UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: June 25, 2000 Commission File Number: 1-7911
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FORT JAMES CORPORATION
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(Exact name of registrant as specified in its charter)
Virginia 54-0848173
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 Lake Cook Road, Deerfield, IL 60015-4753
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (847) 317-5000
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Not Applicable
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of $.10 par value common stock outstanding as of July 15, 2000:
204,712,356 shares
<PAGE>
FORT JAMES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
June 25, 2000
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of June 25, 2000 and
December 26, 1999 3
Consolidated Statements of Operations for the quarters and
six months ended June 25, 2000 and June 27, 1999 4
Consolidated Statements of Cash Flows for the six months
ended June 25, 2000 and June 27, 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 17
ITEM 2. Changes in Securities 17
ITEM 3. Defaults Upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORT JAMES CORPORATION
CONSOLIDATED BALANCE SHEETS
June 25, 2000 and December 26, 1999
<TABLE>
<CAPTION>
June December
(in millions, except share data) 2000 1999
<S> <C> <C>
--------------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 4.6 $ 10.3
Accounts receivable 895.5 880.5
Inventories 801.4 790.4
Deferred income taxes 88.8 111.5
Other current assets 41.0 35.7
--------------------------------------------------------------------------------------
Total current assets 1,831.3 1,828.4
--------------------------------------------------------------------------------------
Property, plant and equipment 7,909.1 7,858.0
Accumulated depreciation (3,635.3) (3,505.9)
--------------------------------------------------------------------------------------
Net property, plant and equipment 4,273.8 4,352.1
Goodwill, net 497.8 528.8
Other assets 502.7 548.9
--------------------------------------------------------------------------------------
Total assets $ 7,105.6 $7,258.2
======================================================================================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 580.8 $ 619.1
Accrued liabilities 569.7 568.7
Current portion of long-term debt 70.3 81.9
--------------------------------------------------------------------------------------
Total current liabilities 1,220.8 1,269.7
--------------------------------------------------------------------------------------
Long-term debt 3,449.1 3,432.0
Deferred income taxes 726.6 748.6
Accrued postretirement benefits other than pensions 406.4 417.1
Other long-term liabilities 256.3 263.5
--------------------------------------------------------------------------------------
Total liabilities 6,059.2 6,130.9
--------------------------------------------------------------------------------------
Common stock, $.10 par value, 500.0 million shares authorized;
204.7 million shares outstanding at June 25, 2000
and 214.0 million at December 26, 1999 20.5 21.4
Additional paid-in capital 2,851.7 3,045.0
Accumulated other comprehensive loss (264.4) (227.1)
Accumulated deficit (1,561.4) (1,712.0)
--------------------------------------------------------------------------------------
Total shareholders' equity 1,046.4 1,127.3
--------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 7,105.6 $7,258.2
======================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FORT JAMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters and Six Months Ended
June 25, 2000 and June 27, 1999
<TABLE>
<CAPTION>
Quarter Six Months
<S> <C> <C> <C> <C>
--------------------- --------------------
(in millions, except per share data) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------- --------------------
Net sales $ 1,756.6 $ 1,718.5 $ 3,433.2 $ 3,387.5
Cost of goods sold (1,231.7) (1,175.2) (2,433.0) (2,310.7)
Selling and administrative expenses (299.1) (291.1) (587.2) (588.2)
Restructure and other items 8.6 1.1 8.6 1.1
-------------------------------------------------------------------------------------------------------------------
Income from operations 234.4 253.3 421.6 489.7
Interest expense (58.6) (59.4) (115.6) (121.9)
Other income (expense), net (3.1) 14.2 11.7 18.1
-------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes,
extraordinary items, and cumulative effect of a change
in accounting principle 172.7 208.1 317.7 385.9
Income tax expense (56.3) (72.2) (104.9) (132.4)
-------------------------------------------------------------------------------------------------------------------
Income from continuing operations before extraordinary
items and cumulative effect of a change in accounting principle 116.4 135.9 212.8 253.5
Loss from discontinued operations, net of taxes - (9.3) - (4.9)
--------------------------------------------------------------------------------------------------------------------
Income before extraordinary items and cumulative effect
of a change in accounting principle 116.4 126.6 212.8 248.6
Extraordinary loss on early extinguishment of debt, net of taxes - (31.0) - (33.2)
Cumulative effect of a change in accounting principle, net of taxes - - - (22.1)
-------------------------------------------------------------------------------------------------------------------
Net income $ 116.4 $ 95.6 $ 212.8 $ 193.3
===================================================================================================================
Basic earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 0.57 $ 0.62 $ 1.02 $ 1.15
Loss from discontinued operations, net of taxes - (0.04) - (0.02)
Extraordinary loss on early extinguishment of debt, net of taxes - (0.14) - (0.15)
Cumulative effect of a change in accounting principle, net of taxes - - - (0.10)
-------------------------------------------------------------------------------------------------------------------
Net income $ 0.57 $ 0.44 $ 1.02 $ 0.88
-------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 205.5 219.6 207.8 219.6
===================================================================================================================
Diluted earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 0.57 $ 0.62 $ 1.02 $ 1.15
Loss from discontinued operations, net of taxes - (0.04) - (0.02)
Extraordinary loss on early extinguishment of debt, net of taxes - (0.14) - (0.15)
Cumulative effect of a change in accounting principle, net of taxes - - - (0.10)
-------------------------------------------------------------------------------------------------------------------
Net income $ 0.57 $ 0.44 $ 1.02 $ 0.88
-------------------------------------------------------------------------------------------------------------------
Weighted average common shares and
common share equivalents outstanding 205.9 220.9 208.1 220.6
===================================================================================================================
Cash dividends per common share $ 0.15 $ 0.15 $ 0.30 $ 0.30
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FORT JAMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 25, 2000 and June 27, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
(in millions) 2000 1999
--------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities:
Net income $ 212.8 $ 193.3
Depreciation expense 232.8 220.4
Amortization of goodwill 8.7 9.3
Deferred income tax provision 8.1 38.2
Restructure and other items (8.6) (1.1)
Loss from discontinued operations, net of taxes - 4.9
Loss on early extinguishment of debt, net of taxes - 33.2
Cumulative effect of a change in accounting
principle, net of taxes - 22.1
Change in current assets and liabilities, excluding
effects of acquisitions and dispositions:
Accounts receivable (43.2) (115.7)
Inventories (18.9) (28.1)
Other current assets (6.1) (12.3)
Accounts payable and accrued liabilities (11.7) (30.0)
Other, net (35.6) (26.1)
--------------------------------------------------------------------------------------------------
Cash provided by operating activities 338.3 308.1
--------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities:
Expenditures for property, plant and equipment (222.5) (220.7)
Proceeds from sale of assets 92.4 3.5
Increase in net assets of discontinued operations - (34.5)
Other, net (0.5) (1.0)
--------------------------------------------------------------------------------------------------
Cash used for investing activities (130.6) (252.7)
--------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities:
Additions to long-term debt 4.0 19.9
Payments of long-term debt (30.8) (333.4)
Net increase in revolving debt 74.5 361.0
Premiums paid on early extinguishment of debt and debt issuance costs - (54.2)
Common stock dividends paid (63.7) (65.9)
Proceeds from exercise of stock options 1.5 8.6
Common stock purchases (198.9) -
Other, net - 11.0
--------------------------------------------------------------------------------------------------
Cash used for financing activities (213.4) (53.0)
--------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (5.7) 2.4
Cash and cash equivalents, beginning of period 10.3 5.3
--------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4.6 $ 7.7
==================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Basis of Presentation:
In the opinion of management, the accompanying unaudited consolidated
financial statements of Fort James Corporation ("Fort James" or "the
Company") contain all adjustments (including normal recurring accruals)
necessary to present fairly the Company's consolidated financial position
as of June 25, 2000 and its results of operations for the quarters and six
months ended June 25, 2000 and June 27, 1999 and its cash flows for the six
months ended June 25, 2000 and June 27, 1999. The balance sheet as of
December 26, 1999 was derived from audited financial statements as of that
date. The results of operations for the quarter and six months ended June
25, 2000 are not necessarily indicative of the results to be expected for
the full year.
Prospective Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS No. 133"). This statement requires the recognition of all
derivative instruments in the statement of financial position as either
assets or liabilities and their measurement at fair value. Depending upon
the nature of the derivative, changes in fair value are either recognized
in other comprehensive income or in earnings. Certain sections of FAS No.
133 were amended in June 2000, when the FASB issued Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133" (FAS No. 138). FASB
Statement No. 137 defers the Company's required adoption of FAS No. 133 and
FAS No. 138 until fiscal 2001. The Company has a program in place to
evaluate its financial instruments and purchase contracts. It has not
determined what effect, if any, FAS No. 133 and FAS No. 138 will have on
its results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company is required to implement SAB 101 in the
fourth quarter of fiscal 2000. The Company has not determined what effect,
if any, SAB 101 will have on its results of operation or financial
position.
In May 2000, the Emerging Issues Task Force ("EITF") reached consensus
on Issue No. 00-14, "Accounting for Certain Sales Incentives" ("EITF
00-14"). This consensus requires that certain sale incentives to customers
be accounted for as a reduction of revenue. The Company is required to
implement EITF 00-14 in the fourth quarter of fiscal 2000. The adoption
will require a reclassification of certain sale incentives from selling
expense to a reduction of revenue. The Company has not determined the
magnitude of the effect EITF 00-14 will have on revenue. However, EITF
00-14 will not affect the Company's income from operations.
2. Dispositions
In January 2000, the Company completed the sale of Fort James -
Marathon LTD ("Marathon"), a non-integrated pulp mill located in Ontario,
Canada, to a joint venture between Tembec Inc. and Kruger Inc. for $69.1
million. In February 2000, the Company closed its groundwood paper
operations at the Wauna mill in Clatskanie, Oregon. The anticipated loss on
the sale of Marathon and costs related to the closure of groundwood
operations were originally recorded in the fourth quarter of 1999.
<PAGE>
Net sales and income (loss) from operations of Marathon and the
groundwood paper business for the quarter ended June 27, 1999 and the six
months ended June 25, 2000 and June 27, 1999 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Quarter Six Months
---------------- -------------------------------
(in millions) 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Net sales of assets held for disposal $ 30.0 $ 18.3 $ 59.4
Income (loss) from operations of assets held for disposal $ (3.3) $ 1.8 $ (4.1)
</TABLE>
In August 1999, Fort James sold its Packaging business to ACX
Technologies, Inc. for $836.3 million in cash. The sale included the
operations, assets, and liabilities of the Company's folding carton,
healthcare, and microwave packaging manufacturing facilities. The Packaging
business is treated as a discontinued operation. The results of
discontinued operations include the operating results for the Packaging
business and an allocation of interest expense and taxes, for periods prior
to the disposition date.
Results for the Packaging business for the quarter and six months ended
June 27, 1999 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999
------------------------------
(in millions) Quarter Six Months
--------------------------------------------------------------------------------------------------- --------------
Net sales $ 139.9 $ 278.9
===================================================================================================================
Loss from discontinued operations $ (14.7) $ (6.8)
Tax benefit 5.4 1.9
-------------------------------------------------------------------------------------------------------------------
Loss from discontinued
operations, net of taxes $ (9.3) $ (4.9)
===================================================================================================================
</TABLE>
3. Unusual and Non-Recurring Items
During the second quarter of 2000, the Company recorded non-recurring
income of $8.6 million as restructure and other items, a component of
income from operations. This was related to the settlement of divestiture
liabilities on terms more favorable than anticipated. The divestiture
liabilities, recorded in 1999, related to the closure of the groundwood
paper business and the sale of Marathon (see Note 2).
4. Other Income (Expense)
The components of other income (expense) for the quarters and six
months ended June 25, 2000 and June 27, 1999 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter Six Months
----------------------------- -----------------------------
(in millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates $ 1.8 $ 1.0 $ 4.2 $ 2.5
Foreign currency exchange gains (losses) (4.5) 3.6 (3.3) 4.7
Minority interest (4.0) (2.6) (6.8) (5.0)
Gain on sale of assets 3.2 0.7 14.4 0.7
Interest on income tax refunds - 9.3 - 9.3
Other, net 0.4 2.2 3.2 5.9
--------------------------------------------------------------------------------------------------------------------
Total other income (expense) $ (3.1) $ 14.2 $ 11.7 $ 18.1
====================================================================================================================
</TABLE>
<PAGE>
5. Stock Purchase Program
In August 1999, the Company began execution of a $500 million
stock purchase program. During the quarter and six months ended June
25, 2000, the Company purchased 3.3 million common shares at a cost of
$75.2 million and 9.4 million common shares at a cost of $198.9
million, respectively. As of June 25, 2000, the Company had purchased
16.5 million common shares at a cost of $398.6 million since the
inception of the program. As a result of the planned acquisition of
Fort James by Georgia-Pacific Corporation ("Georgia-Pacific") (see
Note 11) the Company's stock purchase program has been suspended.
6. Balance Sheet Information
Reduction-in-Force
In the third quarter of 1999, the Company recorded a charge of
$25.0 million for the cost of termination benefits for a
reduction-in-force program that has reduced headcount by approximately
1,300 employees. The program was substantially completed in the first
quarter of 2000. As of June 25, 2000, termination benefits of $16.1
million had been paid and approximately $4.0 million of salary
continuation benefits will be paid in the future according to contract
terms.
Inventories
The components of inventories as of June 25, 2000 and December 26,
1999 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
June December
(in millions) 2000 1999
---------------------------------------------------------------------------------------------------
Raw materials $ 179.2 $ 178.3
Finished goods and work in process 496.4 464.8
Stores and supplies 173.8 165.4
---------------------------------------------------------------------------------------------------
849.4 808.5
Reduction to state certain inventories at last-in, first-out cost (48.0) (18.1)
---------------------------------------------------------------------------------------------------
Total inventories $ 801.4 $ 790.4
===================================================================================================
</TABLE>
7. Comprehensive Income
Comprehensive income for the quarters ended June 25, 2000 and
June 27, 1999 was $120.1 million and $57.7 million, respectively. For
the six months ended June 25, 2000 and June 27, 1999, comprehensive
income was $175.5 million and $65.1 million, respectively. The
difference between net income and comprehensive income is due to
foreign currency translation gains and losses.
<PAGE>
8. Income Per Common Share and Common Share Equivalent
Income and share information used in determining earnings per
share for the quarters and six months ended June 25, 2000 and
June 27, 1999 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
2000 1999
-----------------------------------------
(in millions) Income Shares Income Shares
---------------------------------------------------------------------------------------------------------------------
Second Quarter:
Amounts used to compute basic earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 116.4 $ 135.9
Weighted average common shares outstanding 205.5 219.6
Effect of dilutive securities:
Options (a) 0.4 1.3
---------------------------------------------------------------------------------------------------------------------
Amounts used to compute diluted earnings per share $ 116.4 205.9 $ 135.9 220.9
=====================================================================================================================
Six months:
Amounts used to compute basic earnings per share:
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 212.8 $ 253.5
Weighted average common shares outstanding 207.8 219.6
Effect of dilutive securities:
Options (a) 0.3 1.0
---------------------------------------------------------------------------------------------------------------------
Amounts used to compute diluted earnings per share $ 212.8 208.1 $ 253.5 220.6
=====================================================================================================================
</TABLE>
(a) For the quarters and six months ended June 25, 2000 and June 27, 1999,
outstanding options to purchase 9.6 million and 2.7 million shares of common
stock, respectively, for which the exercise price was greater than the average
market price of the common shares were excluded from the computation of diluted
earnings per share.
9. Commitments and Contingent Liabilities
Environmental Matters:
Like its competitors, Fort James is subject to extensive
regulation by various federal, state, provincial, and local agencies
concerning compliance with environmental control statutes and
regulations. These regulations impose limitations, including effluent
and emission limitations, on the discharge of materials into the
environment, as well as require the Company to obtain and operate in
compliance with the conditions of permits and other governmental
authorizations. Future regulations could materially increase the
Company's capital requirements and certain operating expenses in
future years.
Fort James, along with others, has been identified as a
potentially responsible party ("PRP") at various U.S. Environmental
Protection Agency ("EPA") designated Superfund sites and is involved
in other remedial investigations and actions under federal and state
laws. These sites include the Lower Fox River in Wisconsin, where the
Company and six other companies have been identified as PRPs for
contamination of the river by hazardous substances, and the Kalamazoo
River in southwestern Michigan, where the Company, along with other
PRPs, is participating in the funding of a remedial
investigation/feasibility study.
In the Fox River matter, various state and federal agencies and
tribal entities are seeking sediment restoration and natural resources
damages. In February 1999, the Wisconsin Department of Natural
Resources ("WDNR") released for public comment a draft remedial
investigation/feasibility study of the Fox River. While the draft
study did not advocate any specific restoration alternatives, it
included estimated total costs ranging from zero for `no action' to
approximately $720 million, depending on the alternative or
combination of alternatives selected. In May 2000, the Company reached
an agreement with the WDNR and the EPA for the voluntary restoration
of a particular sediment area on the Fox River. In exchange, the
Company will receive a release from future liability for that area,
provided the restoration goals are achieved. The project is expected
to begin in late summer of 2000 and conclude in November of 2000.
In the Kalamazoo River matter, the Michigan Department of
Environmental Quality ("DEQ") has announced its intention to publish a
record of decision, which will contain the DEQ's proposed remedy,
sometime during 2001.
The final restoration alternatives and the Company's share of
the related costs, for either of these sites, are unknown at this
time.
It is the Company's policy to accrue remediation costs on an
undiscounted basis when it is probable that such costs
will be incurred and when a range of loss can be reasonably estimated.
As of June 25, 2000, Fort James' accrued environmental liabilities,
including remediation and landfill closure costs, totaled $68.4
million. The Company believes that its share of the costs of cleanup
for its current remediation sites will not have a material adverse
impact on its consolidated financial position but could have a
material effect on consolidated results of operations in a given
period.
Litigation:
The Company is party to various legal proceedings generally
incidental to its business. As is the case with other companies in
similar industries, Fort James faces exposure from actual or potential
claims and legal proceedings.
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 attorney
generals brought similar suits. In April 2000, the defendants settled
with the State of Florida and the matter was dismissed. The Company
admitted no wrongdoing. In June 2000, settlements were reached with
the states of New York, West Virginia, and Maryland. The case filed by
the State of Kansas was dismissed earlier.
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. In July 1998, the private
suits were conditionally certified as a class action in the Florida
District Court. Private class action suits also were filed in
Minnesota, Wisconsin, California, and Tennessee on behalf of an
alleged class of indirect purchasers, seeking similar damages for
similar alleged violations under state law. The Minnesota court
refused to certify a class in that state, and the case in Wisconsin
was voluntarily dismissed prior to certification. The class
certification petition was recently argued in California, but no
decision has been rendered. No activity has been forthcoming in
Tennessee. The Company believes that these outstanding cases are
without merit and is vigorously defending both the federal and state
actions. Although the ultimate disposition of the various legal
proceedings to which the Company is a party cannot be predicted with
certainty, it is the Company's policy to accrue settlement costs when
it is probable that such costs will be incurred and when a range of
loss can be reasonably estimated. It is the opinion of the Company's
management that the outcome of any claim which is pending or
threatened, either individually or on a combined basis, will not have
a material adverse effect on the consolidated financial condition of
Fort James but could have a material effect on consolidated results of
operations in a given period.
Other:
In 1995, the Company completed the spin-off of certain assets of
its Communications Papers and Packaging businesses to Crown Vantage
Inc. ("Crown"). On March 15, 2000, Crown filed for Chapter 11
bankruptcy protection from its creditors and secured $100 million of
"debtor in possession" financing. On July 26, 2000, Crown announced
the signing of a letter of intent by its wholly-owned subsidiary,
Crown Paper Co. ("Crown Paper") with Crown Acquisition Corporation
providing for the sale of substantially all of the assets of Crown
Paper. The transaction is subject to, among other things, the
negotiation and execution of a definitive asset purchase agreement,
due diligence, financing, the receipt of higher or better offers and
Bankruptcy Court approval. The Bankruptcy Court has set a hearing date
of September 21, 2000 for approval of the sale. The Company is
currently evaluating possible liabilities it may have related to its
former ownership of Crown operations. Management believes that the
outcome of any potential claims related to Crown will not have a
material adverse effect on the consolidated financial condition of
Fort James but could have a material effect on consolidated results of
operations in a given period.
10. Segments
Segment sales and income from operations for the quarters
and six months ended June 25, 2000 and June 27, 1999 and total assets
as of June 25, 2000 and June 27, 1999 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Tissue Communi- Inter-
---------------------------- cations company
North Papers and and
(in millions) America Europe Dixie Fiber Corporate Total
------------------------------------------------------------------------------------------------------------------------------
Quarter ended June 2000
Net sales $ 951.0 $ 433.6 $ 240.6 $ 226.8 $ (95.4) $1,756.6
Intercompany sales 31.9 - 0.4 63.1 - 95.4
Income from operations before
restructure and other items 172.1 24.4 37.3 10.2 (18.2) 225.8
==============================================================================================================================
Quarter ended June 1999
Net sales $ 913.7 $ 456.3 $ 220.3 $ 200.9 $ (72.7) $1,718.5
Intercompany sales 30.3 - 0.7 41.7 - 72.7
Income from operations before
restructure and other items 183.5 57.4 38.6 (8.6) (18.7) 252.2
==============================================================================================================================
Six months ended June 2000
Net sales $1,864.2 $ 883.5 $ 419.8 $ 464.0 $ (198.3) $3,433.2
Intercompany sales 65.6 - 0.8 131.9 - 198.3
Income from operations before
restructure and other items 316.2 53.5 56.7 24.5 (37.9) 413.0
Total assets 3,315.2 2,093.0 462.8 582.0 652.6 7,105.6
==============================================================================================================================
Six months ended June 1999
Net sales $1,813.1 $ 922.2 $ 395.9 $ 396.9 $ (140.6) $3,387.5
Intercompany sales 55.9 - 1.6 83.1 - 140.6
Income from operations before
restructure and other items 375.6 118.5 57.9 (22.8) (40.6) 488.6
Total assets 3,001.5 2,123.7 430.5 811.1 1,216.5 (a) 7,583.3
==============================================================================================================================
</TABLE>
(a) Includes net assets of discontinued operations, which were previously
reported as a separate segment.
<PAGE>
11. Subsequent Event
On July 17, 2000, Fort James and Georgia-Pacific announced that
the boards of directors of both companies signed a definitive merger
agreement for Georgia-Pacific to acquire Fort James in a transaction
valued at approximately $11 billion in cash, stock and assumed debt.
Under the terms of the agreement, Georgia-Pacific will acquire all
outstanding shares of Fort James for $29.60 per share in cash and
0.2644 shares of Georgia-Pacific stock. Based on the Georgia-Pacific
closing price of $28.625 on July 14, 2000 (the last trading date prior
to the announcement of the transaction), the per share consideration
totals $37.17 per Fort James share. The maximum value that can be
received by Fort James shareholders is $40 per share (comprised of
$29.60 in cash and $10.40 in Georgia-Pacific stock). Therefore, the
0.2644 shares of Georgia-Pacific included in the offer is subject to
downward adjustment in the event its average share price is greater
than $39.33. Subject to regulatory approval, the transaction is
expected to be completed in the fourth quarter of fiscal 2000. For
additional information, see Form 8-K filed on July 17, 2000.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Overview
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
2000 (a) 1999 (b)
-------------------------------------- ------------------------------------
Excluding Unusual Excluding Unusual
(in millions, except per share data) Reported and Non-recurring Reported and Non-recurring
------------------------------------------------------------------------------------------------------------------------
Second Quarter:
Net sales $ 1,756.6 $ 1,756.6 $1,718.5 $ 1,718.5
Income from operations 234.4 225.8 253.3 252.2
Net income 116.4 110.8 95.6 135.2
Diluted earnings per share $ 0.57 $ 0.54 $ 0.44 $ 0.62
========================================================================================================================
Six months:
Net sales $ 3,433.2 $ 3,433.2 $3,387.5 $ 3,387.5
Income from operations 421.6 413.0 489.7 488.6
Net income 212.8 207.2 193.3 252.8
Diluted earnings per share $ 1.02 $ 0.99 $ 0.88 $ 1.15
========================================================================================================================
</TABLE>
(a) Net income for the second quarter and first six months of 2000
included non-recurring income of $8.6 million ($5.6 million after
taxes, or $0.03 per diluted share) for the settlement of divestitur
liabilities on terms more favorable than anticipated.
(b) Net income for the second quarter and first six months of 1999
included non-recurring income of $1.1 million ($0.7 million after
taxes), a loss from discontinued operations of $9.3 million and $4.9
million, or $0.04 and $0.02 per diluted share, respectively, and an
extraordinary loss on the early extinguishment of debt of $31.0
million and $33.2 million, or $0.14 and $0.15 per diluted share,
respectively. Net income for the first six months of 1999 also
included a charge for the cumulative effect of a change in accounting
for start-up costs of $22.1 million, or $0.10 per diluted share.
Net sales increased modestly for the quarter and six months ended June 25, 2000
compared to the same periods in the prior year. Excluding the effects of
currency translation and divested operations, however, net sales increased
approximately 7 percent and 5 percent, respectively. Income from operations
declined for the quarter and six months ended June 25, 2000 compared to the same
periods in 1999. These declines were primarily due to reduced earnings in the
Tissue - Europe and Tissue - North America businesses, driven by escalating
costs in key raw materials, partially offset by increased earnings in the
Communications Papers and Fiber businesses.
Tissue - North America
----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Quarter Six Months
-------------------------------------------------------------------
(in millions) 2000 1999 Inc/(Dec) 2000 1999 Inc/(Dec)
----------------------------------------------------------------------------------------------------------
Net sales $ 951.0 $ 913.7 4.1 % $ 1,864.2 $ 1,813.1 2.8 %
Income from operations 172.1 183.5 (6.2)% 316.2 375.6 (15.8)%
==========================================================================================================
</TABLE>
<PAGE>
Compared to the prior year, the second quarter decline in income from
operations was primarily attributable to increased raw material costs,
principally recycled paper. However, strong improvements in manufacturing cost
reductions and the benefits of pricing initiatives partially offset the higher
raw material costs. Distribution and warehousing costs continued to decline
compared to both the prior year and the first quarter of 2000, despite rising
fuel costs, as product flow improvement programs took effect. In addition, three
major mill maintenance outages were successfully completed in the second
quarter, in a shorter timeframe and with less expense than originally
anticipated.
The away-from-home category experienced top-line growth driven by
higher pricing and mix improvements from Sofpull(R) and NuRoll(R) towels,
coreless Compact(R) tissue and CoolColorTM dispenser product lines. Volume
declined slightly compared to the prior year, as the Company pursued pricing
policies to help alleviate the impacts of the significant raw material
inflation.
Volume in the retail category was comparable to 1999 with gains in bath
tissue offset by lower napkin volume. During the quarter, list price increases
were implemented across all product lines.
The year-to-date decline in income from operations was primarily due to
the continued increase in raw material costs, principally recycled paper.
However, strong improvements in manufacturing cost reductions and benefits of
pricing initiatives, particularly in the away-from-home category, partially
offset the higher raw material costs.
Tissue - Europe
---------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Quarter Six Months
-------------------------------------------------------------------
(in millions) 2000 1999 Inc/(Dec) 2000 1999 Inc/(Dec)
----------------------------------------------------------------------------------------------------------
Net sales $ 433.6 $ 456.3 (5.0)% $ 883.5 $ 922.2 (4.2)%
Income from operations 24.4 57.4 (57.5)% 53.5 118.5 (54.9)%
==========================================================================================================
</TABLE>
Changes in currency exchange rates negatively affected sales and
operating profits by approximately $44 million and $5 million, respectively,
compared to last year's quarter. The second quarter 2000 operating profits were
negatively impacted by continued raw material inflation, partially offset by
finished good pricing increases which have been initiated in all countries.
Europe also experienced finished goods volume growth in all countries, except in
the United Kingdom, with notable gains in France and the Nordic region, compared
to a year ago.
During the first half of the year, changes in currency exchange rates
negatively affected sales and operating profits by approximately $88 million and
$10 million, respectively. Finished goods volume increased in most of the
Company's European markets, except the United Kingdom. However, income from
operations for the six months ended June 25, 2000 was negatively impacted by
continued raw material inflation, partially offset by finished good pricing
increases which have been initiated in all countries.
Dixie
-----
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Quarter Six Months
-------------------------------------------------------------------
(in millions) 2000 1999 Inc/(Dec) 2000 1999 Inc/(Dec)
----------------------------------------------------------------------------------------------------------
Net sales $ 240.6 $ 220.3 9.2 % $ 419.8 $ 395.9 6.0 %
Income from operations 37.3 38.6 (3.4)% 56.7 57.9 (2.1)%
==========================================================================================================
</TABLE>
The current quarter sales improvement was driven by volume gains in
excess of 6 percent for both retail and foodservice categories, with notable
gains in retail plates, the club channel and foodservice cutlery and cups.
Income from operations was affected by strong sales growth and cost reduction
efforts, offset by raw material inflation, particularly in plastic resins. Dixie
has announced price increases in all channels to recover raw material inflation.
The year-to-date sales improvement was driven by volume gains in the
second quarter. The decline in income from operations was the result of raw
material inflation, particularly in plastic resins, partially offset by positive
sales growth and cost reduction efforts.
<PAGE>
Communications Papers and Fiber
-------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Quarter Six Months
-------------------------------------------------------------------
(in millions) 2000 1999 Inc/(Dec) 2000 1999 Inc/(Dec)
----------------------------------------------------------------------------------------------------------
Net sales $ 226.8 $ 200.9 12.9 % $ 464.0 $ 396.9 16.9 %
Income (loss) from operations 10.2 (8.6) 218.6 % 24.5 (22.8) 207.5 %
==========================================================================================================
</TABLE>
The improved earnings were the result of significantly higher pulp and
uncoated freesheet prices, partially offset by lower pulp volume as a result of
the January 2000 sale of Marathon, the Company's non-integrated pulp mill
located in Ontario, Canada. Although uncoated freesheet prices were
significantly higher than last year, they leveled in the second quarter after
increasing steadily from the third quarter of 1999.
Interest Expense and Other Income (Expense)
Lower debt levels resulted in a $0.8 million and a $6.3 million
decrease in interest expense for the quarter and six months ended June 25, 2000.
Other expense for the quarter was $3.1 million compared to other income of $14.2
million in 1999. This decrease was primarily due to foreign currency losses in
the current quarter compared to foreign currency gains in the prior year as well
as interest income received in 1999 related to prior year tax refunds. Other
income for the six months ended June 25, 2000 decreased to $11.7 million from
$18.1 million in 1999. This decrease was primarily due to foreign currency
losses in 2000 compared to foreign currency gains in 1999. Additionally, income
related to a land sale recorded in 2000 was comparable to income received in
1999 related to prior year income tax refunds.
Dispositions
In January 2000, the Company completed the sale of Marathon to a joint
venture between Tembec Inc. and Kruger Inc. for $69.1 million. In February 2000,
the Company closed its groundwood paper operations at the Wauna mill in
Clatskanie, Oregaon. The anticipated loss on the sale of Marathon and costs
related to the closure of groundwood operations were originally recorded in the
fourth quarter of 1999.
In August 1999, Fort James sold its Packaging business to ACX
Technologies, Inc. for $836.3 million in cash. The sale included the operations,
assets, and liabilities of the Company's folding carton, healthcare, and
microwave packaging manufacturing facilities.
Unusual and Non-Recurring Items
Second quarter income from operations included non-recurring income of
$8.6 million ($5.6 million after taxes, or $0.03 per diluted share) related to
the settlement of the divestiture liabilities on terms more favorable than
anticipated. These divestiture liabilities, recorded in 1999, related to the
closure of the groundwood paper business and the sale of Marathon.
Financial Condition
Cash provided by operating activities totaled $338.3 million in the
first six months of 2000, compared with $308.1 million in the prior year. The
increase was primarily due to a lower increase in accounts receivable partially
offset by lower income from operations. Capital expenditures were $222.5 million
for the six months ended June 2000, compared to $220.7 million for the same
period in the prior year. In the first six months of 2000, the Company received
cash proceeds of $92.4 million from the sale of assets, including $69.1 million
from the sale of Marathon. The Company's current ratio was 1.5 as of June 2000
and 1.4 as of December 1999, while working capital increased to $610.5 million
from $558.7 million for the same periods. The increase in working capital was
primarily due to lower accounts payable and higher accounts receivable. The
higher accounts receivable was driven by higher seasonal volume and pricing.
However, days sales outstanding (DSO) decreased by 2.5 days from December to
June as a result of the Company's progress in accounts receivable improvement
programs.
As of June 2000, total indebtedness was $3.5 billion and, including the
effect of interest rate swaps, included approximately $1.8 billion of fixed rate
and $1.7 billion of floating rate obligations. As of December 1999, total
indebtedness was $3.5 billion and, including the effect of interest rate swaps,
included $2.2 billion of fixed rate and $1.3 billion of floating rate
obligations. Outstanding borrowings of $1.0 billion at June 2000 and December
1999, were supported by commercial paper, revolving credit and money market
facilities. Under the most restrictive provisions of the Company's debt
agreements, the Company had additional borrowing capacity of approximately $1.2
billion as of June 2000.
Stock Purchase Program
In August 1999, the Company began execution of a $500 million stock
purchase program. During the quarter and six months ended June 25, 2000, the
Company purchased 3.3 million common shares at a cost of $75.2 million and 9.4
million common shares at a cost of $198.9 million, respectively. As of June 25,
2000, the Company had purchased 16.5 million common shares at a cost of $398.6
million since the inception of the program. As a result of the planned
acquisition of Fort James by Georgia-Pacific Corporation ("Georgia-Pacific")
(see Note 11 to the Consolidated Financial Statements) the Company's stock
purchase program has been suspended.
Inflation
For several years prior to 1999, the Company had experienced moderate
levels of inflation. Beginning in the second half of 1999 and continuing through
the first half of 2000, the Company began to see significant increases in the
cost of its base raw materials, principally recycled paper and purchased pulp.
Management believes that these costs will continue to escalate for the remainder
of 2000. Although the Company has announced price increases in all businesses,
the ultimate effect of these increases are uncertain and therefore, the degree
of recoverability of these cost increases is uncertain.
Effect of New Accounting Standards
See Note 1 to the Consolidated Financial Statements.
Information Concerning Forward-Looking Statements
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results and Company
plans and objectives to differ materially from those projected. Such risks and
uncertainties include, but are not limited to, general business and economic
conditions; competitive pricing pressures for the Company's products; the
ability to successfully introduce new products; changes in raw material, energy
and other costs; the ability to achieve projected net cost reductions;
opportunities that may be presented to and pursued by the Company; and
determinations by regulatory and governmental authorities.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk since
December 26, 1999. For additional information, refer to pages 30-31 of the
Company's Annual Report to Shareholders for the fiscal year ended December 26,
1999.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
See Note 7 to the Consolidated Financial Statements of this Quarterly
Report on Form 10-Q.
Item 2. CHANGES IN SECURITIES.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The exhibits listed below are filed as part of this quarterly
report. Each exhibit is listed according to the number
assigned to it in the Exhibit Table of Item 601 of Regulation
S-K.
Exhibit
Number
10 Material contracts
Agreement and Plan of Merger, dated as of July 16,
2000, among Georgia-Pacific Corporation, Fenres
Acquisition Corp. and Fort James Corporation found in
Form 8-K filed on July 17, 2000, Exhibit 10.1, is
incorporated herein by reference.
27 Financial Data Schedule for the six months ended
June 25, 2000 (filed electronically only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company
during the quarter ended June 25, 2000.
Form 8-K was filed on July 17, 2000, announcing that
the boards of Georgia-Pacific and Fort James signed a
definitive merger agreement for Georgia-Pacific to acquire all
outstanding shares of Fort James. The Agreement and Plan of
Merger among the companies was filed as an exhibit to this
Form 8-K.
Form 8-K was filed on July 20, 2000, containing, as
an exhibit, the Company's second quarter earnings press
release issued on July 19, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORT JAMES CORPORATION
By:/s/ Joseph W. McGarr
Joseph W. McGarr
Executive Vice President and Chief
Financial Officer
By:/s/ Catherine M. Freeman
Catherine M. Freeman
Vice President and Corporate Controlle
(Principal Accounting Officer)
Date: August 4, 2000
