violation of this Agreement for the Executive to (A) serve on
corporate, civic or charitable boards or committees, (B) deliver lectures,
fulfill speaking engagements or teach at educational institutions and (C) manage
personal investments, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been conducted by the Executive
prior to the Effective Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto) subsequent to the
Effective Date shall not thereafter be deemed to interfere with the performance
of the Executive's responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period,
------------ -----------
the Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid in bi-weekly installments, at least equal to the base salary paid
or payable, including any base salary which has been earned but deferred, to the
Executive by the Company and its affiliated companies immediately preceding the
Commencement Date. Any increase in Annual Base Salary shall not serve to limit
or reduce any other obligation to the Executive under this Agreement. Annual
Base Salary shall not be reduced after any such increase and the term Annual
Base Salary as utilized in this Agreement shall refer to Annual Base Salary as
so increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. During the Employment Period, the Executive
------------
shall have an annual bonus opportunity no less than that provided to the
Executive for the year ending immediately prior to the Commencement Date. After
the Effective Date, the Executive shall be awarded, for each fiscal year ending
during the Employment Period, an annual bonus (the "Annual Bonus") in cash at
least equal to the
2
<PAGE>
Executive's highest bonus under the Company's Management Annual Incentive Plan,
or any comparable bonus under any predecessor or successor plan, for the last
five full fiscal years prior to the Effective Date (annualized in the event that
the Executive was not employed by the Company for the whole of such fiscal year)
(the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than
the end of the third month of the fiscal year next following the fiscal year for
which the Annual Bonus is awarded, unless the Executive shall elect to defer the
receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the
---------------------------------------
Employment Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and its affiliated
companies, including, without limitation, the Fort James Corporation of Virginia
Miles L. Marsh Supplemental Retirement Plan, but, after the Effective Date, in
no event shall such plans, practices, policies and programs provide the
Executive with incentive opportunities (measured with respect to both regular
and special incentive opportunities, to the extent, if any, that such
distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 120-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies. All stock options held by the Executive shall vest and become
immediately exercisable on the Effective Date. For purposes of this Agreement,
should the Executive retire under the provisions of the Fort James Corporation
of Virginia Miles L. Marsh Supplemental Retirement Plan, he shall also be
entitled to receive:
(A) Eligibility for the Company's Retiree Medical Plan coverage,
regardless of years of service.
(B) The payment of a lump sum in cash of $50,000.
3
<PAGE>
(iv) Welfare Benefit Plans. During the Employment Period, the
---------------------
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but, after the Effective
Date, in no event shall such plans, practices, policies and programs provide the
Executive with benefits which are less favorable, in the aggregate, than the
most favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies. With respect to the Company's welfare benefit plans,
the Company shall cause any such plan to waive any pre-existing condition
exclusions and actively-at-work requirements thereunder with respect to the
Executive and the Executive's eligible dependents and shall ensure that any
covered expenses incurred on or before the Commencement Date shall be taken into
account for purposes of satisfying applicable deductible, coinsurance and
maximum out-of-pocket provisions after the Commencement Date to the extent that
such expenses are taken into account for the benefit of peer executives of the
Company.
(v) Expenses. During the Employment Period, the Executive shall
--------
be entitled to receive prompt reimbursement for all reasonable expenses incurred
by the Executive in accordance with the policies, practices and procedures of
the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the
---------------
Executive shall be entitled to fringe benefits including, without limitation,
tax and financial planning services and the payment of club dues.
(vii) Vacation. During the Employment Period, the Executive shall
--------
be entitled to paid vacation in accordance with the Vacation Policy as set forth
in the Company's Benefits and Policies Manual, but in no event less
4
<PAGE>
than six weeks per year, as defined in the Benefits and Policies Manual.
(viii) Indemnity. The Executive shall be indemnified by the
---------
Company against claims arising in connection with the Executive's status as an
employee, officer, director or agent of the Company in accordance with the
Company's indemnity policies for its senior executives, subject to applicable
law.
3. Termination of Employment. (a) Death or Disability. The
------------------------- -------------------
Executive's employment shall terminate automatically upon the Executive's death
during the Employment Period. If the Company determines in good faith that the
Disability of the Executive has occurred during the Employment Period (pursuant
to the definition of Disability set forth below), it may give to the Executive
written notice in accordance with Section 11(b) of this Agreement of its
intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the Executive
shall not have returned to full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" shall be set forth in the Company's
Long-Term Disability Plan.
(b) Cause. The Company may terminate the Executive's employment
-----
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean:
(i) intentional gross misconduct by the Executive damaging in a
material way to the Company, or
(ii) a material breach of this Agreement, after the Company has
given the Executive notice thereof and a reasonable opportunity to cure.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "intentional" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the
5
<PAGE>
Board or upon the instructions of the Chief Executive Officer or a senior
officer of the Company or based upon the advice of counsel for the Company shall
be conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company. Following the Effective
Date, the cessation of employment of the Executive shall not be deemed to be for
Cause unless and until there shall have been delivered to the Executive a copy
of a resolution duly adopted by the affirmative vote of not less than three-
quarters of the entire membership of the Board at a meeting of the Board called
and held for such purpose (after reasonable notice is provided to the Executive
and the Executive is given an opportunity, together with counsel, to be heard
before the Board), finding that, in the good faith opinion of the Board, the
Executive is guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
-----------
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean a material breach by the Company of this Agreement after the Executive has
given the Company notice thereof and a reasonable opportunity to cure. For
purposes of this Section 3(c), any good faith determination of "Good Reason"
made by the Executive after the Effective Date shall be conclusive. Anything in
this Agreement to the contrary notwithstanding, a termination by the Executive
for any reason during the 30-day period immediately following the first
anniversary of the Effective Date shall be deemed to be a termination for Good
Reason for all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause,
---------------------
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 11(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the
6
<PAGE>
date of receipt of such notice, specifies the termination date (which date shall
be not more than thirty days after the giving of such notice). The failure by
the Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company, respectively, hereunder or
preclude the Executive or the Company, respectively, from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
-------------------
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
4. Obligations of the Company upon Termination. (a) Good Reason;
------------------------------------------- ------------
Other Than for Cause, Death or Disability. If, during the Employment Period, the
- -----------------------------------------
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the highest Annual Bonus paid or payable, including any
bonus or portion thereof which has been earned but deferred (and
annualized for any fiscal year consisting of less than twelve full
months or during which the Executive was employed for less than twelve
full months), in respect of the five most recently completed fiscal
years prior to the Date of Termination (the "Minimum Bonus") and (y) a
7
<PAGE>
fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of
which is 365 and (3) any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) three, or two in the
case of a termination prior to the Effective Date after the third
anniversary of the Commencement Date (a "Nonrenewal Termination") and
(2) the sum of (x) the Executive's Annual Base Salary and (y) the
Minimum Bonus; and
C. in the event that the Executive is less than 55 years old on
the Date of Termination, an amount equal to the excess of (a) the
actuarial equivalent of the benefit under the Company's qualified
defined benefit retirement plan or such other qualified defined
benefit pension plan in which the Executive participates, if any (the
"Retirement Plan") (utilizing actuarial assumptions no less favorable
to the Executive than those in effect under the Company's Retirement
Plan immediately prior to the Commencement Date), and any excess or
supplemental retirement plan in which the Executive participates
(together, the "SERP") which the Executive would receive if the
Executive's employment continued for three years, or two years in the
case of a Nonrenewal Termination, after the Date of Termination
assuming for this purpose that all accrued benefits are fully vested,
and, assuming that the Executive's compensation in each of the three
years, or two years, as the case may be, is the sum of the Annual Base
Salary and Minimum Bonus over (b) the actuarial equivalent of the
Executive's actual benefit (paid or payable), if any, under the
Retirement Plan and the SERP as of the Date of Termination provided,
that the deemed service credit referred to above shall not apply in
determining eligibility for the Enhanced Early Retirement Benefit; and
(ii) All stock incentive awards, stock options, performance shares
and similar awards ("Stock Awards") shall vest and become exercisable or
payable, as the
8
<PAGE>
case may be.
(iii) for three years, two years in the case of a Nonrenewal
Termination, after the Executive's Date of Termination, or such longer
period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue benefits to the Executive
and/or the Executive's family (other than Accidental Death and
Dismemberment benefits, Short Term and Long Term Disability benefits, and
Business Travel Accident Insurance) at least equal to those which would
have been provided to them in accordance with the plans, programs,
practices and policies described in Section 2(b)(iv) of this Agreement if
the Executive's employment had not been terminated, including the cost of
$3 million of term life insurance on the Executive's life or, if more
favorable to the Executive, as in effect generally at any time thereafter
with respect to other peer executives of the Company and its affiliated
companies and their families, provided, however, that if the Executive
becomes reemployed with another employer and is eligible to receive medical
or other welfare benefits under another employer provided plan, the medical
and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of
eligibility. The Executive shall be entitled to retiree medical benefits as
provided in Section 2(b)(iii).
(iv) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such other amounts
and benefits shall be hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of
-----
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations shall be
paid to the Executive's estate or beneficiary, as applicable, in a lump
9
<PAGE>
sum in cash within 30 days of the Date of Termination. With respect to the
provision of Other Benefits, the term Other Benefits as utilized in this Section
4(b) shall include, without limitation, and the Executive's estate and/or
beneficiaries shall be entitled to receive, death benefits in effect on the date
of the Executive's death with respect to other peer executives of the Company
and its affiliated companies and their beneficiaries. In addition, all Stock
Awards shall vest immediately and/or become exercisable or payable, as the case
may be.
(c) Disability. If the Executive's employment is terminated by reason
----------
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 4(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits as in effect at any time thereafter
generally with respect to other peer executives of the Company and its
affiliated companies and their families. In addition, all Stock Awards shall
vest immediately and/or become exercisable or payable, as the case may be.
(d) Cause; Other than for Good Reason. If the Executive's employment
---------------------------------
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, and (y) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the
Employment Period, excluding a termination for Good Reason, this Agreement shall
terminate without further obligations to the Executive, other than for Accrued
Obligations and the timely payment or provision of Other Benefits. In such
case, all Accrued Obligations shall be paid to the Executive in a lump sum in
cash within 30 days of the Date of Termination.
5. Full Settlement. The Company's obligation to
---------------
10
<PAGE>
make the payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Company may have
against the Executive or others. In no event shall the Executive be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Executive under any of the provisions of this Agreement
and such amounts shall not be reduced whether or not the Executive obtains other
employment. The Company agrees to pay as incurred, to the full extent permitted
by law, all legal fees and expenses which the Executive may reasonably incur as
a result of any contest (regardless of the outcome thereof) by the Company, the
Executive or others of the validity or enforceability of, or liability under,
any provision of this Agreement or any guarantee of performance thereof
(including as a result of any contest by the Executive 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").
6. Certain Additional Payments by the Company.
------------------------------------------
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 6) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the
11
<PAGE>
Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
Notwithstanding the foregoing provisions of this Section 6(a), if it shall be
determined that the Executive is entitled to a Gross-Up Payment, but that the
Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that
could be paid to the Executive such that the receipt of Payments would not give
rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive
and the Payments, in the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 6(c), all determinations
required to be made under this Section 6, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by
PriceWaterhouse Coopers LLC or such other certified public accounting firm as
may be designated by the Executive (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and the Executive within 15
business days of the receipt of notice from the Executive that there has been a
Payment, or such earlier time as is requested by the Company. In the event that
the Accounting Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change of Control, the Executive shall appoint
another nationally recognized accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to
this Section 6, shall be paid by the Company to the Executive within five days
of the receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made ("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 6(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
12
<PAGE>
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 6(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such
13
<PAGE>
claim and may, at its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 6(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 6(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 6(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
7. Confidential Information/Noncompetition/
---------------------------------------
14
<PAGE>
Nonsolicitation. (a) The Executive shall hold in a fiduciary capacity for the
- ---------------
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its affiliated companies and
which shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this Agreement).
After termination of the Executive's employment with the Company, the Executive
shall not, without the prior written consent of the Company or as may otherwise
be required by law or legal process, communicate or divulge any such
information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 9 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
(b) For two years following the Executive's Date of Termination,
Executive agrees not to solicit, influence or entice, either directly or
indirectly, any employee or consultant of the Company or its affiliates to cease
his or her relationship with the Company or any of its affiliates, as the case
may be.
(c) In the event of a termination of the Executive's employment by
the Company for Cause or by the Executive without Good Reason, until the second
anniversary of the Executive's Date of Termination, the Executive will not
directly or indirectly, own, manage, operate, control or participate in the
ownership, management, operation or control of, or be connected as an officer,
employee, partner, director or otherwise with, or have any financial interest
in, any business which is in competition with the Company or any of its
affiliates in any geographic area where such business is being conducted during
such period. Ownership, for personal investment purposes only of not in excess
of 2% of the voting stock of any publicly held corporation shall not constitute
a violation hereof.
(d) Executive acknowledges that the provisions of this Section 7 are
essential to the Company, that the Company would not enter into this Agreement
if it did not include this Section 7 and that damages sustained by the Company
as a result of a breach of this Section 7 cannot be
15
<PAGE>
adequately remedied by damages, and Executive agrees that the Company,
notwithstanding any other provision of this Agreement, and in addition to any
other remedy it may have under this Agreement or at law, shall be entitled to
injunctive and other equitable relief to prevent or curtail any breach of any
provision of this Agreement, including, without limitation, this Section 7.
8. Successors. (a) This Agreement is personal to the Executive and
----------
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
9. Certain Definitions. (a) The "Effective Date" shall mean the
-------------------
first date during the Change of Control Period (as defined in Section 9(b)) on
which a Change of Control (as defined in Section 10) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change of Control occurs and if
the Executive's employment with the Company is terminated prior to the date on
which the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
16
<PAGE>
(b) The "Change of Control Period" shall mean the period commencing
on the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate three years from such Renewal Date,
unless at least 60 days prior to the Renewal Date the Company shall give notice
to the Executive that the Change of Control Period shall not be so extended.
10. Change of Control. For the purpose of this Agreement, a "Change
-----------------
of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i) and (ii) of subsection (c) of this Section 10; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though
17
<PAGE>
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) no Person (excluding any corporation resulting from such
Business Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (ii) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
11. Miscellaneous. (a) This Agreement shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of Virginia, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
18
<PAGE>
If to the Executive:
-------------------
965 East Deer Path Road
Lake Forest, IL 60045
If to the Company:
-----------------
Fort James Corporation
1650 Lake Cook Road
Deerfield, IL 60015-0089
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 3(c) of this Agreement, shall not be deemed to be a waiver
of such provision or right or any other provision or right of this Agreement.
(f) From and after the Commencement Date this Agreement shall
supersede any other agreement between the parties with respect to the subject
matter hereof.
19
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ Miles L. Marsh
----------------------------------
Miles L. Marsh
FORT JAMES CORPORATION
By /s/ Daniel J. Girvan
--------------------------------
20
<PAGE>
Exhibit 12
FORT JAMES CORPORATION and SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (a)
YEAR ENDED DECEMBER 26, 1999
(in millions)
<TABLE>
<S> <C>
Pretax income from continuing operations $501.1
Add:
Interest charged to continuing operations 246.8
Portion of rental expense representative of
interest factor (assumed to be one-third) 19.7
---------------------------------------------------------
Total earnings, as adjusted $767.6
=========================================================
Fixed Charges:
Interest charged to operations $246.8
Capitalized interest 8.0
Portion of rental expense representative of
interest factor (assumed to be one-third) 19.7
---------------------------------------------------------
Total fixed charges $274.5
=========================================================
Ratio of earnings to fixed charges 2.80
=========================================================
</TABLE>
(a) In computing the ratio of earnings to fixed charges, earnings consist of
income before income taxes, undistributed income from less than 50% owned
affiliates, extraordinary items, cumulative effect of a change in accounting
principle, and fixed charges excluding capitalized interest. Fixed charges
consist of interest expense, capitalized interest and a portion of rental
expense (one-third) deemed representative of the interest factor.
<PAGE>
Exhibit 13
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Fort James Corporation ("Fort James" or the "Company") manufactures and markets
consumer tissue products, including bath tissue, facial tissue, paper towels and
napkins, and disposable tabletop products, including cups, plates, bowls and
cutlery. Principal markets for the Company's tissue products include North
America and Europe, while its disposable tabletop products are marketed
primarily in North America under the Dixie name. The Company is the
second-largest provider of tissue-based products globally, and holds the leading
position in North America. In disposable cups and plates, the Company has the
largest U.S. retail market share of such products. Additionally, the Company
manufactures and markets business, office and printing papers, primarily in the
western United States. Fort James also sells small amounts of market pulp and
recycled paper in excess of its local needs. These product lines are the basis
for the Company's reportable operating segments.
Management believes that the following commentary and tables appropriately
discuss and analyze the comparative results of operations and the financial
condition of the Company for the periods covered. As a result of the 1999 sale
of the Company's Packaging business, the financial statements and related notes
have been restated to separately report the results of discontinued operations
for all periods prior to the disposal date. The results of discontinued
operations include operating profits, certain unusual items, and an allocation
of interest expense and taxes. All references to Notes are to "Notes to
Consolidated Financial Statements."
Results for the three years ended December 26, 1999, December 27, 1998 and
December 28, 1997, both as reported and excluding unusual and non-recurring
items ("Recurring"), are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
(in millions except per share data) Reported Recurring Reported Recurring Reported Recurring
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from operations $715.8 $904.4 $1,021.1 $1,112.2 $554.3 $983.3
Income before income taxes 1 504.3 704.2 750.9 842.0 252.5 681.5
Net income (loss) 516.5 468.3 497.6 536.7 (27.0) 415.8
Diluted earnings (loss) per share $ 2.35 $ 2.13 $ 2.26 $ 2.44 $(0.28) $ 1.85
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Income from continuing operations before income taxes, extraordinary items,
and cumulative effect of a change in accounting principle.
Net Sales by Segment
[GRAPH]
In 1999, Fort James reported net income and earnings per diluted share of
$516.5 million and $2.35, respectively, compared to 1998 net income of $497.6
million and earnings per diluted share of $2.26. Reported results improved,
primarily due to the 1999 gain on the sale of the non-strategic Packaging
business. The Company reported a net loss of $27.0 million, or $0.28 per diluted
share in 1997 primarily due to a merger-related restructure charge.
Excluding unusual and non-recurring items, 1999 earnings were $468.3
million, or $2.13 per diluted share, a 13% decrease from the prior year's
earnings of $536.7 million, or $2.44 per diluted share. Sales increased modestly
to $6,827.4 million in 1999 versus $6,802.6 million in 1998. Adjusted for the
effect of unfavorable foreign currency translation, sales increased slightly
more than 1% compared to the prior year. Operating profits in 1999 declined
primarily as a result of increased competitive activity in the North America
tissue market; higher raw material costs, largely occurring in the second half
of the year, without commensurate recovery in product pricing; and higher
distribution, transportation and warehousing costs in North America.
Fort James Corporation 25
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Income from Operations
---------------------------- Income from Income from
(in millions) Sales Reported Recurring1 Sales Operations Sales Operations
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tissue - North America $3,673.9 $ 644.7 $679.4 $3,634.1 $ 872.1 $3,514.0 $790.7
Tissue - Europe 1,834.0 210.4 210.4 1,869.4 236.2 1,828.1 202.4
Dixie 786.9 105.1 106.0 775.5 89.1 780.8 67.5
Communications Papers and Fiber 834.5 (8.7) (6.6) 796.6 2.4 859.0 14.7
Intercompany and Corporate (301.9) (93.1) (84.8) (273.0) (87.6) (278.9) (92.0)
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 6,827.4 858.4 904.4 6,802.6 1,112.2 6,703.0 983.3
Restructure and other items - (142.6) - - (91.1) - (429.0)
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated $6,827.4 $ 715.8 $904.4 $6,802.6 $1,021.1 $6,703.0 $554.3
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Recurring income from operations excludes unusual charges of $46.0 million
for severance and other costs related to a reduction-in-force program and
litigation accruals.
For each of the years presented, the Company recorded several unusual and
non-recurring items that have been excluded from all applicable amounts
presented. Refer to the separate section herein entitled "Unusual and
Non-Recurring Items" for further information.
Results of Operations - 1999 Compared to 1998
Tissue - North America
Recurring income from operations in the Tissue - North America business declined
22% to $679.4 million in 1999 versus $872.1 million in 1998, despite a modest
increase in sales. The reduced profits were primarily a function of lower
pricing, net of trade promotions, resulting from competitive market conditions
and higher fiber and distribution costs; however, market shares strengthened in
all major retail product categories.
Aggregate 1999 unit volumes increased by 3.6%, as shipments to retail
markets increased by 5.1% and shipments in away-from-home channels improved
1.2%. Retail volumes benefited from product reformulations and other new product
initiatives and for the year grew at or above the level of the industry in each
major product line. Away-from-home volumes improved over the course of the year,
with the largest gains posted in differentiated products.
Operating Income
Tissue - North America
[GRAPH]
Pricing, net of trade promotions, declined approximately 4% compared to the
prior year. Retail tissue promotional and merchandising activity increased in
1999, reaching a peak in the third quarter, largely triggered by major bath
tissue product reformulations in the industry. Away-from-home tissue pricing
also decreased as a result of competitive market conditions.
Tissue - North America profits were also affected by higher costs for
recycled paper, which is a primary raw material in retail value and private
label brands and in away-from-home tissue products. After remaining relatively
stable for several years, recycled fiber costs began to rise in the summer of
1999, accelerating through the end of the year. In response to these higher
costs, away-from-home list price increases averaging 9% to 10% and retail list
price increases ranging from 3.5% to 10% were announced with effective dates in
the first half of 2000.
Higher distribution, transportation and warehousing costs also reduced
margins for both retail and away-from-home products. The higher costs were
incurred in customer and transfer freight, as well as in storage and handling
associated with higher inventories to facilitate system changes and the loss of
warehouse space at some mills.
Operating Income Tissue - Europe
[GRAPH]
26 Fort James Corporation
<PAGE>
Tissue - Europe
Income from operations for the European Tissue business decreased 11% to $210.4
million from $236.2 million in 1998. At the same time, sales declined 2% to
$1,834.0 million versus $1,869.4 million. Excluding the effect of foreign
currency translation changes, the Company estimates European profits would have
declined approximately 8% and sales would have increased 2% compared to 1998.
European finished goods unit volumes increased by 2.4%, with
higher-than-average volume increases posted in France, Spain, Finland and
Greece. Unit volumes declined, however, in Italy and the United Kingdom. Similar
to the last few years, the business faced annual pricing erosion, net of trade
promotions, of 2% to 3%, driven by the combination of raw material deflation in
the first half of the year, low industry operating rates, and the entrance of
new competitors into select geographic markets.
In the second half of 1999, costs for both pulp and recycled fiber began to
increase sharply, which together with increased competitive activity
particularly in the United Kingdom, resulted in a contraction in operating
margins.
Dixie
Recurring income from operations in the Dixie business increased 19% to a record
$106.0 million in 1999 from $89.1 million in 1998, while sales increased
modestly to $786.9 million versus $775.5 million. Operating margins expanded to
13.5% from 11.5% in 1998, primarily on the combination of strong retail volume
growth, an improved product mix in foodservice, and continuing cost reductions.
Aggregate 1999 unit volumes increased by 1.5%, as retail volume increases
of 6.8% were largely offset by a 3.7% contraction in foodservice shipments.
Operating Income
Dixie
[GRAPH]
The retail line increased volumes ahead of the industry growth rate, primarily
on successful new product and merchandising activities, including new designs
and pack-size offerings. Foodservice volumes were affected throughout 1999 by
product line rationalization activities, which reduced sales but improved
overall margins. The rationalization activities were completed by the end of
1999. Average Dixie pricing, net of trade promotions, was relatively unchanged
compared to 1998.
Communications Papers and Fiber
The Communications Papers and Fiber businesses reported a recurring loss from
operations of $6.6 million compared to a profit of $2.4 million in 1998, while
sales increased 5% to $834.5 million from $796.6 million. The decline in results
reflects the trend in commodity paper pricing, which troughed in the first
quarter of 1999, before gradually improving over the balance of the year. The
businesses reported losses of $22.8 million in the first half of 1999 before
turning profitable in the second half of the year, driven by improved pricing
for pulp and uncoated freesheet papers.
Communications Papers and Fiber sales and profits for 2000 will be
influenced by the expected continued improvement in commodity paper pricing,
combined with the impact of the first quarter 2000 divestiture of the Company's
Marathon, Ontario, Canada pulp mill and the shut-down of its groundwood paper
operations (see "Unusual and Non-Recurring Items").
Other Income and Expense Items
Interest expense decreased $36.7 million, or 14%, from $264.8 million in 1998 to
$228.1 million in 1999, excluding the effects of an interest rate swap
termination loss in 1999 (see "Unusual and Non-Recurring Items"). Reduced debt
levels and lower average borrowing costs positively affected interest costs.
Operating Income Communications Papers and Fiber
(In millions)
[GRAPH]
Fort James Corporation 27
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company reported other income of $27.9 million in 1999 compared to
other expense of $5.4 million in 1998. The improvement was primarily due to
foreign currency gains and interest on income tax refunds (see Note 4).
The Company's reported effective tax rate was 30.7% in 1999 compared to
34.5% in 1998. The effective income tax rate, excluding tax effects of unusual
and non-recurring items, was 33.5% in 1999 compared to 36.3% in 1998. The
decrease in the effective tax rate was primarily the result of beneficial tax
planning actions.
Unusual and Non-Recurring Items
The components of unusual and non-recurring items and their effects on reported
results for the past three years are summarized as follows:
<TABLE>
<CAPTION>
Earnings (Loss)
Income from Pretax Net Income Per Diluted
(in millions) Operations Income (Loss) Share
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
As reported $ 715.8 $504.3 $516.5 $ 2.35
Severance and litigation 46.0 46.0 28.1 0.13
Restructure and other items 142.6 142.6 83.7 0.38
Interest rate swap termination loss - 11.3 6.9 0.03
Loss from discontinued operations, net of taxes - - 6.4 0.03
Extraordinary items, net of taxes - - (195.4) (0.89)
Cumulative effect of a change in accounting principle, net of taxes - - 22.1 0.10
- --------------------------------------------------------------------------------------------------------------------------------
Before unusual and non-recurring $ 904.4 $704.2 $468.3 $ 2.13
- --------------------------------------------------------------------------------------------------------------------------------
1998
As reported $1,021.1 $750.9 $497.6 $ 2.26
Restructure and other items 91.1 91.1 44.9 0.21
Income from discontinued operations, net of taxes - - (8.4) (0.04)
Extraordinary items, net of taxes - - 2.6 0.01
- --------------------------------------------------------------------------------------------------------------------------------
Before unusual and non-recurring $1,112.2 $842.0 $536.7 $ 2.44
- --------------------------------------------------------------------------------------------------------------------------------
1997
As reported $ 554.3 $252.5 $ (27.0) $(0.28)
Restructure and other items 429.0 429.0 320.8 1.55
Income from discontinued operations, net of taxes - - (9.5) (0.05)
Extraordinary items, net of taxes - - 131.5 0.63
- --------------------------------------------------------------------------------------------------------------------------------
Before unusual and non-recurring $ 983.3 $681.5 $415.8 $ 1.85
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Income from operations for 1999 included unusual charges of $46.0 million
for severance and litigation accruals, of which $17.8 million is included in
cost of goods sold and $28.2 million is included in selling and administrative
expenses. Included in this charge is $25.0 million for the cost of termination
benefits for a reduction-in-force program to reduce headcount by approximately
1,300 employees. The litigation accrual included, among other items, an estimate
of costs related to the antitrust actions described in Note 13.
In 1999, the Company recorded net non-recurring pre-tax charges of $142.6
million. These charges included costs of $157.1 million for asset impairment
write-downs and other costs associated with the sale of Marathon and exiting the
Groundwood Business (as defined below) and $30.0 million for a permanent
Interest Expense
[Graph]
28 Fort James Corporation
<PAGE>
impairment write-down of a non-operating asset; partially offset by a credit of
$44.5 million for the net reversal of merger-related restructure accruals.
In December 1999, Fort James announced the sale of its Marathon, Ontario,
Canada pulp mill ("Marathon") for $69.1 million. Marathon is a non-integrated
pulp mill that did not provide the same strategic benefit as the Company's other
pulp mills, all of which are integrated with tissue-making and converting
operations. In December 1999, the Company also announced its decision to exit
the groundwood paper business ("the Groundwood Business") by closing its
groundwood paper operations at the Wauna mill in Clatskanie, Oregon in the first
quarter of 2000 (see Note 2). These actions were taken to reduce the Company's
exposure to earnings volatility associated with commodity products. At
December 26, 1999, the net assets of Marathon and the Groundwood Business have
been classified as Other Assets.
During 1999, the Company concluded the merger integration initiatives by
closing four facilities in North America and Europe. These closures reduced
staffing by approximately 600 employees. In addition, the Company settled
certain merger-related restructure liabilities on terms more favorable than
anticipated and cancelled the remaining European facility closures due to
extended regulatory review and competitive actions in the marketplace. As a
result, the related restructure accruals were reversed. The Company continues to
review various strategic options related to these facilities.
In December 1999, Fort James purchased its partner's 50% interest in the
Naheola Cogeneration Limited Partnership ("the Naheola Partnership"), for $53.6
million. The Naheola Partnership provided energy to the Company's Naheola,
Alabama mill. The Company recognized an interest rate swap termination loss of
$11.3 million related to the refinancing of $141 million of higher-cost Naheola
Partnership debt on more favorable terms.
In August 1999, Fort James sold its Packaging business for $836.3 million
in cash. This business, which produced folding cartons for packaging food and
other consumer goods, was divested as part of the Company's strategy to focus on
higher-margin consumer product businesses. As a result of this sale, operating
results of the Packaging business have been reported as discontinued operations
(see Note 2). The sale resulted in an
after-tax extraordinary gain of $235.2 million that was partially offset by an
extraordinary loss of $39.8 million on the early extinguishment of debt.
In the first quarter of 1999, the Company adopted Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities," which requires that
start-up and organization costs be expensed as incurred. The change in
accounting policy has been applied to unamortized start-up costs capitalized in
prior years. As a result, a charge of $22.1 million was recorded as a cumulative
effect of a change in accounting principle.
In 1998, the Company recorded net non-recurring pre-tax charges for
restructure and other items of $91.1 million. Included in this total were $102.6
million for merger-related costs not accruable in 1997; $26.2 million for a
permanent impairment write-down of a non-operating asset; $15.1 million for
asset write-downs and plant closures and $6.4 million for other net
miscellaneous costs. These costs were partially offset by a net reversal of
$59.2 million of restructure accruals due to revisions of estimates or
settlement of such liabilities on terms more favorable than anticipated. In
addition, the Company recognized an extraordinary loss of $2.6 million on the
early extinguishment of debt.
In 1998, the Company closed five facilities in North America and Europe as
part of merger integration and restructure initiatives. In addition, staffing
was reduced by 1,300 employees, or approximately 5%, of the Company's combined
workforce. The Company's corporate headquarters and the European and Packaging
business headquarters were also relocated. Costs associated with the relocation
efforts were expensed as incurred.
In 1997, the Company recorded net non-recurring pre-tax charges for
restructure and other items of $429.0 million. These charges included amounts
for facility closures and write-downs of redundant property, plant and equipment
of $215.6 million; employee severance and other employee-related costs of $97.0
million; costs of terminating contracts and other long-term agreements of $82.8
million; investment banking, legal, accounting and other transaction costs of
$54.0 million; and other costs of $49.2 million. These charges were partially
offset by a gain on the sale of timberlands of $69.6 million. The Company also
recognized an extraordinary loss of $131.5 million on the early extinguishment
of debt.
Fort James Corporation 29
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities totaled $674.5 million in 1999 compared to
$870.3 million in 1998. The decrease was primarily due to lower operating income
and higher income tax payments related to the sale of the Packaging business,
partially offset by reduced merger-related spending. Net payments for
restructure and other merger-related expenditures were $28.4 million in 1999
(net of $16.0 million of cash proceeds from the sale of assets) and $153.4
million in 1998.
Investing Activities
Net cash provided by investing activities totaled $172.7 million in 1999 and
included $836.3 million of proceeds from the sale of discontinued operations and
$14.9 million of miscellaneous cash proceeds, partially offset by $533.8 million
of capital expenditures, $110.3 million of net cash paid for acquisitions and a
$34.4 million increase in net assets of discontinued operations. Net cash used
for investing activities totaled $487.5 million in 1998 and included $492.8
million of capital expenditures. The increase in capital spending was primarily
due to the expansion of converting capacity and product development in the Dixie
business and product reformulation of Quilted Northern bathroom tissue,
partially offset by reduced spending for information systems. The Company
currently expects 2000 capital spending to increase by approximately 5% with the
commencement of construction of a new European tissue machine and the effect of
consolidating the Naheola Partnership. Contractual capital commitments as of
December 26, 1999 were not material.
Cash Flow from Operations and Capital Expenditures
[Graph]
Financing Activities
Total indebtedness decreased by $372.5 million in 1999, principally from the
proceeds from the sale of the Packaging business and the use of cash provided by
operations, partially offset by common stock purchases of $199.7 million as part
of a $500 million stock purchase program and the refinancing of $141 million of
debt acquired with the purchase of the Naheola Partnership. During 1999, new
borrowings totaled $356.7 million and debt payments, including the net decrease
in revolving debt, totaled $827.1 million.
During 1999, the Company refinanced $169.3 million of 9.25% senior notes,
$64.0 million of 8.38% senior notes, $62.0 million of 7.75% senior notes and
$58.8 million of 9% senior subordinated notes prior to their scheduled
maturities.
As of December 26, 1999, Fort James had committed revolving credit
agreements with various domestic and foreign banks providing for unsecured
borrowings of up to $1.9 billion. In addition, the Company had a domestic
program providing for commercial paper issuances of up to $1 billion. The
Company and its consolidated subsidiaries also had agreements with several banks
providing for other borrowings, dependent on bank availability. These facilities
allow the Company to borrow at competitive interest rates for general corporate
purposes. At December 26, 1999, the Company had unused credit facilities
amounting to $0.9 billion, net of commercial paper borrowings.
At December 26, 1999, Fort James' weighted-average interest rate was 6.71%
(including the effect of interest rate swap agreements), compared to 6.96% as of
the end of 1998. The Company's debt portfolio is sensitive to changes in
interest rates. Interest rate changes would result in 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 indebtedness at December 26, 1999, a 100 basis point interest rate
change would impact the fair value of the debt portfolio by approximately $70
million. This exposure would be offset by a change of $3 million in the fair
value of the interest rate swap portfolio (see Note 10).
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
Total Outstanding Debt
[GRAPH]
30 Fort James Corporation
<PAGE>
it agrees to various combinations of fixed and/or variable interest rates based
on agreed-upon notional amounts. Total outstanding debt of $3.5 billion on
December 26, 1999 included approximately $2.2 billion of fixed rate and $1.3
billion of floating rate obligations (including the effect of interest rate
swaps). The Company had $0.3 billion and $0.9 billion in notional amounts of
interest rate swap agreements in effect as of December 26, 1999, and December
27, 1998, 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; however, management is reviewing how such exposures
are managed. Additional information on interest rate management activities is
provided in Note 10.
As of December 26, 1999, the Company's debt ratings were investment grade and
were as follows:
- -------------------------------------------------------------------------------
Senior Commercial
Outlook Debt Paper
- -------------------------------------------------------------------------------
Moody's Investor Services Positive Baa2 P2
Standard & Poor's Stable BBB A2
- -------------------------------------------------------------------------------
In 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.
Dividends paid on common and preferred stock decreased to $131.8 million in
1999, compared to $139.5 million in 1998 due to a decrease in the number of
common shares outstanding primarily due to the stock purchase program, and the
elimination of preferred dividends through the conversion or redemption of
preferred stock in 1998.
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 26, 1999, and December 27, 1998, the Company
had outstanding foreign exchange contracts with notional amounts of $20 million
to hedge firm and anticipated purchase commitments and firm sales commitments
denominated in foreign currencies. During 1999, the Company issued approximately
$312 million of Euro denominated bonds which were designated as a hedge against
its net investment in Europe. 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
26, 1999 and December 27, 1998, Fort James had unrealized gains on foreign
currency contracts of $0.3 million and $0.1 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.
Inflation
For several years prior to 1999, the Company had experienced moderate levels of
inflation. In the second half of 1999, the Company began to see significant
increases in the cost of its base raw materials, principally wastepaper and
purchased pulp. Management believes that these costs will continue to escalate
in 2000. Although the Company has announced price increases in the Tissue -
North America retail and away-from-home categories, and selected European
markets, the timing and impact of these increases are uncertain and therefore,
the degree of recoverability of these increased costs is uncertain.
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 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 $32
million in 1999 and $31 million in 1998 were made by Fort James for pollution
control facilities and equipment.
Fort James Corporation 31
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
In 1998, the U.S. Environmental Protection Agency ("EPA") regulations
affecting pulp and paper industry discharges of wastewater and gaseous
emissions, commonly referred to as the "cluster rules," became effective. These
rules require changes in the pulping and bleaching processes presently used in
some U.S. pulp mills, including several of Fort James' mills. The majority of
the investment required to comply with these regulations is due by 2001, with
the possibility of a one-year extension for parts of the program. In fiscal 2000
and 2001, the Company expects to invest a total of approximately $40 million as
part of its compliance program.
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.
Year 2000
The Year 2000 (Y2K) issue was the result of computer programs using two digits
rather than four to define the applicable year. The Company's Y2K remediation
efforts were completed in the fourth quarter of 1999. As a result of these
efforts, the Company experienced no significant Y2K-related problems.
Fort James spent approximately $26 million in 1999, $35 million in 1998 and $8
million in 1997 on its Y2K project.
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.
The Company has operations in seven of the Participating Countries and has
product sales in all but one 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 of December 1999, the Company's information
technology systems were Euro-ready for five of the Participating Countries. The
Company believes it will be able to modify the remaining financial systems and
business activities to accommodate the conversion and transition to the Euro
prior to year-end 2001. The Company is unable to determine the financial effect
of the conversion on its operations, if any, given that the effect will depend
on the competitive conditions 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 1999, the Financial Accounting Standards Board issued FASB Statement No.
137 effective for the Company's fiscal year 2001. This standard is described in
Note 1.
Results of Operations - 1998 Compared to 1997
Tissue - North America
The Tissue - North America business reported both improved sales and income from
operations during 1998. Sales increased $120.1 million or 3% over prior year
sales. Income from operations increased $81.4 million, or 10%, to $872.1
million. Segment operating margins increased to 24.0% in 1998 versus 22.5% 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 negatively
affected the business. Year over year, both sales and operating margins were
essentially unchanged reflecting flat volumes and prices.
32 Fort James Corporation
<PAGE>
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 $1,869.4 million. 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 roll, 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.
Prices were 1% lower in 1998 than in 1997 due to competitive conditions.
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 volume growth, slightly offset by
other cost inflation.
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 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%.
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 from $320.5 million in 1997, to $264.8 million in
1998 due to lower average borrowing costs and reduced debt levels. 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 $5.4 million in 1998 compared to other
income of $18.7 million in 1997. The decrease was primarily due to lower
earnings of unconsolidated subsidiaries and interest and investment income and
to increased foreign currency translation losses.
The Company's effective income tax rate, excluding the tax effects of
restructure and other items, was 36.3% in 1998 compared to 39.0% in 1997. The
decrease in the effective tax rate from the prior year was primarily the result
of the benefits of tax planning actions. The Company's reported effective tax
rate was 34.5% in 1998 compared to 62.4% in 1997. The reported effective tax
rates were affected by non-deductible merger costs in 1997 and the reversal in
1998 of merger-related tax reserves which were established in 1997.
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 affecting 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; 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.
Fort James Corporation 33
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
For the years ended
- ---------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 6,827.4 $ 6,802.6 $ 6,703.0
Cost of goods sold (4,724.5) (4,547.4) (4,630.6)
Selling and administrative expenses (1,244.5) (1,143.0) (1,089.1)
Restructure and other items (142.6) (91.1) (429.0)
- ---------------------------------------------------------------------------------------------------------------------------------
Income from operations 715.8 1,021.1 554.3
Interest expense (239.4) (264.8) (320.5)
Other income (expense), net 27.9 (5.4) 18.7
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes, extraordinary items,
and cumulative effect of a change in accounting principle 504.3 750.9 252.5
Income tax expense (154.7) (259.1) (157.5)
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle 349.6 491.8 95.0
Income (loss) from discontinued operations, net of taxes (6.4) 8.4 9.5
- ---------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items and cumulative effect
of a change in accounting principle 343.2 500.2 104.5
Extraordinary loss on early extinguishment of debt, net of taxes (39.8) (2.6) (131.5)
Extraordinary gain on sale of discontinued operations, net of taxes 235.2 - -
Cumulative effect of a change in accounting principle, net of taxes (22.1) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 516.5 497.6 (27.0)
Preferred dividend requirements - (4.4) (43.4)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $ 516.5 $ 493.2 $ (70.4)
- ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 1.60 $ 2.25 $ 0.26
Income (loss) from discontinued operations, net of taxes (0.03) 0.04 0.05
Extraordinary loss on early extinguishment of debt, net of taxes (0.18) (0.01) (0.67)
Extraordinary gain on sale of discontinued operations, net of taxes 1.07 - -
Cumulative effect of a change in accounting principle, net of taxes (0.10) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.36 $ 2.28 $ (0.36)
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 218.5 216.1 195.5
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 1.59 $ 2.23 $ 0.30
Income (loss) from discontinued operations, net of taxes (0.03) 0.04 0.05
Extraordinary loss on early extinguishment of debt, net of taxes (0.18) (0.01) (0.63)
Extraordinary gain on sale of discontinued operations, net of taxes 1.07 - -
Cumulative effect of a change in accounting principle, net of taxes (0.10) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.35 $ 2.26 $ (0.28)
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and common share equivalents outstanding 219.4 217.9 207.6
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share $ 0.60 $ 0.60 $ 0.60
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34 Fort James Corporation
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
As of
- -----------------------------------------------------------------------------------------------------------
(In millions) Dec. 26, 1999 Dec. 27, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10.3 $ 5.3
Accounts receivable 880.5 857.5
Inventories 790.4 806.5
Deferred income taxes 111.5 162.7
Prepaid expenses and other current assets 35.7 24.3
- -----------------------------------------------------------------------------------------------------------
Total current assets 1,828.4 1,856.3
- -----------------------------------------------------------------------------------------------------------
Property, plant and equipment 7,858.0 7,544.4
Accumulated depreciation (3,505.9) (3,225.4)
- -----------------------------------------------------------------------------------------------------------
Net property, plant and equipment 4,352.1 4,319.0
Goodwill, net 528.8 614.9
Net assets of discontinued operations - 403.4
Other assets 548.9 526.7
- -----------------------------------------------------------------------------------------------------------
Total assets $ 7,258.2 $ 7,720.3
- -----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 619.1 $ 679.2
Accrued liabilities 568.7 636.9
Current portion of long-term debt 81.9 240.0
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 1,269.7 1,556.1
- -----------------------------------------------------------------------------------------------------------
Long-term debt 3,432.0 3,646.4
Deferred income taxes 748.6 756.5
Accrued postretirement benefits other than pensions 417.1 446.8
Other long-term liabilities 263.5 263.1
- -----------------------------------------------------------------------------------------------------------
Total liabilities 6,130.9 6,668.9
- -----------------------------------------------------------------------------------------------------------
Common stock, $0.10 par value, 500.0 million shares authorized;
shares outstanding, 1999-214.0 million and 1998-220.5 million 21.4 22.1
Additional paid-in capital 3,045.0 3,215.6
Accumulated comprehensive loss (227.1) (88.8)
Accumulated deficit (1,712.0) (2,097.5)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,127.3 1,051.4
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 7,258.2 $ 7,720.3
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Fort James Corporation 35
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
For the years ended
- --------------------------------------------------------------------------------------------------------------------------
(In millions) Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided by (Used for) Operating Activities
Net income (loss) $ 516.5 $ 497.6 $ (27.0)
Depreciation expense 445.0 428.3 434.2
Amortization of goodwill 18.4 19.2 19.6
Deferred income tax provision (benefit) 4.9 148.1 (39.3)
Restructure and other items 142.6 24.9 341.2
(Income) loss from discontinued operations, net of taxes 6.4 (8.4) (9.5)
Gain on sale of discontinued operations, net of taxes (235.2) - -
Loss on early extinguishment of debt, net of taxes 39.8 2.6 131.5
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 (93.8) (92.7) (87.4)
Inventories (11.9) (26.4) (72.0)
Other current assets (10.7) (1.8) 23.6
Accounts payable and accrued liabilities (130.2) (75.8) 104.6
Foreign currency hedge - - (31.5)
Other, net (39.4) (45.3) (18.8)
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 674.5 870.3 769.2
- --------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for) Investing Activities
Expenditures for property, plant and equipment (533.8) (492.8) (447.8)
Cash paid for acquisitions, net (110.3) - -
(Increase) decrease in net assets of discontinued operations (34.4) 3.9 (30.3)
Proceeds from sale of discontinued operations 836.3 - -
Proceeds from sale of assets - 5.9 190.1
Other, net 14.9 (4.5) 2.4
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities 172.7 (487.5) (285.6)
- --------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for) Financing Activities
Additions to long-term debt 356.7 466.3 815.4
Payments of long-term debt (590.6) (108.4) (2,378.4)
Net increase (decrease) in revolving debt (236.5) (659.5) 1,385.5
Premiums paid on early extinguishment of debt and debt issuance costs (67.2) (5.6) (169.4)
Redemption of preferred stock - (6.6) (98.1)
Common and preferred stock dividends paid (131.8) (139.5) (121.6)
Proceeds from exercise of stock options 15.9 30.4 82.0
Common stock purchases (199.7) - -
Other, net 11.0 11.8 -
- --------------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (842.2) (411.1) (484.6)
- --------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 5.0 (28.3) (1.0)
Cash and Cash Equivalents, Beginning of Year 5.3 33.6 34.6
- --------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 10.3 $ 5.3 $ 33.6
- --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
36 Fort James Corporation
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Preferred Common Paid-in Comprehensive Accumulated Shareholders'
(In millions) Stock Stock Capital Income (Loss) Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 29, 1996 $ 738.4 $18.9 $2,407.0 $ (12.1) $(2,300.7) $ 851.5
Conversion of preferred stock (287.6) 1.5 286.1 - - -
Redemption of preferred stock (98.1) - - - - (98.1)
Exercise of stock options and awards - 0.4 103.7 - - 104.1
Other - 0.1 11.1 - - 11.2
Comprehensive income (loss):
Net loss - - - - (27.0) (27.0)
Minimum pension liability adjustment
(net of tax benefit of $1.9) - - - 3.0 - 3.0
Foreign currency translation adjustments - - - (142.4) - (142.4)
Unrealized gains on available-for-sale
securities (net of tax benefit of $8.9) - - - 13.9 - 13.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss - - - - - (152.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash dividends declared - - - - (88.5) (88.5)
Preferred stock cash dividends declared - - - - (43.4) (43.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 1997 352.7 20.9 2,807.9 (137.6) (2,459.6) 584.3
Conversion of preferred stock (350.9) 1.0 349.9 - - -
Redemption of preferred stock (1.8) - - - - (1.8)
Exercise of stock options and awards - 0.2 53.3 - - 53.5
Other - - 4.5 - - 4.5
Comprehensive income (loss):
Net income - - - - 497.6 497.6
Minimum pension liability adjustment
(net of tax benefit of $0.7) - - - 1.2 - 1.2
Foreign currency translation adjustments - - - 59.8 - 59.8
Unrealized losses on available-for-sale
securities (net of tax benefit of $7.8) - - - (12.2) - (12.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - 546.4
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash dividends declared - - - - (131.1) (131.1)
Preferred stock cash dividends declared - - - - (4.4) (4.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 27, 1998 - 22.1 3,215.6 (88.8) (2,097.5) 1.051.4
Exercise of stock options and awards - - 24.3 - - 24.3
Common stock purchases - (0.7) (199.0) - - (199.7)
Other - - 4.1 - - 4.1
Comprehensive income (loss):
Net income - - - - 516.5 516.5
Minimum pension liability adjustment
(net of tax benefit of $0.2) - - - 0.3 - 0.3
Foreign currency translation adjustments - - - (138.6) - (138.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - 378.2
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash dividends declared - - - - (131.0) (131.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 26, 1999 $ - $21.4 $3,045.0 $(227.1) $(1,712.0) $1,127.3
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- --------------------------------------------------------------------------------
Fort James Corporation 37
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements present the operating results and
financial position of Fort James Corporation ("Fort James" or the "Company") 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, amortization
of goodwill, and foreign currency translation adjustments, as applicable, since
acquisition. As a result of the sale of a discontinued operation, information
for prior periods has been restated.
Fiscal Year
Fort James' fiscal year includes the 52 or 53 weeks ending on the last Sunday in
December. The years ended December 26, 1999, December 27, 1998 and December 28,
1997 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 herein. 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, generally 5 to 25 years for machinery and
equipment, and 4 to 7 years for computer software developed or obtained for
internal use. 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.
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 $147.7 million as of December 26, 1999 and $143.2 million as of
December 27, 1998. 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 evaluated periodically 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.
Revenue Recognition
Sales revenue is recognized at the time of product shipment to unaffiliated
customers and appropriate provision is made for uncollectible accounts.
38 Forth James Corporation
<PAGE>
Interest Costs
Interest expense not identified with an operating segment has been allocated to
discontinued operations based on the ratio of net assets of discontinued
operations to consolidated net assets.The Company capitalizes interest costs as
part of the cost of constructing certain facilities and equipment.
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Total interest expense $260.7 $298.4 $362.8
Interest expense allocated to
discontinued operations (13.3) (24.4) (31.7)
Interest capitalized (8.0) (9.2) (10.6)
- --------------------------------------------------------------------------------
Net interest expense $239.4 $264.8 $320.5
- --------------------------------------------------------------------------------
Interest paid $267.7 $306.6 $379.2
- --------------------------------------------------------------------------------
Other Operating Expenses
Research and development expenditures are expensed as incurred. Direct and
readily identifiable indirect research and development costs totaled $43.3
million in 1999, $37.6 million in 1998, and $38.0 million in 1997. Advertising
and other promotional expenses are expensed as incurred and totaled $73.3
million in 1999, $81.4 million in 1998, and $102.6 million in 1997.
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 in which they arise.
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. Gains and losses from
foreign exchange contracts which hedge a net investment in a foreign subsidiary
are 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 when the underlying transaction is
recognized.
Earnings Per Common Share and Common Share Equivalent
Income and share information used in determining earnings per share were
calculated as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions) Income Shares Income Shares Income Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $349.6 $491.8 $ 95.0
Preferred stock dividends - (4.4) (43.4)
- ----------------------------------------------------------------------------------------------------------------------------------
Amounts used to compute basic earnings per share 349.6 218.5 487.4 216.1 51.6 195.5
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Options* - 0.9 - 1.8 - 2.5
Convertible preferred stock* - - - - 12.9 9.6
- ----------------------------------------------------------------------------------------------------------------------------------
Amounts used to compute diluted earnings per share $349.6 219.4 $487.4 217.9 $ 64.5 207.6
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Series K, L and N preferred stocks, which were redeemed in the second quarter
1998, were antidilutive for 1998 and 1997. Outstanding options to purchase 6.0
million shares of common stock for which the exercise price of the option was
greater than the average market price of the common shares were also excluded
from the computation of diluted earnings per share.
Fort James Corporation 39
<PAGE>
Notes to Consolidated Financial Statements
Accounting Pronouncements
In the first quarter of 1999, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," which requires that start-up
and organization costs be expensed as incurred. The change in accounting policy
has been applied to unamortized start-up costs capitalized in prior years. As a
result, a charge of $34.1 million ($22.1 million after taxes, or $0.10 per
diluted share) was recorded as a cumulative effect of a change in accounting
principle.
In 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). This statement requires the
recognition of all derivatives on the balance sheet as either assets or
liabilities and their measurement at fair value. Depending upon the nature of
the derivative, changes in fair value are either recognized in other
comprehensive income or in earnings. FASB Statement No. 137 defers the Company's
required adoption of FAS 133 until fiscal 2001. The Company has not determined
what effect, if any, FAS 133 will have on its results of operations or financial
position.
Reclassifications
Certain amounts in the consolidated financial statements and supporting
footnotes have been reclassified to conform to the current year's
classification.
2. Acquisitions, Dispositions and Other Transactions
In December 1999, Fort James signed an agreement to sell its shares of Fort
James - Marathon, LTD ("Marathon"), a non-integrated pulp mill, to a joint
venture between Tembec Inc. and Kruger Inc. for $69.1 million. This sale closed
on January 31, 2000. In December 1999, the Company also announced its decision
to exit the groundwood paper business ("the Groundwood Business") by closing its
groundwood paper operations at the Wauna mill in Clatskanie, Oregon. The closing
of the Groundwood Business will result in the termination of approximately 70
employees and was completed in the first quarter of 2000. The operations of the
Groundwood Business include a whole log chipping operation, a groundwood pulp
mill and a single paper machine. A charge of $157.1 million was recorded for
asset impairment write-downs and other costs associated with these transactions.
At December 26, 1999, the assets of Marathon and the Groundwood Business have
been classified as Other Assets.
Net sales and income (loss) from operations of Marathon and the Groundwood
Business for the years ended December 26, 1999, December 27, 1998, and December
28, 1997 is as follows:
- -------------------------------------------------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Net sales $167.6 $169.3 $173.1
Income (loss) from operations $ (0.2) $ 7.5 $ (2.4)
- -------------------------------------------------------------------------------
In December 1999, Fort James purchased its partner's 50% interest in the
Naheola Cogeneration Limited Partnership ("the Naheola Partnership") for $53.6
million. The Naheola Partnership provided energy to the Company's Naheola,
Alabama mill. The Company recognized an interest rate swap termination loss of
$11.3 million related to the refinancing of $141 million of higher-cost Naheola
Partnership debt on more favorable terms. The acquisition of the equity interest
was recorded as a purchase. The Naheola Partnership was previously accounted for
under the equity method.
In August 1999, the Company sold its Packaging business to ACX Technologies,
Inc. for $836.3 million in cash. The Company recognized an extraordinary gain of
$386.3 million ($235.2 million after taxes, or $1.07 per diluted share) as a
result of this sale. The sale included the operations, assets and liabilities of
the Company's folding carton, healthcare, and microwave packaging manufacturing
facilities.
40 Forth James Corporation
<PAGE>
Results for the Packaging business through August 1, 1999 and for the years
ended December 27, 1998 and December 28, 1997 were as follows:
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Net sales $330.5 $498.5 $556.0
- -------------------------------------------------------------------------------
Income (loss) from
discontinued operations $ (9.1) $ 15.1 $ 17.2
Tax benefit (expense) 2.7 (6.7) (7.7)
- -------------------------------------------------------------------------------
Income (loss) from discontinued
operations, net of taxes $ (6.4) $ 8.4 $ 9.5
- -------------------------------------------------------------------------------
In July 1999, the Company completed the acquisition of Demak'Up for $56.7
million. Demak'Up produces the leading European brand of make-up removal cotton
pads. The operations include a cotton product manufacturing plant in Brionne,
France. The acquisition was accounted for as a purchase.
In August 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 was accounted for as a pooling of
interests. Accordingly, the Company's consolidated financial statements were
restated for all periods prior to the business combination to include the
combined financial results of 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.
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) 1999 1998 1997
- -------------------------------------------------------------------------------
Acquisitions of consolidated entities:
Fair value of assets acquired $247.4 $ - $ -
Liabilities assumed or created 137.1 - -
- -------------------------------------------------------------------------------
Cash paid for acquisitions, net $110.3 $ - $ -
- -------------------------------------------------------------------------------
Cash received from sale of assets $836.3 $ 5.9 $190.1
- -------------------------------------------------------------------------------
3. Restructure and Other Items
In 1999, Fort James recorded net non-recurring pre-tax charges of $142.6
million. These charges included costs associated with the sale of Marathon and
exiting the Groundwood Business and $30.0 million for a permanent impairment
write-down of a non-operating asset, partially offset by a credit of $44.5
million for the net reversal of merger-related restructure accruals.
See Note 2 for additional information on Marathon and the Groundwood Business.
In 1998, the Company recorded net non-recurring pre-tax charges for
restructure and other costs of $91.1 million. Included in this total were $102.6
million for merger-related costs not accruable in 1997; $26.2 million for a
permanent impairment write-down of a non-operating asset; $15.1 million for
asset write-downs and plant closures; and $6.4 million for other net
miscellaneous costs. These costs were partially offset by a net reversal of
$59.2 million of restructure accruals due to revisions of estimates or
settlement of such liabilities on terms more favorable than anticipated.
In 1997, the Company recorded net non-recurring pre-tax charges for
restructure and other costs of $429.0 million. These charges included amounts
for facility closures and write-downs of redundant property, plant and equipment
of $215.6 million; employee severance and other employee-related costs of $97.0
million; costs of terminating contracts and other long-term agreements of $82.8
million; investment banking, legal, accounting and other transaction costs of
$54.0 million; and other costs of $49.2 million. These charges were partially
offset by a gain on the sale of timberlands of $69.6 million.
Fort James Corporation 41
<PAGE>
Notes to Consolidated Financial Statements
Restructure reserve activity for the year ended December 26, 1999 is
summarized below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Estimate Cash
(in millions) 1998 Revisions Payments Reclassifications 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Facility closures and other associated costs $19.8 $ 3.1 $ (15.2) $ (7.7) $ -
Severance and other employee-related costs 46.9 (16.4) (26.7) (3.8) -
Cost of terminating contracts and other long-term agreements 5.2 2.9 (2.5) (5.6) -
- ------------------------------------------------------------------------------------------------------------------------------------
Restructure reserve $71.9 $(10.4) $(44.4) $(17.1) $ -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1998, the Company closed five facilities in North America and Europe as
part of merger integration and restructure initiatives. In addition, staffing
was reduced by 1,300 employees, or approximately 5%, of the Company's combined
workforce. The Company's corporate headquarters and the European and Packaging
business headquarters were also relocated. Costs associated with the relocation
efforts were expensed as incurred.
During 1999, the Company concluded the merger integration initiatives by
closing four facilities in North America and Europe. These closures reduced
staffing by approximately 600 employees. In addition, the Company settled
certain merger-related restructure liabilities on terms more favorable than
anticipated and cancelled the remaining European facility closures due to
extended regulatory review and competitive actions in the marketplace. As a
result, the related restructure accruals were reversed. The Company continues to
review various strategic options related to these facilities. Remaining accruals
related to completed facility closures and contract terminations, for which cash
settlement will occur beyond one year, have been reclassified to long-term
liabilities.
4. Other Income (Expense)
- -------------------------------------------------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Equity in earnings of
unconsolidated affiliates $ 6.5 $ - $ 7.4
Interest and investment income 1.1 2.1 8.6
Gain on sale of assets 2.5 2.8 9.6
Minority interest (10.5) (4.0) (2.6)
Foreign currency exchange
gains (losses) 15.2 (11.6) (4.8)
Interest on income tax refunds 9.9 - -
Other, net 3.2 5.3 0.5
- -------------------------------------------------------------------------------
Total other income (expense) $ 27.9 $ (5.4) $ 18.7
- -------------------------------------------------------------------------------
5. Income Taxes
Income tax expense, and the related disclosures, exclude the tax effects of the
results of discontinued operations, extraordinary losses on early extinguishment
of debt, an extraordinary gain on the sale of discontinued operations, and the
cumulative effect of a change in accounting principle. These items are all
reported net of applicable income tax effects.
The components of pretax income were as follows:
- -------------------------------------------------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Domestic $267.1 $573.3 $175.7
Foreign 237.2 177.6 76.8
- -------------------------------------------------------------------------------
Pretax income $504.3 $750.9 $252.5
- -------------------------------------------------------------------------------
Income tax expense consisted of the following:
- --------------------------------------------------------------------------------
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Current:
Federal $ 93.5 $ 42.7 $127.3
State 13.5 14.8 27.5
Foreign 42.8 53.5 42.0
- --------------------------------------------------------------------------------
Total current income
tax provision 149.8 111.0 196.8
- --------------------------------------------------------------------------------
Deferred:
Federal (17.1) 124.4 (18.2)
State (0.1) 14.5 (14.7)
Foreign 22.1 9.2 (6.4)
- --------------------------------------------------------------------------------
Total deferred income
tax provision (benefit) 4.9 148.1 (39.3)
- --------------------------------------------------------------------------------
Income tax expense $154.7 $259.1 $157.5
- --------------------------------------------------------------------------------
42 Forth James Corporation
<PAGE>
During 1999, 1998 and 1997, tax benefits credited to shareholders' equity,
which primarily related to the redemption of stock options, were $3.4 million,
$22.1 million and $35.1 million, respectively. Cash payments for income taxes
totaled $155.0 million in 1999, $95.0 million in 1998 and $125.9 million in
1997. No provision for income taxes has been made for $328.9 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.
The difference between the federal statutory income tax rate and the
Company's effective income tax rate relates to the following:
- --------------------------------------------------------------------------------
Percent of Pretax Income
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax effect 1.9 2.6 3.3
Restructured operations - (1.8) 9.9
Nondeductible transaction expenses - - 5.2
Foreign tax rate differentials
and other items (3.0) (0.5) 3.3
Goodwill 1.7 0.9 4.5
Dispositions (3.9) - -
Other items, net (1.0) (1.7) 1.2
- --------------------------------------------------------------------------------
Effective income tax rate 30.7% 34.5% 62.4%
- --------------------------------------------------------------------------------
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. The Internal Revenue Service is currently
reviewing Fort James' federal income tax returns for the years 1991 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 deferred
tax assets and liabilities as of December 26, 1999 and December 27, 1998, were
related to the following:
- --------------------------------------------------------------------------------
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Property, plant and equipment $ 812.7 $ 915.3
Pension benefits 93.2 95.5
Other items 181.2 92.8
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,087.1 1,103.6
- --------------------------------------------------------------------------------
Accrued liabilities (138.6) (212.1)
Postretirement benefits
other than pensions (166.3) (181.2)
Alternative minimum tax
credit carryovers - (27.7)
Intangibles (18.4) (22.7)
Tax loss carryovers (18.4) (26.2)
Asset impairments (60.2) -
Other items (60.2) (60.4)
- --------------------------------------------------------------------------------
Total deferred tax assets (462.1) (530.3)
- --------------------------------------------------------------------------------
Valuation allowance 12.1 20.5
- --------------------------------------------------------------------------------
Net deferred tax liability $ 637.1 $ 593.8
- --------------------------------------------------------------------------------
The change in the valuation allowance from December 27, 1998 to December
26, 1999 is primarily related to loss carryovers which may not be utilized in
the future. As of December 26, 1999, the Company had $48.0 million of foreign
net operating loss carryovers that expire primarily from 2000 through 2005, and
$1.0 million of foreign tax credit carryovers that expire from 2000 through
2003.
6. 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.
Fort James Corporation 43
<PAGE>
Notes to Consolidated Financial Statements
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 assets / (liabilities) for pension and other postretirement benefits at
December 26, 1999 and December 27, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
- --------------------------------------------------------------------------------------------------------------------------------
(in millions) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation, beginning of year $1,551.1 $1,435.6 $ 386.5 $ 364.4
Service cost 35.9 22.0 5.5 5.6
Interest cost 101.1 99.3 23.4 23.2
Participant contributions 3.4 2.2 4.0 2.9
Amendments 27.6 (6.3) (8.6) -
Actuarial (gain)/loss (72.7) 89.1 (28.2) 20.6
Foreign currency exchange rate changes (4.2) 6.7 (0.1) -
Acquisitions/divestitures/transfers (32.5) - - -
Curtailments (1.4) (1.9) (0.7) (2.9)
Special termination benefits 0.5 4.7 0.2 1.2
Benefits paid (107.1) (100.3) (33.0) (28.5)
- --------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $1,501.7 $1,551.1 $ 349.0 $ 386.5
- --------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets, beginning of year $1,809.3 $1,802.6 $ - $ -
Actual return on plan assets 282.4 86.0 - -
Employer contributions 6.8 12.5 29.0 25.6
Participant contributions 3.1 2.2 4.0 2.9
Foreign currency exchange rate changes (3.5) 6.3 - -
Acquisitions/divestitures/transfers (39.6) - - -
Benefits paid (107.1) (100.3) (33.0) (28.5)
- --------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, end of year $1,951.4 $1,809.3 $ - $ -
- --------------------------------------------------------------------------------------------------------------------------------
Funded status
Funded status at end of year $ 449.7 $ 258.2 $(349.0) $(386.5)
Unrecognized net transition (asset) liability (12.2) (15.9) 2.1 2.3
Unrecognized prior service cost (gain) 49.2 43.5 (53.9) (62.9)
Unrecognized net actuarial gain (237.1) (38.9) (43.3) (25.4)
- --------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 249.6 $ 246.9 $(444.1) $(472.5)
- --------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost $ 249.6 $ 246.9 $ - $ -
Accrued benefit liability (7.5) (9.2) (444.1) (472.5)
Intangible asset 6.4 7.6 - -
Deferred tax liability 0.5 0.7 - -
Accumulated other comprehensive loss 0.6 0.9 - -
- --------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 249.6 $ 246.9 $(444.1) $(472.5)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 1999 and 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 $8.6 million, $5.0 million, and $0.2
million, respectively, as of December 26, 1999, and $6.0 million, $3.4 million
and $0.2 million, respectively, as of December 27, 1998.
44 Fort James Corporation
<PAGE>
Benefit obligations were determined using the following weighted-average
assumptions:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
U.S. Foreign U.S. Foreign
plans plans plans plans
- --------------------------------------------------------------------------------
Pension benefits:
Discount rate 7.50% 5.75% 6.75% 5.75%
Expected return
on plan assets 10.00% 7.25% 10.00% 7.25%
Rate of compen-
sation increase 4.50% 4.00% 4.50% 4.00%
- --------------------------------------------------------------------------------
Other postretirement
benefits:
Discount rate 7.50% 5.75% 6.75% 5.75%
- --------------------------------------------------------------------------------
The Company utilizes an accelerated method for amortizing unrecognized
actuarial gains and losses for other postretirement benefits.
During 1998, the Company incurred termination benefit costs as part of
enhanced benefit programs offered to certain employees. Charges of $5.5 million
were recorded in restructure and other items for the year ended December 27,
1998.
The components of net periodic benefit costs recognized in the Consolidated
Statements of Operations were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
- ---------------------------------------------------------------------------------------------------------------------------------
(in millions) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 35.9 $ 22.0 $ 14.9 $ 5.5 $ 5.6 $ 5.7
Interest cost 101.1 99.3 86.1 23.4 23.2 24.7
Expected return on plan assets (158.6) (143.6) (116.2) - - -
Amortization of:
Transition (asset) liability (3.0) (3.2) (2.1) 0.2 0.2 0.2
Prior service cost (gain) 4.9 5.9 5.9 (6.7) (6.5) (6.5)
Actuarial loss (gain) 0.4 0.8 1.0 (3.2) (6.3) (2.1)
Curtailment charge (credit) (0.5) (1.7) 3.8 - 0.6 (11.4)
Contributions to multiemployer pension plans 5.0 4.6 4.4 - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit (income)/expense $ (14.8) $ (15.9) $ (2.2) $ 19.2 $ 16.8 $ 10.6
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of determining the obligation for postretirement medical
benefits, the Company has assumed a health care cost trend rate of 7.25% for
1999, decreasing ratably to 4.5% in 2002 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 $ 3.8 $ (3.8)
Effect on accumulated
postretirement benefit obligation 30.3 (26.3)
- --------------------------------------------------------------------------------
Fort James Corporation 45
<PAGE>
Notes to Consolidated Financial Statements
7. Balance Sheet Information
Inventories
- --------------------------------------------------------------------------------
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Raw materials $178.3 $164.2
Finished goods and work in process 464.8 510.9
Stores and supplies 165.4 163.2
- --------------------------------------------------------------------------------
808.5 838.3
Subtraction to state certain inventories
at last-in, first-out cost (18.1) (31.8)
- --------------------------------------------------------------------------------
Total inventories $790.4 $806.5
- --------------------------------------------------------------------------------
Valued at lower of cost or market:
Last-in, first-out $467.2 $482.3
First-in, first-out or average 323.2 324.2
- --------------------------------------------------------------------------------
Total inventories $790.4 $806.5
- --------------------------------------------------------------------------------
Property, Plant and Equipment
- --------------------------------------------------------------------------------
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Land and improvements $ 181.1 $ 196.9
Buildings 993.7 1,029.2
Machinery and equipment 6,181.1 6,001.9
Software 119.5 56.3
Construction in progress 371.3 245.7
- --------------------------------------------------------------------------------
7,846.7 7,530.0
Accumulated depreciation (3,505.9) (3,225.4)
- --------------------------------------------------------------------------------
4,340.8 4,304.6
Timber and timberlands, net 11.3 14.4
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 4,352.1 $ 4,319.0
- --------------------------------------------------------------------------------
Accumulated software amortization for December 26, 1999 and December 27, 1998
was $45.1 million and $34.3 million, respectively.
Accrued Liabilities
- --------------------------------------------------------------------------------
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Restructure reserve $ - $ 71.9
Taxes payable, other than income taxes 59.0 69.2
Interest payable 49.5 56.3
Compensation expense 158.9 201.9
Other items 301.3 237.6
- --------------------------------------------------------------------------------
Total accrued liabilities $568.7 $636.9
- --------------------------------------------------------------------------------
During 1999, the Company recorded a charge of $25.0 million for the cost of
termination benefits for a reduction-in-force program to reduce headcount by
approximately 1,300 employees. As of December 26, 1999, termination benefits of
$12.5 million have been paid and more than 1,100 employees have been terminated.
Accumulated Other Comprehensive Loss
- --------------------------------------------------------------------------------
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Minimum pension liability adjustment $ (0.6) $ (0.9)
Foreign currency translation adjustments (226.5) (87.9)
- --------------------------------------------------------------------------------
Accumulated comprehensive loss $(227.1) $(88.8)
- --------------------------------------------------------------------------------
8. 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 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.
In 1997, the Series O 8 1/4% Cumulative Preferred Stock was redeemed for
$98.1 million and the Series P 9% Cumulative Convertible Preferred Stock was
converted to 15.3 million shares of common stock in a non-cash financing
transaction of $287.5 million.
As of December 26, 1999, the Company has reserved 250,000 preferred shares
for the issuance of Series M preferred stock under the Shareholder Rights Plan.
46 Fort James Corporation
<PAGE>
9. Indebtedness
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted
Average
(in millions) Interest Rate Maturities 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial paper and other short-term borrowings classified as long-term 5.7% 2000 $ 573.2 $ 158.3
Revolving credit facilities 6.9 2002-2007 389.5 886.5
Senior notes 7.1 2000-2023 1,704.9 2,201.8
Euro denominated bonds 4.8 2004 302.9 -
Revenue bonds 6.5 2000-2028 204.1 187.3
Capital lease obligations 10.2 2000-2017 151.0 171.4
Subordinated notes 9.0 2006 - 58.8
Other 188.3 222.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total 3,513.9 3,886.4
Less current portion 81.9 240.0
- ---------------------------------------------------------------------------------------------------------------------------------
Long-term debt $3,432.0 $3,646.4
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Minimum Principal Payments
Minimum principal payments on long-term debt, excluding revolving credit
agreement borrowings, commercial paper and other short-term borrowings
classified as long-term, for the next five years are as follows:
- --------------------------------------------------------------------------------
(in millions) 2000 2001 2002 2003 2004
- --------------------------------------------------------------------------------
Scheduled maturities $81.9 $526.0 $192.1 $301.6 $714.6
- --------------------------------------------------------------------------------
If the current level of commercial paper, credit agreements and revolving
credit agreements remains outstanding until the expiration of the underlying or
supporting agreements, additional payments of $955.5 million in 2002 and $2.8
million in 2007 would be required. It is the Company's intention to refinance or
renew such agreements prior to their expiration.
Revolving Credit Facilities
As of December 26, 1999, Fort James had committed revolving credit agreements
with various domestic and foreign banks providing for unsecured borrowings of up
to $1.9 billion. These facilities allow the Company to borrow at competitive
interest rates for general corporate purposes. At December 26, 1999, the Company
had unused credit facilities amounting to $0.9 billion, net of commercial paper
borrowings. Commitment fees relating to credit facilities are not material.
Commercial Paper and Credit Agreements
As of December 26, 1999, the Company had a domestic program providing for
commercial paper issuances of up to $1 billion. In addition, the Company and its
consolidated subsidiaries had agreements with several banks providing for other
borrowings, dependent on bank availability. These obligations generally bear
interest at competitive market rates.
Restrictive Agreements
The Company's long-term debt agreements include various restrictive covenants
and require maintenance of certain defined financial ratios with which the
Company is in compliance.
Debt Refinancing
During 1999, the Company refinanced $169.3 million of 9.25% senior notes, $64.0
million of 8.38% senior notes, $62.0 million of 7.75% senior notes and $58.8
million of 9% senior subordinated notes prior to their scheduled maturities. As
a result of these transactions, the Company recognized extraordinary losses of
$65.2 million ($39.8 million after taxes, or $0.18 per diluted share) on the
early extinguishment of debt.
Fort James Corporation 47
<PAGE>
Notes to Consolidated Financial Statements
10. 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 underlying exposure being hedged, fluctuations in the value
of the instruments are generally offset by changes in the value of the
underlying exposures. Fort James 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.
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.
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.
Foreign Currency Management
Most of Fort James' foreign currency exposures are managed on a consolidated
basis to take advantage of any natural offsets. The Company enters into forward
exchange contracts 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 26, 1999, and
December 27, 1998, the Company had net unrealized gains of $0.3 million and $0.1
million, respectively, on a notional amount of $20.0 million for these
instruments.
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 26, 1999. Variable rates are predominantly linked to the London
Interbank Offering Rate (LIBOR). 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 estimates of fair values of the Company's financial instruments related
to indebtedness are based on quoted market prices of comparable instruments or
on current rates available to the Company for financial instruments with similar
terms and remaining maturities. Based on the Company's total indebtedness at
December 26, 1999, a 100 basis point interest rate change would impact the fair
value of the total debt portfolio by approximately $70 million. This exposure
would be offset by a change of $3 million in 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 0.3% and 0.4%, respectively,
for the years ended December 26, 1999, and December 27, 1998.
The fair value of the Company's financial instruments related to its
indebtedness were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Value Carrying Value
or Gross Notional Fair Value: or Gross Notional Fair Value:
(in millions) Amount 1 Asset (Liability) Amount 1 Asset (Liability)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt, including current maturities $3,514 $ (3,462) $3,886 $ (3,975)
Interest rate swaps 300 (2) 940 -
Interest rate caps - - 500 -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Long-term debt amount is carrying value; interest rate swap and cap amounts
are notional amounts.
48 Fort James Corporation
<PAGE>
11. Common Stock
Fort James has 500 million authorized shares of common stock, $0.10 par value
("Common Stock"), of which 213,977,078 shares were outstanding as of December
26, 1999. Common shares reserved for issuance as of December 26, 1999, were as
follows:
- --------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------
Stock option plans 5,334,236
Incentive stock plan 9,719,597
Director stock ownership plan 95,167
- --------------------------------------------------------------------------------
Total common shares reserved for issuance 15,149,000
- --------------------------------------------------------------------------------
Changes in common shares outstanding are as follows:
- --------------------------------------------------------------------------------
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Beginning of year 220.5 209.3 188.5
Conversion of preferred stock - 9.5 15.3
Exercise of stock options and
grants of restricted stock 0.6 1.7 5.5
Purchased (7.1) - -
- --------------------------------------------------------------------------------
End of year 214.0 220.5 209.3
- --------------------------------------------------------------------------------
During 1999, the Company began a $500 million stock purchase program. As of
December 26, 1999, the Company had purchased 7.1 million common shares at a
total cost of $199.7 million.
Shareholder Rights Plan
On February 18, 1999, the Company's Board of Directors adopted a shareholder
rights plan which replaced a similar plan that expired on March 1, 1999. Under
the plan, preferred stock purchase rights relating to the Company's Series M
Cumulative Participating Preferred Stock ("Rights") are issued at the rate of
one Right for each share of Common Stock. The Rights will only be exercisable if
a person or group acquires, announces an intent to acquire, or has commenced a
tender or exchange offer for, 15% or more of the outstanding Common Stock and
the Rights have not been redeemed by the Board of Directors.
If a person or group acquires 15% or more of the Company's outstanding Common
Stock, each holder of a Right, other than the acquiring person, will be entitled
to purchase Common Stock having a market value equal to twice the exercise price
of the Right (currently $200 per Right, subject to adjustment). In addition, if
the Company is acquired in a merger or other business combination, or if 50% or
more of the Company's consolidated assets or earning power are sold, after a
person or group has become an acquiring person, each holder of a Right, other
than the acquiring person, will be entitled to purchase common stock of the
acquiring company having a market value equal to twice the exercise price of the
Right. The Rights are nonvoting, pay no dividends, expire on March 1, 2009, and
may be redeemed by the Company for $0.01 per Right at any time prior to the time
any person becomes an acquiring person. The Rights have no effect on earnings
per share until they become exercisable.
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) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $516.5 $497.6 $(27.0) $497.8 $484.3 $(37.4)
Earnings per share - basic $ 2.36 $ 2.28 $(0.36) $ 2.28 $ 2.22 $(0.41)
Earnings per share - diluted $ 2.35 $ 2.26 $(0.28) $ 2.27 $ 2.20 $(0.33)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Fort James Corporation 49
<PAGE>
Notes to Consolidated Financial Statements
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, have terms of ten years and vest in two equal annual
installments. As of December 26, 1999, there were 998 employees and directors
holding options.
Stock option activity was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted
Average Average Average
Exercise Exercise Exercise
(in thousands, except per share data) Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 7,421 $29.29 6,298 $21.83 10,543 $18.34
Granted 2,452 39.16 3,155 37.48 354 40.27
Forfeited (203) 38.00 (69) 34.97 (117) 27.41
Exercised (691) 22.75 (1,823) 17.58 (4,373) 14.53
Expired (304) 35.08 (140) 27.67 (109) 20.53
- ----------------------------------------------------------------------------------------------------------------
Balance, end of year 8,675 $32.27 7,421 $29.29 6,298 $21.83
- ----------------------------------------------------------------------------------------------------------------
Exercisable 5,357 4,254 5,026
Available for grant 3,553 5,742 8,587
Weighted-average fair value of
options granted during the year $12.72 $11.69 $13.22
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Dividend yield 1.50% 1.60% 1.50%
Volatility rate 34.74% 29.82% 27.56%
Risk-free interest rate 5.19% 5.17% 6.27%
Expected option life 5 years 5 years 5 years
- --------------------------------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding as of December 26, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except year and per share data) Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.28 - $15.42 963 3.0 years $13.87 963 $13.87
$15.43 - $20.56 765 4.7 years 19.55 765 19.55
$20.57 - $25.70 252 2.9 years 23.48 252 23.48
$25.71 - $30.84 768 6.1 years 26.72 758 26.68
$30.85 - $35.98 594 5.8 years 33.37 563 33.28
$35.99 - $41.12 4,959 7.7 years 38.13 1,731 37.38
$41.13 - $46.26 358 5.8 years 43.32 313 43.20
$46.27 - $51.41 16 8.3 years 50.88 12 51.05
- ------------------------------------------------------------------------------------------------------------------------------------
Total 8,675 5,357
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50 Fort James Corporation
<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 stock awards were as
follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Awarded 169,394 198,244
Deferred 1,572 1,212
- --------------------------------------------------------------------------------
Total granted 170,966 199,456
- --------------------------------------------------------------------------------
Weighted-average fair value
per share at grant date $30.49 $40.79
- --------------------------------------------------------------------------------
Awards granted to officers and key employees 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 $6.9 million in 1999 and $14.1 million in 1998. As
of December 26, 1999, there were 3,501,000 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 52,000 shares
available for grant as of December 26, 1999.
Stock Plans for Employees
Effective January 1, 1999, the StockPlus Investment Plan and the separate
defined contribution plans for former Fort Howard employees were merged,
creating the new Fort James 401(k) Plan. The Fort James 401(k) Plan is available
to substantially all of the Company's domestic employees. Several alternative
investment funds are available, including an investment fund consisting of
Common Stock. Under the terms of the new plan, participating employees may
contribute, through periodic payroll deductions, up to 15% of their
compensation. Participant contributions of up to 10% of compensation are
matched by the Company at a 60% rate. As of December 26, 1999, there were 22,000
participants in the plan, and the plan held 13.1 million shares of Common Stock
and $1,082.9 million of other investments. Company contributions to this plan
totaled $28.6 million in 1999, $28.7 million in 1998 and $28.4 million in 1997
(including Company contributions to the former Fort Howard plans).
In addition, the Company maintains a stock purchase plan for the benefit of
certain Canadian employees. As of December 26, 1999, 62,000 shares of Common
Stock were held in this plan.
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 26, 1999, future minimum lease payments under noncancelable
operating leases were as follows:
- --------------------------------------------------------------------------------
Minimum
Lease
(in millions) Payments
- --------------------------------------------------------------------------------
2000 $ 30.7
2001 25.8
2002 20.2
2003 17.1
2004 11.3
2005 and thereafter 29.7
- --------------------------------------------------------------------------------
Total future minimum lease payments $134.8
- --------------------------------------------------------------------------------
Rent expense totaled $59.1 million in 1999, $62.2 million in 1998, and $62.4
million in 1997.
Litigation and Environmental Matters
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.
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
Fort James Corporation 51
<PAGE>
Notes to Consolidated Financial Statements
general brought similar suits that were consolidated in the Florida District
Court, three of which were dismissed. In October 1999, the defendants reached an
agreement in principle with the State of Florida by which the Florida state case
was settled. The Company admits no wrongdoing. Only a suit filed by the State of
New York remains in the federal action. Suits were subsequently filed by the
state attorneys general of West Virginia and Maryland in their respective state
courts. Numerous private suits on behalf of an alleged class of direct
purchasers have also been filed in federal courts, all seeking similar damages
for similar alleged violations. The private suits were conditionally certified
as a class action in the Florida District Court, in July 1998. Private class
action suits also have been filed in four states on behalf of an alleged class
of indirect purchasers, seeking similar damages for similar alleged violations
under state law. The Company believes that these cases are without merit and is
vigorously defending both the federal and state actions.
Although the ultimate disposition of the various legal proceedings to which
the Company is a party cannot be predicted with certainty, it is the Company's
policy to accrue settlement costs when it is probable that such costs will be
incurred and when a range of loss can be reasonably estimated. It is the opinion
of the Company's management that the outcome of any claim which is pending or
threatened, either individually or on a combined basis, will not have a material
adverse effect on the consolidated financial condition of Fort James but could
have a material effect on consolidated results of operations in a given 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 1998, the U.S. Environmental Protection Agency ("EPA") regulations
affecting pulp and paper industry discharges of wastewater and gaseous
emissions, commonly referred to as the "cluster rules," became effective. These
rules require changes in the pulping and bleaching processes presently used in
some U.S. pulp mills, including several of Fort James' mills. The majority of
the investment required to comply with these regulations is due by 2001, with
the possibility of a one-year extension for parts of the program. In fiscal 2000
and 2001, the Company expects to invest a total of approximately $40 million as
part of its compliance program.
Fort James, along with others, has been identified as a potentially
responsible party ("PRP") at 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. Various state and federal agencies and tribal entities are
seeking sediment restoration and natural resources damages. In February 1999,
the Wisconsin Department of Natural Resources released for public comment a
draft remedial investigation/feasibility study of the Fox River. While the draft
study did not advocate any specific restoration alternatives, it included
estimated total costs ranging from zero for 'no action' to approximately $720
million, depending on the alternative or combination of alternatives selected.
The final restoration alternative and the Company's share of the related costs
are unknown at this time. The Company, along with other PRPs, is also
participating in the funding of a remedial investigation/feasibility study of
contamination of the Kalamazoo River located in Michigan. Management does not
anticipate selection of a remedy prior to 2002.
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 $65.6 million as of
December 26, 1999 and $54.1 million as of December 27, 1998.
52 Fort James Corporation
<PAGE>
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 PRPs. The Company believes that its share of the costs
of cleanup for its current remediation sites will not have a material adverse
effect 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.
14. Segment Information
The Company is organized based on the products it offers and operates in the
following industry segments: (i) Tissue - North America, which manufactures and
markets paper-based consumer towel and tissue products; (ii) Tissue - Europe,
which 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 retail tabletop brand, DIXIE; and (iv) Communications
Papers, which manufactures and markets uncoated business and printing papers
serving the commercial printing and office markets, and Fiber, which includes
market pulp sales to both intercompany and third-party customers and the Harmon
Associates wastepaper brokerage business.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Tissue
- -----------------------------------------------------------------------------
Communications Intercompany
(in millions) North America Europe Dixie Papers and Fiber and Corporate Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Net sales $3,673.9 $1,834.0 $786.9 $834.5 $ (301.9) $6,827.4
Intercompany sales 109.2 - 3.0 189.7 - 301.9
Income from operations, before
restructure and other items 644.7 210.4 105.1 (8.7) (93.1) 858.4
Depreciation expense 232.1 95.5 24.1 70.4 22.9 445.0
Capital expenditures 268.7 104.4 51.9 61.1 47.7 533.8
Assets 3,260.1 2,153.2 441.1 820.5 583.3 7,258.2
- ----------------------------------------------------------------------------------------------------------------------------------
1998
Net sales $3,634.1 $1,869.4 $775.5 $796.6 $ (273.0) $6,802.6
Intercompany sales 96.7 - 3.3 173.0 - 273.0
Income from operations, before
restructure and other items 872.1 236.2 89.1 2.4 (87.6) 1,112.2
Depreciation expense 223.2 93.6 25.1 71.9 14.5 428.3
Capital expenditures 265.7 97.8 22.5 45.9 60.9 492.8
Assets 3,009.4 2,308.8 392.4 825.0 1,184.7 7,720.3
- ----------------------------------------------------------------------------------------------------------------------------------
1997
Net sales $3,514.0 $1,828.1 $780.8 $859.0 $ (278.9) $6,703.0
Intercompany sales 103.7 - 3.8 171.4 - 278.9
Income from operations, before
restructure and other items 790.7 202.4 67.5 14.7 (92.0) 983.3
Depreciation expense 235.3 98.3 26.1 69.4 5.1 434.2
Capital expenditures 260.2 69.0 20.5 65.6 32.5 447.8
Assets 2,917.2 2,191.1 414.2 895.6 1,247.7 7,665.8
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fort James Corporation 53
<PAGE>
Notes to Consolidated Financial Statements
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. For the year ended December 26, 1999, income from
operations included unusual charges for severance and other costs related to a
reduction-in-force program and for antitrust and other litigation accruals of
$46.0 million. Income from operations, before restructure and other 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 cannot be
specifically identified to a segment, such as equipment used in the production
of various products, are allocated based on estimated production. Corporate
assets consist primarily of cash and cash equivalents, current deferred income
taxes, investments in unconsolidated affiliates, net pension assets and net
assets of discontinued operations.
No single customer accounted for more than 10% of the Company's
consolidated net sales in any year.
Sales and long-lived assets (primarily property, plant and equipment) by
geographic areas are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
Long-lived Long-lived Long-lived
(in millions) Sales Assets Sales Assets Sales Assets
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $4,807.2 $3,209.1 $4,762.7 $3,100.0 $4,691.3 $3,037.0
France 830.1 361.8 802.9 423.0 794.7 411.2
Other 1,190.1 781.2 1,237.0 796.0 1,217.0 779.0
- ----------------------------------------------------------------------------------------------------
$6,827.4 $4,352.1 $6,802.6 $4,319.0 $6,703.0 $4,227.2
- ----------------------------------------------------------------------------------------------------
</TABLE>
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:
- -------------------------------------------------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Condensed income statement
information:
Net sales $ 4,452.8 $4,370.3 $4,295.6
Gross profit 1,207.9 1,426.6 1,326.6
Income (loss) from continuing
operations before extraordinary
items and the cumulative
effect of a change in
accounting principle (62.9) 99.2 (93.7)
Net income (loss) (98.6) 118.5 (161.1)
- -------------------------------------------------------------------------------
Condensed balance sheet
information:
Current assets $ 959.6 $ 865.8
Noncurrent assets 3,165.8 3,575.7
Current liabilities 546.0 651.0
Noncurrent liabilities 5,035.4 5,129.5
Deficit (1,456.0) (1,339.0)
- -------------------------------------------------------------------------------
54 Fort James Corporation
<PAGE>
16. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income Income Per Common Share
From From -------------------------------------
(in millions, except Continuing Net Income Continuing Dividends Stock Price
per share data) Net Sales Gross Profit Operations/1/ (Loss) Operations/2/ Declared High Low
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
1st quarter/a/ $1,669.0 $533.5 $117.6 $ 97.7 $0.53 $0.15 $41 9/16 $28 7/16
2nd quarter/b/ 1,718.5 543.3 135.9 95.6 0.62 0.15 40 3/8 31 11/16
3rd quarter/c/ 1,739.3 531.6 94.1 325.1 0.43 0.15 42 25 15/16
4th quarter/d/ 1,700.6 494.5 2.0 (1.9) 0.01 0.15 29 1/16 24 9/16
- ----------------------------------------------------------------------------------------------------------------------------------
1998
1st quarter/e/ $1,668.8 $533.9 $115.4 $115.0 $0.52 $0.15 $48 3/16 $34 5/16
2nd quarter/f/ 1,731.1 566.6 132.5 136.2 0.60 0.15 52 1/4 41 3/8
3rd quarter/g/ 1,713.7 581.0 147.6 150.7 0.68 0.15 45 1/4 27
4th quarter/h/ 1,689.0 573.7 96.3 95.7 0.43 0.15 41 32
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Income from continuing operations, before extraordinary items and
cumulative effect of a change in accounting principle.
/2/ Per diluted common share.
/a/ Results for the first quarter of 1999 included income from discontinued
operations of $4.4 million after taxes or $0.02 per diluted share, and
charges of $22.1 million after taxes or $0.10 per diluted share, for the
cumulative effect of a change in accounting for start-up costs, and $2.2
million after taxes or $0.01 per diluted share, for an extraordinary loss
on the early extinguishment of debt.
/b/ Results for the second quarter of 1999 included net non-recurring income
of $1.1 million ($0.7 million after taxes) for the reversal of
liabilities settled on terms more favorable than anticipated which were
largely offset by merger related severance costs, a loss from
discontinued operations of $9.3 million after taxes or $0.04 per diluted
share, and an extraordinary loss on the early extinguishment of debt of
$31.0 million after taxes or $0.14 per diluted share.
/c/ Results for the third quarter of 1999 included net non-recurring income
of $13.4 million ($12.0 million after taxes or $0.06 per diluted share)
from the reversal of merger-related restructure accruals due to revisions
of estimates partially offset by a permanent impairment write-down of a
non-operating asset, and unusual charges of $46.0 million ($28.1 million
after taxes or $0.13 per diluted share) for severance and other costs
related to a reduction-in-force program and accruals for on-going
litigation. In addition, a loss from discontinued operations of $1.5
million after taxes or $0.01 per diluted share was offset by an
extraordinary gain on the sale of the Packaging business of $232.5
million after taxes or $1.05 per diluted share.
/d/ Results for the fourth quarter of 1999 included a non-recurring charge of
$157.1 million ($96.4 million after taxes or $0.45 per diluted share) for
the estimated loss on the sale of Marathon and exiting the Groundwood
Business. In addition, the Company recorded an unusual charge of $11.3
million ($6.9 million after taxes or $0.03 per diluted share) for an
interest rate swap termination fee, an extraordinary loss of $6.6 million
after taxes or $0.03 per diluted share on early extinguishment of debt
and a favorable adjustment to the extraordinary gain on the sale of the
Packaging business of $2.7 million after taxes or $0.01 per diluted
share.
/e/ Results for the first quarter of 1998 included nonrecurring merger-
related relocation and other costs of $6.5 million ($4.1 million after
taxes or $0.02 per diluted share), income from discontinued operations of
$2.2 million after taxes, or $0.01 per diluted share, and a net charge of
$2.6 million after taxes, or $0.01 per diluted share, for an
extraordinary loss on early extinguishment of debt.
/f/ Results for the second quarter of 1998 included merger-related relocation
and costs of $8.8 million ($5.4 million after taxes or $0.03 per diluted
share) and income from discontinued operations of $3.7 million after
taxes, or $0.02 per diluted share.
/g/ Results for the third quarter of 1998 included merger-related costs not
accruable in 1997 of $12.7 million ($7.8 million after taxes or $0.03 per
diluted share) partially offset by a reversal of $10.5 million ($0.05 per
diluted share) for merger related tax reserves established in 1997 in
accordance with temporary IRS regulations, which were subsequently
rescinded, and income from discontinued operations of $3.1 million after
taxes or $0.01 per diluted share.
/h/ Results for the fourth quarter of 1998 included nonrecurring costs of
$63.1 million ($38.1 million after taxes or $0.18 per diluted share) for
merger-related costs not accruable in 1997, a permanent impairment write-
down of a non-operating asset and plant closure costs; partially offset
by the net reversal of previously recorded merger-related restructure
accruals and tax reserves and loss from discontinued operations of $0.6
million after taxes.
Fort James Corporation 55
<PAGE>
Management Responsibility Statement
The management of Fort James Corporation is responsible for the preparation,
integrity and fair presentation of the consolidated financial statements and
other information contained in this Annual Report. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and include, where necessary, amounts which are based on management's
best estimates and judgments. The Company maintains a system of internal
accounting controls designed to provide reasonable assurance that assets are
safeguarded, transactions are executed and recorded in accordance with proper
authorizations, and financial records are maintained so as to permit the
preparation of reliable financial statements. The system of internal controls is
enhanced by written policies and procedures, an organizational structure which
provides appropriate division of responsibilities, careful selection and
training of qualified people, and a program of periodic audits by both internal
auditors and independent accountants. The control environment is further
enhanced by the Company's "Standards of Business Conduct Policy" which sets
standards of professionalism and integrity for employees worldwide. The Audit
Committee of the Board of Directors, composed entirely of non-employee
directors, meets periodically with management, the internal auditors, and the
independent accountants to review the adequacy of internal accounting controls,
reported financial results, and the nature, extent and results of internal and
external audits. The independent accountants and internal auditors have direct
and independent access to the Audit Committee.
/s/ Miles L. Marsh
Miles L. Marsh
Chairman of the Board and Chief Executive Officer
/s/ Joseph W. McGarr
Joseph W. McGarr
Executive Vice President and Chief Financial Officer
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, cash flows, and shareholders' equity
present fairly, in all material respects, the financial position of Fort James
Corporation at December 26, 1999 and December 27, 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 26, 1999, 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
PricewaterhouseCoopers LLP
Chicago, Illinois
January 26, 2000
56 Fort James Corporation
<PAGE>
Selected Financial Data/a/
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(In millions, except ratio and per share data) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Net sales $6,827.4 $6,802.6 $6,703.0 $6,819.7 $7,457.4
Costs and expenses 5,969.0 5,690.4 5,719.7 5,980.9 6,665.5
Restructure and other items 142.6 91.1 429.0 59.7 44.8
Interest expense 239.4 264.8 320.5 387.4 492.4
Income from continuing operations/b/ 349.6 491.8 95.0 277.8 164.1
Extraordinary items, net of taxes 195.4 (2.6) (131.5) (8.1) (18.8)
Net income (loss) 516.5 497.6 (27.0) 319.9 141.1
Net income (loss) available to
common shareholders 516.5 493.2 (70.4) 261.4 82.6
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Position, End of Year
Total current assets $1,828.4 $1,856.3 $1,820.2 $1,724.9 $1,960.6
Property, plant and equipment 4,352.1 4,319.0 4,227.2 4,660.9 4,763.7
Goodwill 528.8 614.9 622.6 715.2 743.5
Total assets 7,258.2 7,720.3 7,665.8 8,087.4 8,807.3
Total current liabilities 1,269.7 1,556.1 1,528.6 1,484.8 1,334.3
Current debt 81.9 240.0 34.4 128.9 107.5
Long-term debt 3,432.0 3,646.4 4,154.7 4,304.5 5,405.5
Minority interests 12.5 10.3 10.4 11.3 165.3
Preferred stock - - 352.7 738.4 740.3
Common shareholders' equity (deficit) 1,127.3 1,051.4 231.6 113.1 (324.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Information/a/
Per share of common stock (diluted):
Income from continuing operations/b/ $ 1.59 $ 2.23 $ 0.30 $ 1.20 $ 0.64
Extraordinary items 0.89 (0.01) (0.63) (0.04) (0.12)
Net income (loss) 2.35 2.26 (0.28) 1.43 0.50
Annual rate of dividends declared 0.60 0.60 0.60 0.60 0.60
Book value 5.27 4.77 1.11 0.60 (1.89)
Common stock market price:
High $ 42.00 $ 52.25 $ 47.13 $ 34.25 $ 37.38
Low 24.56 27.00 27.25 22.38 20.00
Year-end 27.13 37.69 37.50 34.00 24.13
Weighted-average of common shares
and common share equivalents 219.4 217.9 207.6 183.1 164.1
- ------------------------------------------------------------------------------------------------------------------------------------
Other Data
Capital expenditures (excluding acquisitions) $ 533.8 $ 492.8 $ 447.8 $ 424.2 $ 369.0
Depreciation and amortization expense $ 463.4 $ 447.5 $ 453.8 $ 466.1 $ 517.4
Return on average capital employed 15.5% 18.8% 16.5% 12.9% 12.1%
Return on net sales 6.9% 7.9% 6.2% 4.1% 2.7%
Ratio of total debt to total capitalization 75.5% 78.5% 87.6% 83.7% 90.5%
Current ratio 1.44 1.19 1.19 1.16 1.47
Cash dividend payout ratio 25.4% 27.2% +100% 34.3% 76.9%
Ratio of earnings to interest 3.9 4.0 3.0 2.2 1.7
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/a/ Reflects effect of a 6.5-for-one Fort Howard stock split in 1995.
/b/ Income from continuing operations before extraordinary items and
cumulative effect of a change in accounting principle. Book value per
common share: Common shareholders' equity (deficit) divided by
outstanding shares of Common Stock. Return on average capital employed:
Income (loss) from continuing operations before unusual and non-recurring
items, 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) from continuing operations before
after-tax unusual and non-recurring items, 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 common and
preferred stock cash dividends declared, divided by net income (loss).
Ratio of earnings to interest: Income (loss) from continuing operations
before unusual and non-recurring items, interest expense and income
taxes, divided by total interest cost. Total interest cost is interest
expense before unusual items plus capitalized interest.
Fort James Corporation 57
<PAGE>
Exhibit 13 - Appendix A
<TABLE>
<CAPTION>
Net sales by segment ratio bar chart as defined by the following data points:
1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tissue - North America 52.2%
Tissue - Europe 26.9%
Dixie 11.5%
Communications Papers and Fiber 9.4%
==========================================================================================================================
Operating income, excluding unusual items - Tissue - North America bar chart as defined by the following data points:
(in millions) 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
Operating income, excluding unusual items $790.7 $872.1 $679.4
============================================================================================================================
Operating income - Tissue - Europe bar chart as defined by the following data points:
(in millions) 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
Operating income $202.4 $236.2 $210.4
============================================================================================================================
Operating income, excluding unusual items - Dixie bar chart as defined by the following data points:
(in millions) 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
Operating income, excluding unusual items $ 67.5 $ 89.1 $106.0
============================================================================================================================
Operating income (loss), excluding unusual items - Communications Papers and Fiber bar chart as defined by the following
data points:
(in millions) 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss), excluding unusual items $ 14.7 $ 2.4 $ (6.6)
============================================================================================================================
Interest Expense, excluding unusual items, bar chart as defined by the following data points:
(in millions) 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense, excluding unusual items $320.5 $264.8 $228.1
============================================================================================================================
Cash Flow from operations and capital expenditures bar chart as defined by the following data points:
Cash flow from operations $ 769 $ 870 $ 675
Capital expenditures 448 493 534
============================================================================================================================
Total debt bar chart as defined by the following data points:
(in millions) 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
Total debt $4,190 $3,886 $3,514
============================================================================================================================
Fort James Corporation 25
</TABLE>
2
<PAGE>
EXHIBIT 21
FORT JAMES CORPORATION SUBSIDIARIES (a)(b)
As of December 26, 1999
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 Alberta, Ltd. Alberta
Fort James B.V. Netherlands
Fort James Belux S.P.R.L. Belgium
Fort James Brionne S.A.S. France
Fort James Canada Inc. Canada
Fort James Communications Corporation Delaware
Fort James de Mexico S.A. de C.V. Mexico
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 France s.c.a. France
Fort James Healthcare Management Corporation Delaware
Fort James Hellas S.A. Greece
Fort James Holding de Mexico,
S.A. de C.V. Mexico Mexico
Fort James International Holdings, Ltd. Virginia
Fort James Investment S.a.r.l. Luxembourg
Fort James Ireland Limited Ireland
Fort James Italia S.r.l. Italy
Fort James Maine, Inc. Maine
Fort James Nederland B.V. Netherlands
Fort James Operating Company Virginia
Fort James S.a.r.1 Luxembourg
Fort James S.P.R.L. Belgium
Fort James S.P.R.L.S. Com. p.A. Spain
Fort James Services S.N.C. Belgium
Fort James Suomi Oy Finland
Fort James Tredegar, Inc. Virginia
Fort James UK Limited United Kingdom
Fort James-Pennington, Inc. Alabama
HAC Holding Corporation Delaware
HARCO Trucking Corporation New York
Harmon Associates Corporation New York
Harmon Associates Ltd. Ontario
Jarapar Participacoes, Ltda. Brazil
Naheola Cogeneration Limited Partnership Alabama
Sodipan S.C.A. France
Sodipan S.N.C. France
St. Francis Insurance Company Ltd. Bermuda
West Mason, Inc. Delaware
Certain subsidiaries which, if considered in the aggregate, would not constitute
a significant subsidiary are not considered.
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.
3
<PAGE>
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;
(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 reports, dated January 26, 2000, on our audits of
the consolidated financial statements of Fort James Corporation as of
December 26, 1999 and December 27, 1998, and for each of the three fiscal
years in the period ended December 26, 1999, which reports are included in
the 1999 Annual Report, which is incorporated herein by reference or
included in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 24, 2000
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT JAMES
CORPORATION DECEMBER 26, 1999 FORM 10-K FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000053117
<NAME> FORT JAMES CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> DEC-26-1999
<CASH> 10
<SECURITIES> 0
<RECEIVABLES> 881
<ALLOWANCES> 0
<INVENTORY> 790
<CURRENT-ASSETS> 1,828
<PP&E> 7,858
<DEPRECIATION> 3,506
<TOTAL-ASSETS> 7,258
<CURRENT-LIABILITIES> 1,270
<BONDS> 3,432
0
0
<COMMON> 21
<OTHER-SE> 1,106
<TOTAL-LIABILITY-AND-EQUITY> 7,258
<SALES> 6,827
<TOTAL-REVENUES> 6,827
<CGS> (4,725)
<TOTAL-COSTS> (6,112)
<OTHER-EXPENSES> 28
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (239)
<INCOME-PRETAX> 504
<INCOME-TAX> (155)
<INCOME-CONTINUING> 350
<DISCONTINUED> (6)
<EXTRAORDINARY> 195
<CHANGES> (22)
<NET-INCOME> 517
<EPS-BASIC> 2.36
<EPS-DILUTED> 2.35
</TABLE>
