-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HIuzXGvU3X+1F0/1PVlprIj2YYzqxZzjP+NAUhkUuWOm0SxWlHGciC9gsliSMjys c3kkYRvQGvGhhKTYSX0NFA== 0000950130-00-001355.txt : 20000320 0000950130-00-001355.hdr.sgml : 20000320 ACCESSION NUMBER: 0000950130-00-001355 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAMPION INTERNATIONAL CORP CENTRAL INDEX KEY: 0000019150 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 131427390 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03053 FILM NUMBER: 572029 BUSINESS ADDRESS: STREET 1: ONE CHAMPION PLAZA CITY: STAMFORD STATE: CT ZIP: 06921 BUSINESS PHONE: 2033587000 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES PLYWOOD CHAMPION PAPERS IN DATE OF NAME CHANGE: 19720821 10-K405 1 FORM 10-K =============================================================================== 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 fiscal year ended December 31, 1999 Commission File Number 1-3053 CHAMPION INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) New York 13-1427390 (State of incorporation) (I.R.S. Employer Identification Number) One Champion Plaza Stamford, Connecticut 06921 (203) 358-7000 (Address including zip code and telephone number, including area code, of registrant's principal executive offices) ---------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ----------------------- Common Stock, $.50 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 (or for such shorter period that the registrant was required to file such reports), 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 any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of February 29, 2000 was approximately $4,994,000,000. As of February 29, 2000, 96,583,264 shares of common stock of the registrant were outstanding. Portions of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1999 are incorporated by reference in Parts I, II and IV hereof. =============================================================================== PART I Item 1. Business General Champion International Corporation was incorporated under the laws of the State of New York on April 28, 1937. References to the "Company" include Champion International Corporation and its subsidiaries at December 31, 1999, unless the context otherwise requires. On February 17, 2000, UPM-Kymmene Corporation and the Company announced that their boards of directors had approved a definitive merger agreement. Under the terms of the agreement, UPM-Kymmene will exchange 1.99 of its ordinary shares for each outstanding share of the Company's Common Stock. Company shareholders may elect to receive either UPM-Kymmene American Depositary Receipts or ordinary shares. The merger is conditioned upon, among other things, the approvals of the shareholders of both companies and regulatory approvals in various jurisdictions. The companies anticipate that the merger can be completed during the first half of 2000. The Company is one of the leading domestic manufacturers of paper for business communications, commercial printing and publications. In addition, the Company has significant market pulp, plywood, lumber and wood chip manufacturing operations and owns or controls approximately 4,996,000 acres of timberlands in the United States. The Company's Canadian and Brazilian subsidiaries also own or control significant timber resources supporting their operations. The Company's business segments are North American pulp and paper, Brazilian pulp and paper, distribution and wood products. See Note 14 of "Notes to Financial Statements" on pages 43 and 44 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1999 (the "Company's 1999 Annual Report"), which Note is incorporated by reference herein, for information concerning the Company's business segments and operations in different geographic areas for 1997, 1998 and 1999. On October 7, 1997, the Company approved a plan to divest several non- strategic operations. As part of the divestiture, the Company offered for sale the Canton, North Carolina freesheet papers and bleached paperboard mill, the newsprint mills at Lufkin and Sheldon, Texas, the groundwood papers mill at Deferiet, New York and the premium freesheet papers mill at Hamilton, Ohio. Also offered for sale were the liquid packaging operation (the DairyPak unit) consisting of the Waynesville, North Carolina plant and six paperboard converting plants, the recycling business and approximately 300,000 acres of timberlands. In 1998, the Company sold the Lufkin and Sheldon mills, one of the paperboard converting plants and a portion of the recycling business. In 1999, the Company sold the Canton mill, the Deferiet mill, the Waynesville plant, the five remaining paperboard converting plants and the approximately 300,000 acres of timberlands. The Company is continuing to actively pursue the sale of the Hamilton mill. In addition, the Company has offered for sale approximately 35,000 acres of timberlands in North Carolina and Tennessee. The Hamilton mill is not included in the discussion under "North American Pulp and Paper" below except as set forth under "North American Pulp and Paper - Operations to Be Divested". North American Pulp and Paper The North American pulp and paper segment consists of the Company's domestic pulp and paper operations, excluding its distribution business, as well as the softwood market pulp operations at the Company's wholly owned Canadian subsidiary, Weldwood of Canada Limited ("Weldwood"). See the "Paper Net Sales" table on page 24 of the Company's 1999 Annual Report, which table is incorporated by reference herein, for information concerning the net sales to unaffiliated customers of the various products of the North American pulp and paper segment for 1997, 1998 and 1999. 1 Uncoated Papers The uncoated papers business manufactures and sells uncoated freesheet papers, pulp and, to a lesser extent, coated freesheet papers. The principal manufacturing properties of this operation consist of integrated pulp and paper mills at Courtland, Alabama and Pensacola, Florida. As of December 31, 1999, these mills had an annual capacity of approximately 1,471,000 tons of pulp and 1,540,000 tons of freesheet papers. Most of the fiber requirements of the uncoated papers business is supplied by its own mills and approximately 6% of its fiber requirements in 1999 was purchased from third-party suppliers. In addition, approximately 12% of the pulp produced at the Courtland and Pensacola mills was sold on the open market in 1999. Papers produced by the uncoated papers business are used for computer forms, desktop printers, copier paper, envelope papers and a variety of commercially printed products. The uncoated papers business and the coated papers business jointly maintain 11 sales offices throughout the United States, as well as an order services office in Hamilton, Ohio, for the sale of their products to direct purchasers and through paper merchants and brokers. The uncoated papers business also has responsibility for the sale of uncoated freesheet papers distributed by the Company pursuant to an agreement with APRIL Fine Paper Trading Pte Ltd. The Company leases substantial portions of the Courtland mill under 17 long-term net leases which expire between 2007 and 2029. Each of these leases provides for rental payments over its term sufficient to pay interest on and to retire the industrial development or pollution control revenue bonds issued in connection with the financing of the property subject to such lease. The Company is required to purchase, or has the option to purchase, the property subject to each such lease for a nominal sum at the time the related bonds are retired. Coated Papers The coated papers business manufactures and sells coated groundwood papers, coated freesheet papers, pulp and, to a lesser extent, uncoated groundwood papers. The manufacturing properties of this operation consist of integrated pulp and paper mills at Bucksport, Maine; Sartell, Minnesota; and Quinnesec, Michigan. As of December 31, 1999, these mills had an annual capacity of approximately 804,000 tons of pulp, 816,000 tons of groundwood papers and 329,000 tons of coated freesheet papers. A portion of the fiber requirements of the coated papers business is supplied by its own mills, a portion is supplied by other Company pulp mills, and approximately 25% of its fiber requirements in 1999 was purchased from third-party suppliers. The Company manufactures pulp for sale on the open market at the Quinnesec mill. In 1999, approximately 59% of the pulp production of this mill, or 255,000 tons, was sold on the open market. The balance was used in the production of paper at the Quinnesec mill and at other Company paper mills. The Company's coated and uncoated groundwood grades are used primarily for consumer magazines, direct mail catalogs, directories, textbooks and coupons. Coated freesheet papers are used in catalogs, magazines, textbooks, labels, annual reports and many other commercially printed products. Sales are made to direct purchasers and through paper merchants and brokers from the 11 sales offices and the order services office in Hamilton, Ohio jointly maintained with the uncoated papers business. The Company leases the building which houses one of the paper machines at the Sartell mill until 2008. Thereafter, the Company has options to renew the lease for five terms of five years each. The Company also has the option to purchase the building at its then-current market value at the end of the initial term in 2008 or thereafter at the end of each five-year renewal term. 2 Kraft The Company produces unbleached linerboard, kraft paper and pulp at its integrated pulp and paper mill at Roanoke Rapids, North Carolina. As of December 31, 1999, this mill had an annual capacity of approximately 529,000 tons of pulp, 410,000 tons of linerboard and 119,000 tons of kraft paper. All of this mill's pulp production is used at the mill. In addition, a portion of the fiber requirements of this mill is supplied by other Company pulp mills and approximately 3% of its fiber requirements in 1999 was purchased from third-party suppliers. Unbleached linerboard is used for corrugated boxes, and kraft paper is used for multiwall and grocery bags. Sales are made to converters through three regional sales offices and an order services office in Roanoke Rapids, North Carolina. Pulp For information concerning market pulp produced at the Courtland and Pensacola mills, see the section captioned "Uncoated Papers" above. For information concerning market pulp produced at the Quinnesec mill, see the section captioned "Coated Papers" above. Market pulp produced at these three mills is sold through the Company's headquarters in Stamford, Connecticut and a sales office in Appleton, Wisconsin. Weldwood manufactures bleached softwood kraft pulp at its mill in Hinton, Alberta, Canada. As of December 31, 1999, this mill had an annual capacity of approximately 472,000 tons. In 1999, approximately 23% of the mill's pulp production was used in the Company's own freesheet papers and groundwood papers mills. The balance was sold on the open market through the Company's headquarters in Stamford, Connecticut and a Company sales office in Appleton, Wisconsin. Cariboo Pulp & Paper Company, a joint venture owned equally by Weldwood and Daishowa-Marubeni International Limited, operates a bleached softwood kraft pulp mill in Quesnel, British Columbia, Canada. As of December 31, 1999, this mill had an annual capacity of approximately 370,000 tons. In 1999, approximately 19% of Weldwood's 50% share of the mill's pulp production was used in the Company's Hamilton, Ohio mill, which is to be divested. The balance of Weldwood's share was sold on the open market through the Company's headquarters in Stamford, Connecticut and a Company sales office in Appleton, Wisconsin. While certain of the Company's mills purchase pulp on the open market, the Company and Weldwood overall are net sellers of pulp. Excluding the operations divested in 1999, the Company and Weldwood in the aggregate in 1999 produced approximately 902,000 tons of pulp for sale to unaffiliated purchasers, while the Company used approximately 243,000 tons of pulp purchased from third-party suppliers, resulting in net market pulp of approximately 659,000 tons. Operations to Be Divested The Company has offered for sale the Hamilton, Ohio paper mill. This mill manufactures and sells premium freesheet papers and, as of December 31, 1999, had an annual capacity of approximately 132,000 tons of freesheet papers. Brazilian Pulp and Paper The Brazilian pulp and paper segment consists primarily of the pulp and paper operations of the Company's wholly owned Brazilian subsidiary, Champion Papel e Celulose Ltda. ("Champion Papel"). In addition, the segment includes Champion Papel's wood-related operations. 3 See the "Paper Net Sales" table on page 24 of the Company's 1999 Annual Report, which table is incorporated by reference herein, for information concerning the net sales to unaffiliated customers of the various products of the Brazilian pulp and paper segment for 1997, 1998 and 1999. Champion Papel is a major integrated manufacturer of uncoated freesheet papers, coated groundwood papers and pulp in Brazil. As of December 31, 1999, its two mills had an annual capacity of approximately 423,000 tons of uncoated freesheet papers, 205,000 tons of coated groundwood papers and 439,000 tons of pulp. In addition to being a leading supplier of freesheet and groundwood papers in Brazil, Champion Papel exports a substantial portion of its paper production. As of December 31, 1999, Champion Papel had approximate annual capacities of 1,000,000 tons of softwood chips, most of which is exported to Europe and Japan, and 9 million board feet of softwood lumber. For information concerning timberlands owned or controlled by Champion Papel, see the section captioned "Timber Properties" below. Distribution Nationwide Papers, a unit of the Company, is a distributor of paper, paper products and industrial products. Its marketing operations are carried out through 31 sales offices and 28 distribution centers in 20 states. At three of the centers, Nationwide Papers converts rolls of bleached paperboard and coated and uncoated papers into sheets. In 1999, approximately 82% of its sales were attributable to merchandise purchased from numerous manufacturers other than the Company. However, Nationwide Papers is not dependent on any single supplier for such merchandise. This business has responsibility for the sale of uncoated freesheet papers, designed for use in laser jet printers, manufactured and distributed by the Company pursuant to an agreement with Hewlett-Packard Company. This agreement grants the Company a license to use certain Hewlett-Packard trademarks in North America, Central America, South America, Europe, Africa and the Middle East in connection with the sale of these papers. Wood Products The Company is a major producer of softwood plywood and softwood lumber. The Company's wood products business is conducted through its domestic wood products operations and through the wood products operations of Weldwood. The principal wood products manufacturing facilities operated by the Company are summarized under Item 2 of this Report. As of December 31, 1999, the Company's domestic wood products operations had approximate annual capacities of 940 million square feet (3/8" basis) of softwood plywood and 495 million board feet of softwood lumber. As of December 31, 1999, Weldwood had approximate annual capacities of 395 million square feet (3/8" basis) of softwood plywood, 1,162 million board feet of softwood lumber and 2.5 million cubic feet of laminated-veneer lumber ("LVL"). The Company sells lumber and plywood through one sales office to wholesalers, dealers, industrial users and retailers. Weldwood exports a significant amount of lumber and plywood and also sells such products and LVL through two sales offices to wholesalers, industrial users and retailers throughout North America. See the "Wood Products Net Sales" table on page 26 of the Company's 1999 Annual Report, which table is incorporated by reference herein, for information concerning the net sales to unaffiliated customers of the various products of the wood products segment for 1997, 1998 and 1999. 4 Timber Properties The Company owns 4,549,007 acres and controls 447,043 acres of timberlands in the United States. The Company's owned and controlled timberlands contain in the aggregate approximately 18,686,000 cunits (one cunit equals 100 cubic feet of solid wood) of merchantable sawtimber and approximately 39,570,000 cunits of pulpwood. In 1999, the Company harvested approximately 20% of its domestic fiber requirements from its owned and controlled timberlands. A portion of the fiber harvested by the Company is sold on the domestic open market and in the export market. Broken down by region, the Company's domestic timber acreage and volume are as follows: In the State of Washington, the Company owns 298,339 acres and controls 244 acres of timberlands. These timberlands contain in the aggregate approximately 7,945,000 cunits of merchantable sawtimber and approximately 899,000 cunits of pulpwood. In the South, primarily in Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee, Texas and Virginia, the Company owns 2,574,384 acres and controls 424,932 acres of timberlands containing in the aggregate approximately 5,153,000 cunits of merchantable sawtimber and approximately 23,856,000 cunits of pulpwood. The Company owns 1,676,284 acres and controls 21,867 acres of timberlands in the North, primarily in Maine, Michigan, Minnesota, New Hampshire and Wisconsin. These timberlands contain in the aggregate approximately 5,588,000 cunits of merchantable sawtimber and approximately 14,815,000 cunits of pulpwood. The Company's domestic log and pulpwood requirements are procured from its owned and controlled lands, as described above, as well as from open market purchases, short-term timber purchase contracts with independent timber owners and agencies of the United States and various state governments, and supply agreements with other companies. In the opinion of management, these sources will provide an adequate supply of logs and pulpwood to meet the Company's principal raw materials requirements for the foreseeable future. It is expected that the proportion of the Company's domestic fiber requirements derived from the Company's owned and controlled lands will remain approximately 20% for the next several years and will increase thereafter as more of the Company's plantations, primarily in the South, reach maturity. Supplementing the Company's domestic timberlands are its several seed orchards and nursery operations. These facilities will enable the Company to produce most of the trees which it plans to plant in the United States in the future, including the approximately 64 million trees planned for planting in 2000. Weldwood obtains raw materials for its wood products manufacturing operations primarily from sustained-yield, long-term licenses which grant cutting rights on government-owned timberlands and from long-term agreements with other companies based on their harvesting licenses. Weldwood believes that these sources will provide a substantial portion of the raw materials required by its wood products manufacturing operations for the foreseeable future, with the balance to be obtained from other third-party suppliers. In British Columbia, Canada, Weldwood has rights to harvest approximately 547,000 cunits of merchantable sawtimber annually from long-term licenses and, during the balance of the current terms of such licenses, has rights to harvest an aggregate of approximately 8,017,000 cunits. In Alberta, Canada, Weldwood has cutting rights through June 15, 2008 with respect to approximately 2,461,000 acres of timberlands pursuant to an agreement with the Provincial Government of Alberta. This agreement is renewable at Weldwood's option, subject to Provincial Government approval, for successive 20- year periods as long as the Hinton, Alberta pulp mill remains in operation. Weldwood has the right to harvest approximately 671,000 cunits of merchantable sawtimber and pulpwood annually under this agreement. Also in Alberta, Canada, Weldwood has cutting rights through July 23, 2012 with respect to approximately 1,591,000 acres of timberlands pursuant to an agreement with the Provincial Government of Alberta. This agreement is renewable at Weldwood's option, subject to Provincial Government approval, for successive 20-year periods as long as the LVL plant remains in operation. Weldwood has the right to harvest approximately 263,000 cunits of merchantable sawtimber and pulpwood annually under this agreement. 5 Cariboo Pulp & Paper Company holds certain rights to harvest up to 533,000 cunits of pulpwood annually from approximately 3,900,000 acres of government- owned timberlands in British Columbia pursuant to a long-term license. Weldwood believes that this source of pulpwood, as well as supplies of wood chips from sawmills and plywood plants in the area, will satisfy the raw materials requirements of Cariboo's pulp mill for the foreseeable future. Babine Forest Products Company, a joint venture in which Weldwood has an indirect 58% interest, operates a sawmill in British Columbia and is beneficially entitled to harvest approximately 230,000 cunits of merchantable sawtimber annually pursuant to long-term licenses. Houston Forest Products Company, a joint venture in which Weldwood and West Fraser Mills Ltd. are equal participants, operates a sawmill in British Columbia and is beneficially entitled to cut approximately 229,000 cunits of merchantable sawtimber annually pursuant to a long-term license. Champion Papel owns or controls 1,514,004 acres of timberlands and savanna in Brazil. The owned or controlled acreage includes 1,053,504 acres in the State of Amapa, of which 180,545 acres are pine and eucalyptus plantations. Champion Papel expects to plant additional eucalyptus and pine trees on its land in Amapa until approximately 38% of such land is planted, with 50% legally required to be left undisturbed, leaving the balance for natural features and improvements. In the State of Parana, Champion Papel owns 130,772 acres, of which 20% is legally required to be left undisturbed and an additional 20% will be left for natural features and improvements. In the State of Sao Paulo, Champion Papel owns or controls 118,234 acres, of which 20% is legally required to be left undisturbed and an additional 5% will be left for natural features and improvements. In the State of Mato Grosso do Sul, Champion Papel owns or controls 211,494 acres, of which 20% is legally required to be left undisturbed and an additional 8% will be left for natural features and improvements. Certain of the Company's land holdings have a value substantially in excess of that of land primarily used for fiber supply purposes. The Company has sold or contributed to its wholly owned real estate subsidiaries, net of land repurchased by the Company, an aggregate of approximately 333,000 acres of such land. These subsidiaries have sold approximately 273,000 acres, of which approximately 14,000 acres were sold during 1999, for residential, recreational, commercial or industrial purposes. The balance is being held for similar sale or long-term appreciation. A substantial portion of the land held by the Company's real estate subsidiaries is located in Texas, Florida, Minnesota and North Carolina. Mineral, Oil and Gas Resources The Company owns or controls various mineral, oil and gas rights with respect to approximately half of the timberlands owned or controlled by the Company in the United States. The Company has conducted a general review of its domestic mineral, oil and gas rights and presently is not aware of any significant reserves or deposits except as discussed below. The Company has oil and gas interests in fields located in Alabama, Florida, Louisiana, Mississippi and Texas. Drilling operations are conducted by others pursuant to leases and other agreements with the Company. The Company estimates that proved reserves attributable to the Company's interests in such fields aggregated approximately 1,200,000 barrels of oil and 5,000,000 Mcf (thousand cubic feet) of natural gas as of December 31, 1999. The Company's share of production from such fields was approximately 226,000 barrels of oil, 718,000 Mcf of natural gas and 1,517,000 gallons of gas products in 1999. Proved oil and gas reserves attributable to the Company's non-operating royalty interests and/or operating interests in the oil and gas fields described above are based primarily upon estimates furnished by the operators of those fields. The Company's share of production from such fields during each calendar year is based on monthly production information received from the operators, showing the application of such interests of the Company to actual production volumes for such month. The Company owns the surface rights and full or partial mineral rights to considerable timberlands in Texas which overlay lignite deposits. The Company estimates that it owns approximately 350,000,000 tons of lignite reserves in Texas, of which 80% is estimated to be recoverable. These lignite reserves presently are not being mined due to current market conditions. 6 Capital Program The Company presently anticipates that capital spending, including contract timber, reforestation and capitalized interest, will be approximately $486 million in 2000, a significant portion of which will be devoted to incremental improvements, routine capital replacements and environmental compliance. In 1999, the Company completed an alkaline-conversion project and various environmental improvement projects at the Courtland, Alabama mill. The total cost of these projects was approximately $101 million. In 1998, the Company began a gas-fired turbine cogeneration project at the Bucksport, Maine mill. The Company will own 28% of the project, which is expected to be completed in 2000. The Company's share of the total project cost will be approximately $33 million, of which approximately $12 million will be expended by the Company in 2000. In 1999, the Company began a project to modernize the No. 3 paper machine at the Sartell, Minnesota mill. The project is expected to be completed in 2000 at a cost of approximately $48 million, of which approximately $19 million will be expended in 2000. In 1999, the Company began an alkaline-conversion project and various production improvement projects at the Mogi Guacu, Brazil mill. These projects are expected to be completed in 2000 at a cost of approximately $48 million, of which approximately $28 million will be expended in 2000. In 1999, the Company began construction of a lumber mill in western Florida. The new lumber mill will have an annual capacity of approximately 150 million board feet of lumber. The project is expected to be completed in 2000 at a cost of $61 million, of which approximately $55 million will be expended in 2000. The Company has under consideration the possible establishment of a new chipping operation in the State of Amapa, Brazil and the possible construction of a pulp and paper mill at Tres Lagoas, Brazil. Approximately $290 million had been expended as of December 31, 1999 in connection with these projects, including land acquisition and reforestation. Approximately $18 million is expected to be expended in 2000 for these projects. Competition The Company's products are pulp, paper and wood products. The markets in which the Company sells its products are highly competitive. The Company faces numerous competitors within the forest products industry in each of its major markets and also competes with suppliers of kraft paper substitutes made from plastics. Competition in all markets is based primarily on price. The Company is one of the largest domestic producers and suppliers of coated and uncoated freesheet and groundwood papers and hardwood market pulp. Weldwood is one of the largest producers of lumber and softwood market pulp in Canada. Champion Papel is the largest producer and supplier of coated groundwood papers in Brazil and one of the largest producers and suppliers of uncoated freesheet papers in Brazil. Foreign Operations For information concerning sales and income of the Company's foreign subsidiaries and the risks associated with the Company's foreign operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations", incorporated by reference in Item 7 of this Report from the Company's 1999 Annual Report. Employees The Company had 17,785 employees at December 31, 1999. Of these, 11,204 were domestic employees, 7 48% of whom were covered by contracts with labor unions. Overall, 61% of the Company's employees were covered by contracts with labor unions. Union contracts relating to the Bucksport, Maine and Sartell, Minnesota groundwood papers mills will expire on April 30, 2000 and August 31, 2000, respectively. Union contracts covering other domestic operations will expire as follows: 2000 - the Florida and Georgia wood products operations; 2001 - the Pensacola, Florida freesheet papers mill and the Hamilton, Ohio premium freesheet papers mill; 2002 - the Courtland, Alabama freesheet papers mill and a Maine wood products operation; 2005 - the Roanoke Rapids, North Carolina kraft mill and a Maine wood products operation. The Quinnesec, Michigan mill is a non-union facility. At Weldwood, union contracts covering the wood products facilities, except the Hinton, Alberta plant, will expire in 2000. Union contracts covering the Hinton, Alberta pulp mill and wood products plant and the joint venture pulp mill at Quesnel, British Columbia will expire in 2003. The wood products mills of Weldwood subsidiaries Decker Lake Forest Products Limited and Sunpine Forest Products Ltd. are non-union facilities. The labor contracts which cover the Company's various operations in Brazil are renegotiated each year. The Environment For information regarding environmental capital expenditures, hazardous substance cleanup, environmental legal proceedings and other environmental matters affecting the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations", incorporated by reference in Item 7 of this Report from the Company's 1999 Annual Report. Energy Requirements The Company believes that it will be able to meet its energy needs for the foreseeable future. Wood wastes and pulping liquors, which are by-products from the manufacture of wood products and pulp, provide a reliable and relatively low-cost source of energy for the Company's primary manufacturing facilities. The Company's domestic wood products manufacturing facilities and domestic pulp, paper and kraft mills satisfy approximately half of their energy requirements from such wood wastes and pulping liquors. The Company's foreseeable needs for purchased energy have been anticipated, and the Company believes that it has arranged for adequate sources of supply. Item 2. Properties In 1999, the Company's domestic and foreign manufacturing facilities operated at 98% of capacity in the North American and Brazilian pulp and paper segments, at 97% of capacity for lumber and studs and at full capacity for plywood. Production curtailments in the Company's North American and Brazilian pulp and paper segments were attributable primarily to weak market conditions, scheduled maintenance and a two-week strike at Weldwood's Hinton pulp mill. Production curtailments in the wood products segment were attributable primarily to quotas relating to the export of Canadian wood products to the United States. Reference is made to Item 1 of this Report for information concerning the general character, adequacy and capacity of the principal plants, timber properties and other materially important physical properties of the Company. The following lists show the location, nature and ownership of the Company's principal plants. None of these plants is subject to a mortgage and, except as indicated, all are owned in fee. 8 North American Pulp and Paper Uncoated Papers (a) Integrated pulp and freesheet papers mills: (i) Courtland, Alabama/1/; and (ii) Pensacola, Florida. Coated Papers (b) Integrated pulp and groundwood papers mills: (i) Bucksport, Maine; and (ii) Sartell, Minnesota/2/. (c) The Company operates an integrated pulp and freesheet papers mill in Quinnesec, Michigan. Kraft (d) The Company operates an integrated pulp, linerboard and kraft papers mill in Roanoke Rapids, North Carolina. Premium Papers (e) The Company operates a premium freesheet papers mill in Hamilton, Ohio (which the Company has offered for sale as discussed in Item 1 in the section captioned "North American Pulp and Paper"). Pulp (f) Market pulp is produced at the Company's freesheet papers mills in Pensacola, Florida, Courtland, Alabama and Quinnesec, Michigan. (g) Weldwood operates a pulp mill in Hinton, Alberta, Canada and owns 50% of a joint venture which operates a pulp mill in Quesnel, British Columbia, Canada. Brazilian Pulp and Paper (a) Champion Papel operates an integrated pulp and freesheet papers mill at Mogi Guacu, Brazil. (b) Inpacel, a wholly owned subsidiary of Champion Papel, operates an integrated pulp and groundwood papers mill in Arapoti, Brazil. (c) Champion Papel, through wholly owned subsidiaries, operates a wood chipping operation and a softwood lumber mill in Brazil. Wood Products (a) The Company operates three softwood plywood plants in the United States. _______________________ /1/ For Courtland, Alabama mill lease information, see Item 1 - "North American Pulp and Paper" of this Report. /2/ For Sartell, Minnesota mill lease information, see Item 1 - "North American Pulp and Paper" of this Report. 9 (b) Weldwood operates two softwood plywood plants in Canada. One of these plants is located on leased land. (c) The Company operates five softwood lumber mills in the United States. (d) Weldwood operates three softwood lumber mills in Canada. One of these mills is located on leased land. (e) Sunpine Forest Products Ltd. ("Sunpine"), a wholly owned subsidiary of Weldwood, operates a softwood lumber mill, a lumber-treating operation and a veneer mill in Canada. (f) Decker Lake Forest Products Limited, a subsidiary in which Weldwood has an indirect 58% interest, operates a softwood lumber mill in Canada. (g) Each of Babine Forest Products Company and Houston Forest Products Company, joint ventures in which Weldwood has an interest, operates a mill for the production of softwood lumber in Canada. One of these mills is located on leased land. (h) Sunpine operates an LVL plant in Canada. Item 3. Legal Proceedings On December 30, 1999, the Company entered into a Consent Order with the Florida Department of Environmental Protection relating to alleged violations of the wastewater discharge permit at the Company's Pensacola, Florida mill. The Consent Order requires the Company to take additional steps to control the discharge of suspended solids, nutrients and oxygen-consuming material in the mill's wastewater and to pay a civil penalty of $137,730. The Consent Order has not yet become effective due to the filing of administrative appeals by third parties. On March 1, 2000, an action was filed against the Company, each of the Company's directors and UPM-Kymmene Corporation in the Supreme Court of the State of New York for the County of New York. The action, which purports to be a class action on behalf of the Company's shareholders, alleges breach of fiduciary duty by the directors of the Company in approving the Company's proposed merger with UPM-Kymmene. The action seeks compensatory damages in an unspecified amount and an injunction against the merger. The Company intends to vigorously defend this action. The Company also is involved in other legal and administrative proceedings and claims of various types. While any litigation contains an element of uncertainty, management, based upon the opinion of the Company's General Counsel, presently believes that the outcome of each such proceeding or claim which is pending or known to be threatened (including the actions described above), or all of them combined, will not have a material adverse effect on the Company. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of the Registrant/1/ L. Scott Barnard (age 57) is an Executive Vice President of the Company, a position which he has held since ________________________ /1/ The term of office for each executive officer expires at the Annual Meeting of the Board of Directors of the Company to be held immediately following the 2000 Annual Meeting of Shareholders. 10 August 1992. He has responsibility for the Company's distribution business, pulp sales and international sales. From September 1996 to April 1998, he had responsibility for the Company's pulp and paper sales. From February 1989 to September 1996, he had responsibility for sales and marketing for the printing and writing papers and publication papers businesses. Stephen B. Brown (age 60) is Senior Vice President and General Counsel of the Company, a position which he has held since January 1997. From April 1983 to December 1996, he was Vice President-Senior Counsel. Mark V. Childers (age 47) is an Executive Vice President of the Company, a position which he has held since April 1998. He heads the forest products unit, which consists of domestic timberlands operations and the domestic wood products business. From August 1992 to April 1998, he was Senior Vice President- Organizational Development and Human Resources of the Company. Michael P. Corey (age 56) is a Senior Vice President of the Company, a position which he has held since February 1997. He has responsibility for marketing, strategic planning, corporate analysis, value-based management, acquisitions and divestitures, mineral resources and the Company's real estate subsidiaries. From December 1984 to February 1997, he was Vice President- Corporate Analysis. Richard J. Diforio, Jr. (age 64) is a Senior Vice President of the Company, a position which he has held since November 1992. He has responsibility for environmental, health and safety affairs. Thomas L. Griffin (age 57) is an Executive Vice President of the Company, a position which he has held since April 1998. He heads the coated papers and kraft papers businesses. From October 1996 to April 1998, he was Vice President-General Manufacturing Manager of the freesheet papers business. From July 1995 to September 1996, he was Vice President-Manufacturing of the publication papers business. From February 1991 to June 1995, he was Vice President-Operations Manager of the Company's Deferiet, New York mill. Kenwood C. Nichols (age 60) is Vice Chairman and Executive Officer and a director of the Company. He was elected Executive Officer in 1996. Since August 1989, he has served as Vice Chairman and a director. Richard E. Olson (age 62) is Chairman of the Board of Directors and Chief Executive Officer of the Company, positions which he has held since 1996. From December 1987 to 1996, he was an Executive Vice President of the Company, with responsibility for engineering, technology, manufacturing support and major projects. Richard L. Porterfield (age 53) is an Executive Vice President of the Company, a position which he has held since August 1992. He heads the uncoated papers business. From August 1992 to April 1998, he had responsibility for the forest products unit. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company had 13,784 record holders of its Common Stock as of February 29, 2000. The Company's Common Stock is traded on the New York Stock Exchange. Restrictions on the ability of the Company to pay cash dividends are included in several of the Company's debt instruments and the Company's Restated Certificate of Incorporation. At December 31, 1999, the most restrictive of these limitations required the Company to maintain tangible net worth (as defined below) of at least $2.2 billion. As a result of this requirement, such amount is unavailable for the payment of dividends. Approximately $867 million of tangible net worth at December 31, 1999 was free of such restrictions. Tangible net worth is defined as shareholders' equity minus goodwill, unamortized debt discount and other like intangibles, all determined on a consolidated basis for the Company. 11 For information concerning the high and low sales prices of the Company's Common Stock for each quarterly period during the last two years and the amount of dividends declared on the Company's Common Stock in each quarterly period during the last two years, see the section on page 60 of the Company's 1999 Annual Report captioned "Common Stock Prices and Dividends Declared". Said section is incorporated by reference herein. Item 6. Selected Financial Data There is incorporated by reference herein the table on pages 56 and 57 of the Company's 1999 Annual Report captioned "Eleven-Year Selected Financial Data". Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations There is incorporated by reference herein the section on pages 48 to 55 of the Company's 1999 Annual Report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations". In September 1998, the EPA issued final regulations requiring a 60% reduction in Nitrogen Oxide (NOx) emissions in 22 states. The states are required to submit plans for reducing NOx emissions from industrial sources and to implement their plans by 2003. Four of the Company's mills are located in the affected states. Based upon a preliminary review of the regulations, the Company presently anticipates that it could incur capital expenditures of $20 to $40 million over a multi-year period to comply with the regulations. Approximately 15% of the estimated costs are attributable to the Hamilton, Ohio mill which the Company has offered for sale. These estimated expenditures assume that the technology identified by the EPA is capable of achieving the NOx reductions projected by the EPA, which the Company has not independently confirmed. The cost of this project is not included in the capital expenditure information set forth above under "Capital Expenditures" or "Environmental Capital Expenditures." Item 7A. Quantitative and Qualitative Disclosures About Market Risk There is incorporated by reference herein the section on page 55 of the Company's 1999 Annual Report captioned "Financial Market Risk". Item 8. Financial Statements and Supplementary Data There is incorporated by reference herein the sections of the Company's 1999 Annual Report captioned "Consolidated Statement of Income", "Consolidated Balance Sheet", "Consolidated Cash Flows", "Consolidated Retained Earnings", "Consolidated Statement of Comprehensive Income", "Notes to Financial Statements" and "Report of Independent Public Accountants", which sections are on pages 29, 30, 31, 32, 32, 33 to 46 and 47, respectively, of the Company's 1999 Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant See the section captioned "Executive Officers of the Registrant" under Part I of this Report for information concerning the Company's executive officers. 12 Information Concerning the Company's Directors The following table sets forth the names of the directors of the Company, their terms of office, the years in which they first became directors of the Company and their ages. Each director's term will end upon the merger contemplated by the Agreement and Plan of Merger by and among UPM-Kymmene Corporation, Blue Acquisition, Inc. and the Company dated as of February 17, 2000 or, if the merger is not consummated, at the Annual Meeting of Shareholders in the year set forth in the second column of the following table.
Name Term Will Expire First Elected a Director Age ---------------------------------------------------------------------------------------- Lawrence A. Bossidy 2002 1995 65 Robert A. Charpie 2000 1975 74 H. Corbin Day 2001 1997 62 Alice F. Emerson 2001 1993 68 Allan E. Gotlieb 2000 1989 72 Henrique C. Meirelles 2002 1999 54 Kenwood C. Nichols 2001 1989 60 Richard E. Olson 2002 1996 62 Walter V. Shipley 2000 1983 64 Richard E. Walton 2000 1987 68 ----------------------------------------------------------------------------------------
Mr. Bossidy has been Chairman of the Board of Honeywell International Inc., a manufacturer of aerospace and automotive products, engineered materials, specialty chemicals and electronic materials, since the acquisition of Honeywell Inc. by AlliedSignal Inc. on December 1, 1999. He had served as Chief Executive Officer of AlliedSignal since 1991 and Chairman of the Board of AlliedSignal since 1992. From 1957 to 1991, he served in various executive and financial positions, including Vice Chairman and Executive Officer, at General Electric Company, a diversified services and manufacturing company. He also is a director of Merck & Co., Inc. and J.P. Morgan & Co. Incorporated. Mr. Charpie served as President of Cabot Corporation, a producer of chemicals, metals, oil and gas, from 1969 to 1986 and as Chairman of the Board of Cabot from 1986 to 1988. He is Chairman of Ampersand Venture Management Corporation, a venture capital investment management firm. Mr. Day has been Chairman of the Board of Jemison Investment Co., Inc., a diversified holding company and venture capital firm, since 1988. He is a limited partner and former general partner of Goldman, Sachs & Co., which provides investment banking and financial advisory services to the Company. He also is a director of European Investors Holding Company, Inc., Hughes Supply, Inc. and Protective Life Corporation. Ms. Emerson is a Senior Advisor at The Andrew W. Mellon Foundation, a philanthropic institution. From 1975 until joining the Mellon Foundation in 1991, she served as President of Wheaton College in Norton, Massachusetts. She also is a director of AES Corporation, Eastman Kodak Company and FleetBoston Financial Corporation. Mr. Gotlieb served as Canada's Ambassador to the United States from 1981 to 1989 and as Chairman of Burson-Marsteller Canada, a public relations firm, from 1991 to 1995. He is a director of Alcan Aluminium Limited and Hollinger Inc. Mr. Meirelles has been President of Global Banking and Financial Services and a director of FleetBoston Financial Corporation since the merger of BankBoston Corporation and Fleet Financial Group on October 1, 1999. He had served as President and Chief Operating Officer and a director of BankBoston Corporation since 1996. He served BankBoston Corporation and its subsidiaries in various positions since 1974, including as Regional Manager of Brazil from 1994 to 1996. He also is a director of Bestfoods and Raytheon Company. 13 Mr. Nichols was elected Vice Chairman and Executive Officer of the Company in 1996. He has been Vice Chairman and a director of the Company since 1989. Mr. Olson was elected Chairman and Chief Executive Officer of the Company in 1996. He had been an Executive Vice President of the Company since 1987. Mr. Shipley is Retired Chairman of the Board of The Chase Manhattan Corporation. He served as Chairman and Chief Executive Officer of The Chase Manhattan Corporation from 1996 through May 1999 and as Chairman of the Board from June through December 1999. From 1982 to 1996, he served as Chairman and Chief Executive Officer or as President of Chemical Banking Corporation, which merged with and changed its name to The Chase Manhattan Corporation in 1996. He also is a director of Bell Atlantic Corporation and Exxon Mobil Corporation. Mr. Walton was a professor at the Harvard University Graduate School of Business Administration, specializing in organizational development and work innovation in industry, from 1968 to 1997. Item 11. Executive Compensation Summary Compensation Table The following table sets forth information concerning the compensation for 1997, 1998 and 1999 of the Company's Chief Executive Officer and each of the other four most highly compensated executive officers of the Company in 1999 (collectively, the "named executives"). Summary Compensation Table
Long-Term Compensation Annual Compensation Awards --------------------------------------------------- ------------ Bonus Other All ------------------------ Annual Securities Other Name and Incentive Deferral Compen- Underlying Compen- Principal Salary/(2)/ Award/(2)/ Premium/(3)/ sation/(4)/ Options sation/(5)/ Position Year ($) ($) ($) ($) (#) ($) - ----------------------------------------------------------------------------------------------------------------------- Richard E. Olson, 1999 $800,000 $1,500,000 $150,000 $ -- 55,000 $207,790 Chairman and 1998 800,000 475,000 47,500 -- 55,000 233,786 Chief Executive Officer 1997 800,000 300,000 N/A 1,071 23,000 167,777 - ----------------------------------------------------------------------------------------------------------------------- Kenwood C. Nichols, 1999 700,000 1,000,000 0 -- 40,000 156,960 Vice Chairman and 1998 665,000 320,000 0 -- 40,000 204,307 Executive Officer 1997 665,000 250,000 N/A 843 15,500 152,186 - ----------------------------------------------------------------------------------------------------------------------- L. Scott Barnard, 1999 441,000 408,600 0 -- 20,000 105,742 Executive Vice 1998 441,000 180,000 18,000 -- 20,000 102,559 President 1997 424,000 140,000 N/A 420 8,000 100,167 - ----------------------------------------------------------------------------------------------------------------------- Richard L. Porterfield, 1999 386,000 357,500 35,750 1,502 20,000 72,534 Executive Vice 1998 386,000 160,000 0 -- 18,500 76,035 President 1997 371,000 135,000 N/A 352 6,800 69,575 - ----------------------------------------------------------------------------------------------------------------------- Thomas L. Griffin, 1999 320,000 357,500 35,750 -- 20,000 53,641 Executive Vice 1998 281,580 175,000 17,500 -- 15,800 51,088 President/(1)/ - -----------------------------------------------------------------------------------------------------------------------
(1) Mr. Griffin was elected an Executive Vice President in 1998. 14 (2) The amounts reported in the Salary and Incentive Award columns, respectively, include all salary and annual incentive compensation for the applicable years, whether paid currently in cash or deferred until retirement at the election of the named executive. (3) As an incentive for senior managers to increase their equity interest in the Company, the Compensation and Stock Option Committee of the Board of Directors authorized a 10% increase in the amount of any annual incentive compensation awards for 1998 and 1999 that were deferred until retirement by the recipients in the form of units equivalent to shares of the Company's Common Stock. Messrs. Olson, Barnard and Griffin made such deferral elections for 1998, and Messrs. Olson, Porterfield and Griffin made such deferral elections for 1999. The resulting increase in their annual incentive compensation for each of 1998 and 1999 is set forth in the Deferral Premium column. The total annual incentive compensation for each of 1998 and 1999 for Messrs. Olson, Barnard, Porterfield and Griffin is equal to the sum of the amounts set forth in the Incentive Award and Deferral Premium columns. (4) The amounts reported for Mr. Porterfield for 1999 and for Messrs. Olson, Nichols, Barnard and Porterfield for 1997 represent certain tax payments made by the Company on their behalf. In each of 1997, 1998 and 1999, the value of personal benefits provided to the named executives was less than the minimum amount required to be reported. (5) The amounts reported for 1999 include matching contributions by the Company to accounts under the Savings Plan for Salaried Employees and the Nonqualified Supplemental Savings Plan, as follows: Mr. Olson - $38,475; Mr. Nichols - $30,600; Mr. Barnard - $18,457; Mr. Porterfield - $16,380; and Mr. Griffin - $14,450. Company contributions are invested in shares of the Company's Common Stock under the Savings Plan for Salaried Employees, which is funded, and are made in units equivalent to shares of the Company's Common Stock under the Nonqualified Supplemental Savings Plan, which is unfunded. The balance of the amounts reported for 1999 represents premiums paid by the Company under the Company's Executive Life Insurance Plan. All employees who are above a certain compensation grade level, including all of the executive officers, participate in this plan. (6) As of year-end 1999, the number and market value of restricted stock units and of performance share units in the aggregate held by each of the named executives were as follows: Mr. Olson - 80,600 units ($4,992,163); Mr. Nichols - 66,500 units ($4,118,844); Mr. Barnard - 48,000 units ($2,973,000); Mr. Porterfield - 40,600 units ($2,514,663); and Mr. Griffin - 14,800 units ($916,675). 15 Option Grant Table The following table sets forth information concerning the grant of stock options to each of the named executives in 1999. The potential realizable values included in the table represent hypothetical gains from the stock options granted in 1999 as well as the corresponding hypothetical gains for all shareholders in the market value of the Company's Common Stock. These hypothetical gains are based upon assumed annual stock price appreciation rates of 5% and 10% over the full 10-year term of the options in accordance with Securities and Exchange Commission regulations. Option Grants in 1999
Individual Grants/(1)/ -------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates Number of Stock Price Appreciation Securities % of Total for Option Term Underlying Options Exercise ------------------------------ Options Granted to or Base Granted Employees Price/(2)/ Expiration 5% 10% Name (#) in 1999 ($/Sh) Date ($) ($) - ------------------------------------------------------------------------------------------------------------------------ Richard E. Olson 55,000 5.66% $33.625 February 17, 2009 $1,163,085 $2,947,615 Kenwood C. Nichols 40,000 4.12% 33.625 February 17, 2009 845,880 2,143,720 L. Scott Barnard 20,000 2.06% 33.625 February 17, 2009 422,940 1,071,860 Richard L. Porterfield 20,000 2.06% 33.625 February 17, 2009 422,940 1,071,860 Thomas L. Griffin 20,000 2.06% 33.625 February 17, 2009 422,940 1,071,860 - ------------------------------------------------------------------------------------------------------------------------ All Shareholders N/A N/A N/A N/A $2.0 billion $5.2 billion - ------------------------------------------------------------------------------------------------------------------------
(1) All of the stock options awarded to the named executives last year were granted on February 17, 1999 and became exercisable on February 17, 2000, provided the optionee remained in the Company's employ until that date. Although the Compensation and Stock Option Committee of the Board of Directors had the authority to permit the exercise of those stock options at any time prior to February 17, 2000 upon its determination of the existence of a special or extraordinary situation, it did not exercise this authority. Reference is made to "Employment and Severance Agreements" below for a description of the cash settlement, under certain circumstances, of stock options held by the named executives upon a termination of employment without cause within three years after a change in control of the Company. (2) The exercise price is 100% of the fair market value of a share of the Company's Common Stock on the date of grant. The exercise price may be paid in cash or in shares of the Company's Common Stock valued at their fair market value on the date of exercise. 16 Option/SAR Exercise and Year-End Values Table The following table sets forth information with respect to each of the named executives concerning the exercise of stock options and tandem stock appreciation rights ("SARs") in 1999 and concerning unexercised stock options and tandem SARs held at December 31, 1999. Aggregated Option/SAR Exercises in 1999 and Year-End Option/SAR Values
Number of Securities Number of Securities Value of Unexercised Underlying Underlying Unexercised In-the-Money Options/SARs Options/SARs Value Options/SARs at Year-End at Year-End /(1)/ Exercised Realized (#) ($) Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------------------------ Richard E. Olson 0 $ 0 102,000 55,000 $1,086,000 $1,557,188 Kenwood C. Nichols 0 0 237,500 40,000 5,719,969 1,132,500 L. Scott Barnard 0 0 58,000 20,000 936,125 566,250 Richard L. Porterfield 33,500 584,656 26,800 20,000 498,975 566,250 Thomas L. Griffin 0 0 28,300 20,000 346,781 566,250 - ------------------------------------------------------------------------------------------------------------------
(1) The amounts in these columns are based upon the $61.9375 closing price of a share of the Company's Common Stock on December 31, 1999 on the New York Stock Exchange Composite Transactions. 17 Pension Plan Table The Company's retirement program consists of (i) a tax-qualified, funded pension plan for all non-represented salaried employees, including executive officers, and (ii) for executive officers and other key employees, a non- qualified, unfunded supplemental retirement income plan that provides benefits which, but for certain limits imposed by the Internal Revenue Code on tax- qualified plans, would be provided under the Company's qualified pension plan. The retirement program provides non-contributory benefits based upon years of service and average annual earnings for, in the case of executive officers, the highest three consecutive years in the 10 years preceding retirement. Average annual earnings covered by the program consist of (1) the average of the salaries reported in the Summary Compensation Table for the applicable years, plus (2) the higher of (a) the average of the bonuses reported in the Summary Compensation Table for such years or (b) the average of the bonuses paid in such years but earned in, and reported in the Summary Compensation Table for, the immediately preceding years. The following table sets forth, for various income and service levels, the annual benefits payable to executive officers under the Company's retirement program for life, commencing at normal retirement at age 65 or upon early retirement after age 62. These benefits are presented on a straight-life annuity basis and before deducting the portion of Social Security payments attributable to Company contributions as provided by the retirement program. Pension Plan Table
Average Approximate Annual Retirement Benefits ---------------------------------------------------------------------------------- Annual 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years Earnings of Service of Service of Service of Service of Service of Service -------------------------------------------------------------------------------------------------- $ 500,000 $ 83,333 $125,000 $ 166,667 $ 208,333 $ 250,000 $ 291,667 750,000 125,000 187,500 250,000 312,500 375,000 437,500 1,000,000 166,667 250,000 333,333 416,667 500,000 583,333 1,250,000 208,333 312,500 416,667 520,833 625,000 729,167 1,500,000 250,000 375,000 500,000 625,000 750,000 875,000 1,750,000 291,667 437,500 583,333 729,167 875,000 1,020,833 2,000,000 333,333 500,000 666,667 833,333 1,000,000 1,166,667 3,000,000 500,000 750,000 1,000,000 1,250,000 1,500,000 1,750,000 --------------------------------------------------------------------------------------------------
Average annual earnings for the highest three consecutive years in the last 10 years and presently credited years of service for the named executives are as follows: Mr. Olson - $1,567,580 / 33 years; Mr. Nichols - $1,259,667 / 27 years; Mr. Barnard - $756,689 / 31 years; Mr. Porterfield - $702,800 / 21 years; and Mr. Griffin - $501,703 / 9 years. Messrs. Nichols and Olson have agreements with the Company which provide for annual retirement benefits of 60%, in the case of Mr. Nichols, and 65%, in the case of Mr. Olson, of average annual earnings (salary and bonus) for the highest three consecutive years in the 10 years preceding retirement. These contractual retirement benefits are provided only to the extent that they exceed the retirement benefits paid under the Company's retirement program, described above. The agreements also provide a survivor retirement benefit for the wives of Messrs. Nichols and Olson equal to 60% of the retirement benefit payable thereunder to the respective executives. Under the agreements, upon retirement Messrs. Nichols and Olson will receive the present value of all of their retirement benefits, other than the portion attributable to the qualified pension plan, in a lump sum. 18 Employment and Severance Agreements Termination Absent a Change in Control The Company has employment agreements with Messrs. Nichols and Olson which provide for minimum annual salaries of $700,000 and $800,000, respectively. If employment is terminated by the Company without cause other than within three years after a change in control of the Company, Messrs. Nichols and Olson are entitled to severance pay for two years at annual rates of $1,700,000 and $2,300,000, respectively, as well as the continuation for two years of certain employee benefits, including medical, dental and disability coverages. These agreements also provide certain retirement benefits, as discussed above under "Pension Plan Table". The Company has agreements with Messrs. Barnard, Griffin and Porterfield which provide that, if employment is terminated by the Company without cause other than within three years after a change in control of the Company, they are entitled to severance pay for two years at annual rates of $912,000, $677,500 and $937,000, respectively, as well as the continuation for two years of certain employee benefits, including medical, dental and disability coverages. Termination Following a Change in Control All of these agreements provide for the payment in a lump sum of the following amounts if the named executive is terminated without cause within three years after a change in control of the Company: (i) severance pay at the annual rates referred to above, and medical, dental and disability coverages, for two years in the event of certain types of terminations or three years in the event of other types of terminations; (ii) the present value of all of the named executive's retirement benefits, other than the portion attributable to the Company's qualified pension plan, after providing credit for two additional years of service in the event of certain types of terminations or three additional years of service in the event of other types of terminations; and (iii) an amount (grossed up for income tax purposes) sufficient to pay any applicable excise tax on benefits received in connection with a change in control in excess of the amount determined under Section 280G of the Internal Revenue Code. The agreements also provide that, under certain circumstances, the Company settle the named executive's stock options and tandem SARs for cash equal to the difference between the fair market value of the option shares at the time of termination (or, if applicable and if higher, the change in control tender offer price) and the exercise price. In addition, provision is made for the payment of legal expenses if the Company refuses to make required payments under the agreements. The agreements provide for the funding of the foregoing amounts through a trust when a potential change in control occurs. Such funding has taken place, since the execution of the merger agreement with UPM-Kymmene Corporation and Blue Acquisition, Inc. on February 17, 2000 constituted a potential change in control. General Provisions The Company's obligation to make the payments provided for in these agreements is subject to certain conditions. Such conditions require, among other things, that following termination of employment the named executive provide such assistance in litigation as may reasonably be requested by the Company and refrain from actions, such as competition against the Company and disclosure of confidential information relating to the Company, that would be materially detrimental to the Company. For the purpose of these agreements, "termination" means involuntary discharge as well as the named executive's decision to terminate employment following specified types of constructive discharge, including diminution of responsibility, reduction of salary or (if within three years after a change in control) relocation beyond a specified area. "Cause" means an act of dishonesty constituting a felony and resulting or intended to result in personal gain at the expense of the Company. "Change in control" means (a) the acquisition by any person of securities representing 30% or more of the combined voting power of the Company's securities, (b) a change in the composition of a majority of the Board of Directors under certain circumstances, (c) certain mergers and consolidations or (d) approval by shareholders of the liquidation of the Company or the consummation of an agreement for the disposition of all or substantially all of its assets. The closing under the merger agreement with UPM-Kymmene Corporation and Blue Acquisition, Inc. will constitute a change in control. 19 Directors' Compensation Each director who is not an employee of the Company receives an annual retainer of $22,500 for services as a director and a fee of $1,500 for each Board meeting attended. Each committee chair receives an annual retainer of $5,000, and committee members, including chairs, receive a fee of $1,000 for each committee meeting attended. At each director's election, these fees are paid quarterly in cash or are deferred quarterly in the form of units equivalent to shares of the Company's Common Stock; such units accrue dividend equivalents and are paid in cash following retirement from the Board in the same manner as the stock units described in the next paragraph. The Board believes that, in order to further align the interests of outside directors with the interests of shareholders, directors' compensation should include a significant component of Company equity. Accordingly, each director who is not an employee of the Company receives quarterly grants of Common Stock equivalent units with an annual value of $22,500. These units accrue amounts equal to dividends paid on the Common Stock, which are credited in the form of additional units. The value of all of a director's Common Stock equivalent units (whether received pursuant to the grants described in this paragraph or pursuant to any elective deferral of fees as described in the previous paragraph) is paid in cash following his or her retirement from the Board, in accordance with a schedule selected by the director, based upon the price of the Common Stock at the time of payment. The Company provides $50,000 of group term life insurance and $250,000 of travel accident insurance to the outside directors as well as directors liability insurance for all directors. Compensation Committee Interlocks and Insider Participation H. Corbin Day is one of the three outside directors who comprise the Compensation and Stock Option Committee of the Board of Directors. He is a limited partner and former general partner of Goldman, Sachs & Co., which provides investment banking and financial advisory services to the Company. Mr. Day retired as a general partner of Goldman Sachs in 1986. Since then, he has had no role in the management of and has not shared in the profits of Goldman Sachs. As a limited partner, his financial interest in Goldman Sachs consists solely of the receipt of a fixed rate of return on the capital contribution that he made to the firm prior to his retirement as a general partner. This return is not dependent upon or affected in any way by the services that Goldman Sachs performs for the Company. 20 Item 12. Security Ownership of Certain Beneficial Owners and Management Principal Shareholders The following table sets forth certain information as of December 31, 1999 with respect to each person who is known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock, which is the only outstanding class of voting securities of the Company.
Name and Address Amount and Nature Percent of Beneficial Owner of Beneficial Ownership of Class ------------------------------------------------------------------------------------------------------- Sanford C. Bernstein & Co., Inc. 767 Fifth Avenue 13,625,865 shares/(1)/ 14.1% New York, New York 10153/(1)/ FMR Corp. 82 Devonshire Street 7,953,662 shares/(2)/ 8.3% Boston, Massachusetts 02109/(2)/ Capital Research and Management Company 333 South Hope Street 7,055,000 shares/(3)/ 7.3% Los Angeles, California 90071/(3)/ Dodge & Cox One Sansome St. 5,015,905 shares/(4)/ 5.2% San Francisco, California 94104/(4)/ -------------------------------------------------------------------------------------------------------
The information that is footnoted in the table above and set forth in the notes below is based upon a Schedule 13G filed with the Securities and Exchange Commission by each respective shareholder. (1) In its Schedule 13G, Sanford C. Bernstein & Co., Inc. stated that (i) such shares are held for the accounts of various clients, and (ii) it has sole voting power with respect to 7,242,616 of such shares, shared voting power with respect to 1,490,046 of such shares and sole dispositive power with respect to all of such shares. (2) In its Schedule 13G, FMR Corp. stated that (i) such shares collectively are beneficially owned by FMR Corp., certain controlling shareholders thereof, and various subsidiaries and one former subsidiary thereof, and (ii) such companies and individuals collectively have sole voting power with respect to 357,332 of such shares and sole dispositive power with respect to all of such shares. (3) In its Schedule 13G, Capital Research and Management Company stated that, in its capacity as investment adviser, it has sole dispositive power with respect to all of such shares. (4) In its Schedule 13G, Dodge & Cox stated that (i) such shares are held for the accounts of various clients, and (ii) it has sole voting power with respect to 4,567,805 of such shares, shared voting power with respect to 39,900 of such shares and sole dispositive power with respect to all of such shares. * * * On February 17, 2000, the Company, UPM-Kymmene Corporation and Blue Acquisition, Inc. entered into a merger agreement pursuant to which UPM-Kymmene will acquire all of the outstanding capital stock of the Company. The transaction is subject to various conditions, including approval by the shareholders of the Company and of UPM-Kymmene and regulatory approvals in various jurisdictions. 21 Stock Ownership by Directors and Executive Officers The following table sets forth certain information with respect to the shares and equivalent units of the Company's Common Stock beneficially owned, as of February 29, 2000, by each director, by each of the named executives and by all directors and executive officers as a group. The number of shares beneficially owned by all directors and executive officers as a group represents less than 1% of the outstanding Common Stock, as determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. Name Number of Shares/(1)/ ------------------------------------------------------------ L. Scott Barnard 105,905/(2),(3)/ Lawrence A. Bossidy 4,895/(4)/ Robert A. Charpie 51,513/(4)/ H. Corbin Day 6,672/(4)/ Alice F. Emerson 1,948/(4)/ Allan E. Gotlieb 2,518/(4)/ Thomas L. Griffin 71,815/(2),(3)/ Henrique C. Meirelles 2,688/(4)/ Kenwood C. Nichols 328,010/(2),(3)/ Richard E. Olson 240,933/(2),(3)/ Richard L. Porterfield 72,419/(2),(3)/ Walter V. Shipley 8,907/(4)/ Richard E. Walton 8,435/(4)/ All directors and executive officers as a group 1,103,370/(2),(3),(4)/ ------------------------------------------------------------ (1) Certain directors and executive officers share voting or investment power with other persons with respect to 31,809 of such shares. (2) The amounts reported include shares of Common Stock that executive officers have the right to acquire pursuant to stock options that are exercisable within 60 days, as follows: Mr. Barnard - 78,000 shares; Mr. Griffin - 48,300 shares; Mr. Nichols - 277,500 shares; Mr. Olson - 157,000 shares; Mr. Porterfield - 46,800 shares; and all executive officers as a group - 759,600 shares. The table does not include shares underlying performance share units and unvested restricted stock units held by executive officers. (3) The amounts reported include shares of Common Stock that have been earned out under certain compensation plans and the receipt of which has been deferred until retirement, as follows: Mr. Barnard - 12,087 shares; Mr. Griffin - 4,438 shares; Mr. Nichols - 13,598 shares; Mr. Olson - 15,343 shares; Mr. Porterfield - 9,514 shares; and all executive officers as a group - 65,372 shares. The amounts reported also include Common Stock equivalent units held under the deferral arrangements of certain compensation and savings plans which entitle participants to receive a cash payment for each unit equal to the price of a share of Common Stock at the time of payment, as follows: Mr. Barnard - 9,239 units; Mr. Griffin - 15,286 units; Mr. Nichols - 5,028 units; Mr. Olson - 47,511 units; Mr. Porterfield - 14,339 units; and all executive officers as a group - 107,562 units. (4) The amounts reported include Common Stock equivalent units, as follows: Mr. Bossidy - 2,895 units; Mr. Charpie - 43,822 units; Mr. Day - 3,672 units; Ms. Emerson - 1,518 units; Mr. Gotlieb - 1,518 units; Mr. Meirelles - 688 units; Mr. Shipley - 7,907 units; Mr. Walton - 6,535 units; and all directors as a group - 68,555 units. These Common Stock equivalent units consist of the units discussed above under "Directors' Compensation" and, in the case of certain directors, similar units representing the settlement of their accrued pension benefit as of January 1, 1997 under the Company's former retirement plan for outside directors. 22 Item 13. Certain Relationships and Related Transactions Transactions The Company and its subsidiaries have transactions in the ordinary course of business with organizations with which certain of the Company's directors are associated. In 1999, none of those transactions was sufficiently significant to be reportable, and management believes that all were on substantially the same terms as those prevailing at the time for comparable transactions with other persons. It is expected that similar transactions with such organizations will take place in the future. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements. The following Consolidated Financial Statements of Champion International Corporation and Subsidiaries, Notes to Financial Statements and Report of Independent Public Accountants are incorporated by reference herein from the Company's 1999 Annual Report:
Caption in Company's Description 1999 Annual Report (page number) ----------- -------------------------------- Consolidated Statements of Income for each of the three years in the period ended December 31, 1999.............................. Consolidated Statement of Income (page 29) Consolidated Balance Sheets at December 31, 1999 and 1998...................... Consolidated Balance Sheet (page 30) Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999.......................... Consolidated Cash Flows (page 31) Consolidated Statements of Retained Earnings for each of the three years in the period ended December 31, 1999.......................... Consolidated Retained Earnings (page 32) Consolidated Statements of Comprehensive Income for each Consolidated Statement of of the three years in the period ended December 31, 1999....................... Comprehensive Income (page 32) Notes to Financial Statements.................................................. Notes to Financial Statements (pages 33 to 46) Report of Independent Public Accountants with respect to the financial statements listed above............................... Report of Independent Public Accountants (page 47)
(b) Financial Statement Schedules. All Financial Statement Schedules have been omitted since the information is not applicable, is not required or is included in the Consolidated Financial Statements or Notes to Financial Statements listed under section (a) of this Item 14. (c) Exhibits. Each Exhibit is listed according to the number assigned to it in the Exhibit Table of Item 601 of Regulation S-K. The Exhibit numbers preceded by an asterisk (*) indicate Exhibits physically filed with this Annual Report on Form 10-K. All other Exhibit numbers indicate Exhibits filed by incorporation by reference herein. Exhibit numbers 10.1 through 10.39, which are preceded by a plus sign (+), are management contracts or compensatory plans or arrangements. 23 Exhibit Number Description - -------------- ----------- 2.1 Agreement and Plan of Merger, dated as of February 17, 2000, by and among Champion International Corporation, UPM-Kymmene Corporation and Blue Acquisition, Inc. (filed by incorporation by reference to Exhibit 2.1 to the Company's Form 8-K dated February 25, 2000, Commission File No. 1-3053). 2.2 Stock Option Agreement, dated as of February 17, 2000, between Champion International Corporation and UPM-Kymmene Corporation (filed by incorporation by reference to Exhibit 2.2 to the Company's Form 8-K dated February 25, 2000, Commission File No. 1-3053). 2.3 Parent Stock Option Agreement, dated as of February 17, 2000, between Champion International Corporation and UPM-Kymmene Corporation (filed by incorporation by reference to Exhibit 2.3 to the Company's Form 8-K dated February 25, 2000, Commission File No. 1-3053). 2.4 Parent Treasury Stock Option Agreement, dated as of February 17, 2000, between Champion International Corporation and UPM- Kymmene Corporation (filed by incorporation by reference to Exhibit 2.4 to the Company's Form 8-K dated February 25, 2000, Commission File No. 1-3053). 3.1 Restated Certificate of Incorporation of the Company, filed in the State of New York on October 20, 1986 (filed by incorporation by reference to Exhibit 3.1 to the Company's Form 10-K for the fiscal year ended December 31, 1986, Commission File No. 1-3053). 3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company, filed in the State of New York on July 18, 1988 (filed by incorporation by reference to Exhibit 4.1 to the Company's Form 10-Q for the quarter ended June 30, 1988, Commission File No. 1-3053). 3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company, filed in the State of New York on December 6, 1989 (filed by incorporation by reference to Exhibit 4.1 to the Company's Form 8-K dated December 14, 1989, Commission File No. 1-3053). 3.4 Certificate of Amendment of Restated Certificate of Incorporation of the Company, filed in the State of New York on December 21, 1989 (filed by incorporation by reference to Exhibit 3.4 to the Company's Form 10-K for the fiscal year ended December 31, 1989, Commission File No. 1-3053). 3.5 By-Laws of the Company (filed by incorporation by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended March 31, 1999, Commission File No. 1-3053). 4 Letter agreement dated March 29, 1991 of the Company to furnish to the Commission upon request copies of certain instruments with respect to long-term debt (filed by incorporation by reference to Exhibit 4 to the Company's Form 10-K for the fiscal year ended December 31, 1990, Commission File No. 1-3053). +10.1 Champion International Corporation 1986 Management Incentive Program, consisting of the 1986 Stock Option Plan and the 1986 Contingent Compensation Plan (filed by incorporation by reference to Exhibit 19.1 to the Company's Form 10-Q for the quarter ended June 30, 1986, Commission File No. 1-3053). 24 Exhibit Number Description - -------------- ----------- +10.2 Amendment to Champion International Corporation 1986 Management Incentive Program (filed by incorporation by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-3053). +10.3 Amendment to Champion International Corporation 1986 Management Incentive Program (filed by incorporation by reference to the appendix to the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders). +10.4 Champion International Corporation 1999 Stock Option Plan (filed by incorporation by reference to Exhibit A to the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders). *+10.5 Amendment to Champion International Corporation 1999 Stock Option Plan. +10.6 Champion International Corporation Supplemental Retirement Income Plan (filed by incorporation by reference to Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended December 31, 1989, Commission File No. 1-3053). +10.7 Amendment dated as of January 1, 1994 to Champion International Corporation Supplemental Retirement Income Plan (filed by incorporation by reference to Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 1-3053). +10.8 Champion International Corporation Nonqualified Supplemental Savings Plan (filed by incorporation by reference to Exhibit 10.5 to the Company's Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 1-3053). +10.9 Champion International Corporation Management Incentive Deferral Plan (filed by incorporation by reference to Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended December 31, 1997, Commission File No. 1-3053). +10.10 Form of Restricted Stock Unit Grant Letter dated February 18, 1997 (filed by incorporation by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1997, Commission File No. 1-3053). +10.11 Champion International Corporation 1997 Incentive Compensation Plan (filed by incorporation by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 1997, Commission File No. 1-3053). +10.12 Champion International Corporation 1997 Performance Share Plan (filed by incorporation by reference to Exhibit 10.3 to the Company's Form 10-Q for the quarter ended March 31, 1997, Commission File No. 1-3053). +10.13 Agreement dated as of September 18, 1997 between the Company and Mr. Olson providing certain employment, severance and retirement arrangements (filed by incorporation by reference to Exhibit 10.11 to the Company's Form 10-K for the fiscal year ended December 31, 1997, Commission File No. 1-3053). +10.14 Agreement Relating to Legal Expenses dated September 18, 1997 between the Company and Mr. Olson providing reimbursement of certain legal expenses following a change in control of the Company (filed by incorporation by reference to Exhibit 10.12 to the Company's Form 10-K for the fiscal year ended December 31, 1997, Commission File No. 1-3053). 25 Exhibit Number Description - -------------- ----------- +10.15 Amendment dated as of May 28, 1999 to Agreement dated as of September 18, 1997 between the Company and Mr. Olson (filed by incorporation by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1999, Commission File No. 1-3053). +10.16 Agreement dated as of October 18, 1990 between the Company and Mr. Nichols providing certain employment, severance and retirement arrangements (filed by incorporation by reference to Exhibit 10.16 to the Company's Form 10-K for the fiscal year ended December 31, 1990, Commission File No. 1-3053). +10.17 Agreement Relating to Legal Expenses dated October 18, 1990 between the Company and Mr. Nichols providing reimbursement of certain legal expenses following a change in control of the Company (filed by incorporation by reference to Exhibit 10.17 to the Company's Form 10-K for the fiscal year ended December 31, 1990, Commission File No. 1-3053). +10.18 Amendment dated as of September 19, 1991 to Agreement dated as of October 18, 1990 between the Company and Mr. Nichols (filed by incorporation by reference to Exhibit 10.18 to the Company's Form 10-K for the fiscal year ended December 31, 1991, Commission File No. 1-3053). +10.19 Amendment dated as of May 28, 1999 to Agreement dated as of October 18, 1990 between the Company and Mr. Nichols (filed by incorporation by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30, 1999, Commission File No. 1-3053). +10.20 Agreement dated as of October 18, 1990 between the Company and Mr. Barnard providing certain severance arrangements (filed by incorporation by reference to Exhibit 10.31 to the Company's Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 1-3053). +10.21 Agreement Relating to Legal Expenses dated October 18, 1990 between the Company and Mr. Barnard providing reimbursement of certain legal expenses following a change in control of the Company (filed by incorporation by reference to Exhibit 10.32 to the Company's Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 1-3053). +10.22 Amendment dated as of September 19, 1991 to Agreement dated as of October 18, 1990 between the Company and Mr. Barnard (filed by incorporation by reference to Exhibit 10.33 to the Company's Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 1-3053). +10.23 Amendment dated as of May 28, 1999 to Agreement dated as of October 18, 1990 between the Company and Mr. Barnard (filed by incorporation by reference to Exhibit 10.4 to the Company's Form 10-Q for the quarter ended September 30, 1999, Commission File No. 1-3053). +10.24 Agreement dated as of October 18, 1990 between the Company and Mr. Porterfield providing certain severance arrangements (filed by incorporation by reference to Exhibit 10.34 to the Company's Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 1-3053). 26 Exhibit Number Description - -------------- ----------- +10.25 Agreement Relating to Legal Expenses dated October 18, 1990 between the Company and Mr. Porterfield providing reimbursement of certain legal expenses following a change in control of the Company (filed by incorporation by reference to Exhibit 10.35 to the Company's Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 1-3053). +10.26 Amendment dated as of September 19, 1991 to Agreement dated as of October 18, 1990 between the Company and Mr. Porterfield (filed by incorporation by reference to Exhibit 10.36 to the Company's Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 1-3053). +10.27 Amendment dated as of May 28, 1999 to Agreement dated as of October 18, 1990 between the Company and Mr. Porterfield (filed by incorporation by reference to Exhibit 10.3 to the Company's Form 10-Q for the quarter ended September 30, 1999, Commission File No. 1-3053). +10.28 Agreement dated as of May 28, 1999 between the Company and Mr. Griffin providing certain severance arrangements (filed by incorporation by reference to Exhibit 10.5 to the Company's Form 10-Q for the quarter ended September 30, 1999, Commission File No. 1-3053). +10.29 Agreement Relating to Legal Expenses dated May 28, 1999 between the Company and Mr. Griffin providing reimbursement of certain legal expenses following a change in control of the Company (filed by incorporation by reference to Exhibit 10.7 to the Company's Form 10-Q for the quarter ended September 30, 1999, Commission File No. 1-3053). +10.30 Amendment dated as of May 28, 1999 to Agreement dated as of May 28, 1999 between the Company and Mr. Griffin (filed by incorporation by reference to Exhibit 10.6 to the Company's Form 10-Q for the quarter ended September 30, 1999, Commission File No. 1-3053). +10.31 Trust Agreement dated as of February 19, 1987 between the Company and Fleet National Bank securing certain payments under the contracts listed as Exhibit numbers 10.13 through 10.30, among others, following a change in control of the Company (filed by incorporation by reference to Exhibit 19.11 to the Company's Form 10-Q for the quarter ended June 30, 1987, Commission File No. 1-3053). +10.32 Amendment dated as of August 18, 1988 to Trust Agreement dated as of February 19, 1987 between the Company and Fleet National Bank (filed by incorporation by reference to Exhibit 10.29 to the Company's Form 10-K for the fiscal year ended December 31, 1988, Commission File No. 1-3053). +10.33 Second Amendment dated as of October 1, 1999 to Trust Agreement dated as of February 19, 1987 between the Company and Fleet National Bank (filed by incorporation by reference to Exhibit 10.8 to the Company's Form 10-Q for the quarter ended September 30, 1999, Commission File No. 1-3053). *+10.34 Third Amendment dated as of December 1, 1999 to Trust Agreement dated as of February 19, 1987 between the Company and Fleet National Bank. 27 Exhibit Number Description - -------------- ----------- +10.35 Champion International Corporation Executive Life Insurance Plan (filed by incorporation by reference to Exhibit 10.27 to the Company's Form 10-K for the fiscal year ended December 31, 1990, Commission File No. 1-3053). +10.36 Amendment dated as of January 1, 1994 to Champion International Corporation Executive Life Insurance Plan (filed by incorporation by reference to Exhibit 10.33 to the Company's Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 1-3053). +10.37 Second Amendment dated as of July 17, 1996 to Champion International Corporation Executive Life Insurance Plan (filed by incorporation by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 1996, Commission File No. 1-3053). +10.38 Extract from the minutes of the meeting of the Board of Directors of the Company held on October 18, 1979 relating to the $50,000 of group term life insurance provided by the Company for non-employee directors (filed by incorporation by reference to Exhibit 10.28 to the Company's Form 10-K for the fiscal year ended December 31, 1990, Commission File No. 1- 3053). +10.39 Compensation Plan for Non-Employee Directors (filed by incorporation by reference to Exhibit 10.4 to the Company's Form 10-Q for the quarter ended March 31, 1997, Commission File No. 1-3053). *11 Schedule showing calculation of basic earnings per common share and diluted earnings per common share. *13 Portions of the Company's 1999 Annual Report which are specifically incorporated by reference herein. *21 List of significant subsidiaries of the Company. *23.1 Opinion and Consent of the Senior Vice President and General Counsel of the Company. *23.2 Consent of Arthur Andersen LLP. *24 Power of Attorney relating to the execution and filing of this Annual Report on Form 10-K and all amendments hereto. *27 Financial Data Schedule. 28 (d) Reports on Form 8-K. No Reports on Form 8-K have been filed during the last quarter of the period covered by this Report. * * * Forward-Looking Statements Certain statements in this Report (including statements incorporated by reference herein) that are neither reported financial results nor other historical information are forward-looking statements. 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 expressed in the forward-looking statements. Such risks and uncertainties include, but are not limited to, changes in the United States and international economies; changes in worldwide demand for the Company's products; changes in worldwide production and production capacity in the forest products industry; competitive pricing pressures for the Company's products; currency fluctuations; and changes in raw material, energy and other costs. 29 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, on the 17th day of March, 2000. CHAMPION INTERNATIONAL CORPORATION (Registrant) By /s/ Lawrence A. Fox ------------------------------- (Lawrence A. Fox) Vice President and Secretary 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 date indicated. Signature Title Date - --------- ----- ---- Chairman of the Board, Chief Executive Officer and Director (Principal Richard E. Olson* Executive Officer) March 13, 2000 - ------------------------ (Richard E. Olson) Vice Chairman and Executive Officer and Director (Principal Kenwood C. Nichols* Accounting Officer) March 13, 2000 - ------------------------ (Kenwood C. Nichols) Vice President-Finance and Treasurer (Principal Thomas L. Hart* Financial Officer) March 13, 2000 - ------------------------ (Thomas L. Hart) Lawrence A. Bossidy* Director March 13, 2000 - ------------------------ (Lawrence A. Bossidy) Robert A. Charpie* Director March 13, 2000 - ------------------------ (Robert A. Charpie) H. Corbin Day* Director March 13, 2000 - ------------------------ (H. Corbin Day) Alice F. Emerson* Director March 13, 2000 - ------------------------ (Alice F. Emerson) Allan E. Gotlieb* Director March 13, 2000 - ------------------------ (Allan E. Gotlieb) 30 Signature Title Date --------- ----- ---- Henrique C. Meirelles* Director March 13, 2000 - -------------------------- (Henrique C. Meirelles) Walter V. Shipley* Director March 13, 2000 - -------------------------- (Walter V. Shipley) Richard E. Walton* Director March 13, 2000 - -------------------------- (Richard E. Walton) *By /s/ Lawrence A. Fox March 17, 2000 ----------------------- (Lawrence A. Fox) A power of attorney authorizing Stephen B. Brown, Lawrence A. Fox and Richard E. Olson and each of them to sign this Report and all amendments hereto as attorneys-in-fact for officers and directors of the registrant is filed as Exhibit 24 hereto. 31 EX-10.5 2 AMEND TO CHAMPION INTERNATIONAL 1999 STOCK OPTION EXHIBIT 10.5 CHAMPION INTERNATIONAL CORPORATION FIRST AMENDMENT TO 1999 STOCK OPTION PLAN 1. Revised Section 7(d): (d) Amendment and Termination. The Plan shall take effect on the Effective Date. The Board may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part; provided, however, that any such amendment shall be subject to shareholder approval (i) if and to the extent such shareholder approval is required by applicable law or in accordance with the applicable rules of the national securities exchange on which the Stock is principally traded, (ii) if such amendment would increase the number of shares of Stock reserved for issuance under the Plan, as provided in the first paragraph of Section 5, other than pursuant to the adjustment provisions set forth in the second paragraph of Section 5, (iii) if such amendment would provide for Awards to be granted to persons other than employees of the Company and its present and future Subsidiaries and Affiliates, (iv) if such amendment would materially increase the benefits accruing to Grantees or (v) if such amendment would eliminate or diminish in any way any of the requirements for shareholder approval set forth in this Section 7(d) or in Section 7(k). Notwithstanding the foregoing, no amendment, suspension or termination shall affect adversely any of the rights of any Grantee, without such Grantee's consent, under any Award theretofore granted under the Plan. Unless earlier terminated by the Board pursuant to the provisions of the Plan, the Plan shall terminate on the tenth anniversary of the Effective Date. No Awards shall be granted under the Plan after such termination date. 2. New Section 7(k): (k) Repricing. Anything in the Plan to the contrary notwithstanding, shareholder approval shall be required to (i) decrease the exercise price per share of Stock subject to an Option or the grant price of an SAR, other than pursuant to the adjustment provisions set forth in the second paragraph of Section 5, or (ii) cancel an Option or an SAR in exchange for the grant of a new Option or SAR with a lower exercise or grant price. EX-10.34 3 THIRD AMENDMENT TO TRUST AGREEMENT EXHIBIT 10.34 THIRD AMENDMENT TO TRUST AGREEMENT DATED AS OF FEBRUARY 19, 1987 BETWEEN CHAMPION INTERNATIONAL CORPORATION AND FLEET NATIONAL BANK ------------------------------------------ This Amendment between Champion International Corporation, a New York corporation (the "Company"), and Fleet National Bank (the "Trustee") is effective as of December 1, 1999 and amends the Trust Agreement dated as of February 19, 1987, as amended as of August 18, 1988 and October 1, 1999, between the Company and the Trustee (the "Trust"). WHEREAS, the Company and the Trustee have entered into the Trust; and WHEREAS, the parties wish to modify certain language that was included in the October 1, 1999 amendment to the Trust in order to more clearly express the intention of the parties and give effect to the provisions of the Trust; and WHEREAS, all of the Executives have agreed in writing to this Amendment; NOW, THEREFORE, it is agreed by and between the parties as follows: 1. The last sentence of Section 8.01 of the Trust is amended in its entirety to read as follows: "The Trustee shall not be required to examine any such letters of credit for their validity, to determine the suitability of any such letters of credit to fund the Company's obligations under the Agreements, or to perform any act with respect to any such letters of credit, other than to hold and administer them in accordance with the terms of the Trust." 2. All capitalized terms used herein and not defined herein shall have the meanings assigned to them in the Trust. 3. Except as amended hereby, all of the provisions of the Trust shall continue in full force and effect without change. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. CHAMPION INTERNATIONAL CORPORATION By /s/ T. L. Hart --------------------------------------------- Vice President - Finance and Treasurer FLEET NATIONAL BANK By /s/ Susan H. James --------------------------------------------- Bank Officer EX-11 4 SCHEDULE SHOWING CALCULATION OF BASIC EARNINGS EXHIBIT 11 CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES CALCULATION OF BASIC EARNINGS (LOSS) PER COMMON SHARE AND DILUTED EARNINGS (LOSS) PER COMMON SHARE (In millions, except per share)
Years Ended December 31, ----------------------------------- 1999 1998 1997 -------- -------- -------- Basic earnings (loss) per common share (1): Income (loss) before extraordinary item $ 237 $ 75 $ (549) Extraordinary item, net of taxes (5) - - -------- -------- -------- Net income (loss) applicable to common stockholders $ 232 $ 75 $ (549) ======== ======== ======== Average number of common shares outstanding 95.9 95.9 95.8 ======== ======== ======== Basic earnings (loss) per share: Income (loss) before extraordinary item $ 2.48 $ .79 $ (5.72) Extraordinary item (.05) - - -------- -------- -------- Net income (loss) $ 2.43 $ .79 $ (5.72) ======== ======== ======== Diluted earnings (loss) per common share (1, 2): Net income (loss) on a diluted basis $ 232 $ 75 $ (549) ======== ======== ======== Average number of common shares outstanding 95.9 95.9 95.8 Add common share effect, assuming conversion of potentially dilutive securities 0.5 0.7 - -------- -------- -------- Average number of common shares outstanding on a diluted basis 96.4 96.6 95.8 ======== ======== ======== Diluted earnings (loss) per share: Income (loss) before extraordinary item $ 2.46 $ .78 $ (5.72) Extraordinary item (.05) - - -------- -------- -------- Net income (loss) $ 2.41 $ .78 $ (5.72) ======== ======== ========
(1) Basic earnings per share is computed by dividing net income applicable to common stockholders by the average number of common shares outstanding during the year. The computation of diluted earnings per share assumes that the average number of common shares outstanding is increased by dilutive common share equivalents. (2) Potentially dilutive securities at December 31, 1999 included shares issuable pursuant to certain stock-based compensation arrangements. These securities included 309,500 shares issuable upon the vesting of the restricted share units as well as 136,000 shares issuable upon the exercise of stock options calculated using the treasury stock method. Potentially dilutive securities in 1997 were not included in the computation of diluted earnings per share because the effect would have been antidilutive. EX-13 5 PORTIONS OF THE COMPANY'S 1999 ANNUAL REPORT EXHIBIT 13
Paper - ------------------------------------------------------------------------------------------------------------- Years Ended December 31 Net Sales (in millions of dollars) 1999 % 1998 % 1997 % - ------------------------------------- --------- --------- --------- --------- --------- --------- Product Category: Uncoated freesheet (U.S. & Brazil) $1,112 29 $1,327 29 $1,329 28 Coated groundwood (U.S. & Brazil) 767 19 809 17 668 14 Coated freesheet 515 13 529 11 557 12 Market pulp 422 10 372 8 411 9 Kraft paper and linerboard 199 5 188 4 189 4 Bleached board business 110 3 285 6 299 6 Uncoated groundwood 101 2 218 5 261 5 Resale of outside purchases 755 18 694 15 680 14 Newsprint - - 177 4 362 7 Other 32 1 41 1 45 1 --------- --------- --------- --------- --------- --------- $4,013 100 $4,640 100 $4,801 100 ========= ========= ========= ========= ========= ========= Wood Products - ------------------------------------------------------------------------------------------------------------- Years Ended December 31 Net Sales (in millions of dollars) 1999 % 1998 % 1997 % - ------------------------------------- --------- --------- --------- --------- --------- --------- Product Category: Lumber $ 508 40 $ 400 40 $ 404 43 Softwood plywood 311 25 234 23 230 25 Logs and stumpage 310 25 256 25 203 22 Sidings and industrial plywood 55 4 53 5 54 6 Chips 36 3 43 4 35 3 Miscellaneous products 35 3 27 3 9 1 --------- --------- --------- --------- --------- --------- $1,255 100 $1,013 100 $ 935 100 ========= ========= ========= ========= ========= =========
1 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Statement of Income (in millions, except per share amounts)
Years Ended December 31 1999 1998 1997 - ----------------------------------------------------- ----------- ----------- ---------- Net Sales $ 5,268 $ 5,653 $ 5,736 Costs and Expenses: Cost of products sold 4,417 4,953 5,141 Selling, general and administrative expenses 375 367 393 Provision for restructuring (Note 9) - 80 891 Interest and debt expense (Notes 3 and 5) 243 261 240 Other (income) expense - net (Note 11) (89) (45) (32) ---------- ---------- --------- Total Costs and Expenses 4,946 5,616 6,633 Income (Loss) before Income Taxes and Extraordinary Item 322 37 (897) Income Taxes (Benefit) (Note 12) 85 (38) (348) ---------- ---------- --------- Income (Loss) before Extraordinary Item 237 75 (549) Extraordinary Item - Loss on Early Retirement of Debt, Net of Taxes (5) - - ---------- ---------- --------- Net Income (Loss) $ 232 $ 75 $ (549) ========== ========== ========= Average Number of Common Shares Outstanding 95.9 95.9 95.8 ========== ========== ========= Basic Earnings (Loss) Per Common Share: Income (Loss) before Extraordinary Item $ 2.48 $ .79 $ (5.72) Extraordinary Item (.05) - - ---------- ---------- --------- Net Income (Loss) $ 2.43 $ .79 $ (5.72) ========== ========== ========= Diluted Earnings (Loss) Per Common Share: Income (Loss) before Extraordinary Item $ 2.46 $ .78 $ (5.72) Extraordinary Item (.05) - - ---------- ---------- --------- Net Income (Loss) $ 2.41 $ .78 $ (5.72) ========== ========== =========
The accompanying notes are an integral part of this statement. 2 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Balance Sheet (in millions of dollars)
Assets December 31 1999 1998 - ----------------------------------------------------- ----------- ---------- Current Assets: Cash and cash equivalents $ 418 $ 300 Receivables - net 540 521 Inventories (Note 2) 421 503 Prepaid expenses 24 28 Deferred income taxes (Note 12) 79 87 ----------- ---------- Total Current Assets 1,482 1,439 ----------- ---------- Timber and Timberlands, at cost - less cost of timber harvested 2,273 2,430 ----------- ---------- Property, Plant and Equipment, at cost (Notes 3, 5 and 6) 7,484 8,585 Less - accumulated depreciation 3,608 4,356 ----------- ---------- 3,876 4,229 ----------- ---------- Other Assets and Deferred Charges 687 742 ----------- ---------- $ 8,318 $ 8,840 =========== ==========
The accompanying notes are an integral part of this statement. 3 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Balance Sheet (in millions of dollars)
Liabilities and Shareholders' Equity December 31 1999 1998 - -------------------------------------------------------------- ----------- ---------- Current Liabilities: Accounts payable and accrued liabilities (Note 4) $ 691 $ 720 Current installments of long-term debt (Note 5) 127 228 Short-term borrowings (Note 5) 72 90 Income taxes (Note 12) 33 10 ---------- --------- Total Current Liabilities 923 1,048 ---------- --------- Long-Term Debt (Note 5) 2,526 2,948 ---------- --------- Other Liabilities (Notes 13 and 16) 813 787 ---------- --------- Deferred Income Taxes (Note 12) 961 961 ---------- --------- Commitments and Contingent Liabilities (Notes 6, 16 and 17) - - ---------- --------- Shareholders' Equity: Capital Shares (Notes 7 and 8): Preference stock, 8,531,431 shares authorized but unissued - - Common stock, $.50 par value: 250,000,000 authorized shares; 111,767,273 and 111,025,755 issued shares 56 56 Capital surplus 1,743 1,706 Retained Earnings (Note 5) 2,437 2,228 ---------- --------- 4,236 3,990 Treasury Shares, at cost (Note 7) (689) (690) Accumulated Other Comprehensive Income (Note 10) (452) (204) ---------- --------- 3,095 3,096 ---------- --------- $ 8,318 $ 8,840 ========== =========
The accompanying notes are an integral part of this statement. 4 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Cash Flows (in millions of dollars)
Years Ended December 31 1999 1998 1997 - ----------------------------------------------------- ----------- ----------- ---------- Cash flows from operating activities: Net Income (Loss) $ 232 $ 75 $ (549) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for restructuring - 80 891 Depreciation expense 340 395 425 Cost of timber harvested 79 92 93 Gain on disposal of assets (16) (22) (24) Foreign currency transaction (gain) loss (40) (11) (1) Pension contributions (10) (9) (16) Deferred income taxes 39 (62) (371) Changes in assets and liabilities, net of acquisitions and divestitures: Receivables (102) 72 (16) Inventories 8 (60) 7 Prepaid expenses - 10 4 Accounts payable and accrued liabilities 32 (42) (23) Income taxes payable 24 (13) (12) Other liabilities 23 15 10 All other - net 25 35 67 ---------- ---------- --------- Net cash provided by operating activities 634 555 485 ---------- ---------- --------- Cash flows from investing activities: Expenditures for property, plant and equipment (232) (305) (321) Timber and timberlands expenditures (106) (127) (128) Acquisition of timberlands and mills (Note 18) - (104) (47) Purchase of investments - - (22) Proceeds from redemptions of investments - - 25 Proceeds from sales of divested operations 268 481 - Proceeds from sales of property, plant and equipment and timber and timberlands 33 27 43 All other - net (46) (39) (16) ---------- ---------- --------- Net cash used in investing activities (83) (67) (466) ---------- ---------- --------- Cash flows from financing activities: Proceeds from issuance of long-term debt 79 571 474 Payments of current installments of long-term debt and long-term debt (520) (991) (385) Cash dividends paid (19) (20) (19) Payments to acquire treasury stock - (34) - All other - net 27 11 11 ---------- ---------- --------- Net cash provided by (used in) financing activities (433) (463) 81 ---------- ---------- --------- Increase in cash and cash equivalents 118 25 100 Cash and cash equivalents: Beginning of period 300 275 175 ---------- ---------- --------- End of period $ 418 $ 300 $ 275 ========== ========== ========= Supplemental cash flow disclosures: Cash paid during the year for: Interest (net of capitalized amounts) $ 242 $ 272 $ 241 Income taxes (net of refunds) (Note 12) 17 17 42
The accompanying notes are an integral part of this statement. 5 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Retained Earnings (in millions, except per share amounts)
Years Ended December 31 1999 1998 1997 - ----------------------------------------------------- ----------- ----------- ---------- Beginning Balance $ 2,228 $ 2,172 $ 2,740 Net Income (Loss) 232 75 (549) Cash Dividends Declared: Common Stock - $.25 per share in 1999; $.20 per share in 1998 and 1997 (23) (19) (19) ----------- ----------- ---------- Ending Balance $ 2,437 $ 2,228 $ 2,172 =========== =========== ==========
The accompanying notes are an integral part of this statement. Consolidated Statement of Comprehensive Income (in millions of dollars)
Years Ended December 31 1999 1998 1997 - ----------------------------------------------------- ----------- ----------- ---------- Net Income (Loss) $ 232 $ 75 $ (549) Foreign currency translation adjustments: Cumulative tax effect of changing the Brazilian functional currency to the Real - (52) - Other foreign currency translation adjustments (248) (95) (24) ----------- ----------- ---------- Net foreign currency translation adjustments (248) (147) (24) ----------- ----------- ---------- Comprehensive Income (Loss) $ (16) $ (72) $ (573) =========== =========== ==========
The accompanying notes are an integral part of this statement. 6 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 1. Summary of Significant Accounting Policies A. Consolidation The consolidated financial statements include the accounts of the company and all of its domestic and foreign subsidiaries. Affiliates which are 20% to 50% owned are reflected using the equity method of accounting, with the related investments included in Other Assets and Deferred Charges. All significant intercompany transactions have been eliminated. Certain amounts have been reclassified to conform to the current year's presentation. B. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. C. Cash and Cash Equivalents Cash and cash equivalents includes all highly liquid investments with original maturities of three months or less. Short-term investments are investments which mature within 12 months but which do not meet the criteria of cash equivalents. D. Inventories Inventories are generally stated at the lower of average cost or market (market approximates net realizable value), except for certain inventories of the paper segments, which are stated on the last-in, first-out (LIFO) method. E. Fixed Assets Property, Plant and Equipment, which includes capitalized leases, is stated at cost. Timber and Timberlands, which includes original costs, road construction costs, and reforestation costs, such as site preparation and planting costs, is stated at unamortized cost. Property taxes, surveying, fire control and other forest management expenses are charged to expense as incurred. When fixed assets are sold or retired, cost and accumulated depreciation are eliminated from the accounts, and gains or losses are recorded in income. For financial reporting purposes, plant and equipment are depreciated using the straight-line method over the estimated service lives of the individual assets. Machinery and equipment lives range from three to 35 years, buildings from 10 to 40 years, and land improvements from five to 24 years. Leasehold improvements are amortized over the shorter of the lives of the leases or estimated service lives. Cost of timber harvested is based on the estimated quantity of timber available during the growth cycle and is credited directly to the asset accounts. 7 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- F. Revenue Recognition The company recognizes revenues when title passes, which is generally when products are shipped. G. Earnings Per Share Basic earnings per share is computed by dividing net income applicable to common stockholders by the average number of common shares outstanding during the year. The computation of diluted earnings per share assumes that the average number of common shares outstanding is increased by dilutive common share equivalents. H. Foreign Currency Translation The assets and liabilities of the company's Canadian subsidiary are translated into U.S. dollars using year-end exchange rates. The resulting translation gains or losses are included with the cumulative translation adjustment in the Shareholders' Equity section of the balance sheet. Gains or losses resulting from foreign currency transactions are included in net income. Prior to 1998, the company's Brazilian subsidiary used the U.S. dollar as its functional currency because the local currency, the Real, had been deemed hyperinflationary. Except for certain items translated at historical exchange rates, assets and liabilities were translated using year-end exchange rates. Gains or losses resulting from balance sheet translation were included in net income. Effective January 1, 1998, the company accounts for its Brazilian subsidiary using the Real as its functional currency. Assets and liabilities are translated into U.S. dollars using the same procedures as described above for the company's Canadian subsidiary. I. Financial Instruments The carrying amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings, and accounts payable and accrued liabilities approximate fair values due to the short maturity of those instruments. The fair value of the company's debt is discussed in Note 5. The company occasionally enters into forward exchange contracts to hedge certain assets that are denominated in foreign currencies. At December 31, 1999, the company had no significant forward exchange contracts outstanding. The company does not hold financial instruments for trading purposes. J. Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement, which will be effective for the company beginning in the fiscal year 2001, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. The Statement requires that changes in each derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The company has not yet quantified the anticipated impact on the financial statements of adopting the Statement. However, given the current level of the company's derivative and hedging activities, the impact is not expected to be material. 8 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 2. Inventories
December 31 (in millions of dollars) 1999 1998 - ----------------------------------------------- ----------- ----------- Paper, pulp and packaging products $ 219 $ 291 Wood products 55 47 Logs 54 46 Pulpwood 22 25 Raw materials, parts and supplies 71 94 ----------- ----------- $ 421 $ 503 =========== ===========
At December 31, 1999 and 1998, inventories stated using the last-in, first-out (LIFO) method, representing approximately 31% and 35% of total inventories, were $128 million and $174 million, respectively. If the lower of average cost or market method (which approximates current cost) had been utilized for inventories carried at LIFO, inventory balances would have been increased by $51 million and $57 million at December 31, 1999 and 1998, respectively. 9 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 3. Property, Plant and Equipment
December 31 (in millions of dollars) 1999 1998 - ------------------------------------------------ ----------- ----------- Land and land improvements $ 294 $ 315 Buildings and leasehold improvements 817 913 Machinery and equipment 6,199 7,194 Construction in progress 174 163 ----------- ----------- 7,484 8,585 Accumulated depreciation (3,608) (4,356) ----------- ----------- $ 3,876 $ 4,229 =========== ===========
Interest capitalized into construction in progress during 1999, 1998 and 1997 was $5 million, $9 million and $8 million, respectively. Accumulated depreciation at December 31, 1999 includes $137 million of asset impairment and asset write-off charges related to assets to be divested pursuant to the company's restructuring plan (Note 9). Depreciation expense includes the following components:
Years Ended December 31 (in millions of dollars) 1999 1998 1997 - ---------------------------------------------------- ----------- ----------- ----------- Land improvements $ 15 $ 14 $ 13 Buildings and leasehold improvements 25 28 29 Machinery and equipment 300 353 383 ----------- ----------- ----------- $ 340 $ 395 $ 425 =========== =========== ===========
10 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 4. Accounts Payable and Accrued Liabilities
December 31 (in millions of dollars) 1999 1998 - ------------------------------------------------ ----------- ----------- Accounts payable $ 279 $ 280 ----------- ----------- Accrued liabilities: Payrolls and commissions 118 119 Employee benefits 87 107 Interest 47 47 Taxes, other than income taxes 28 25 Other 122 137 ----------- ----------- Total accrued liabilities 402 435 ----------- ----------- Dividends payable 10 5 ----------- ----------- $ 691 $ 720 =========== ===========
11 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 5. Indebtedness
December 31 (in millions of dollars) 1999 1998 - -------------------------------------------------------------------------- ----------- ----------- Secured debt, 7.7% average rate, payable through 2012 (a) $ 58 $ 45 Unsecured fixed rate debt, 7.3% average rate, payable through 2037 2,016 2,434 Unsecured variable rate debt, 14.7% average rate, payable through 2029 (b) 242 390 Lease obligations, 6.6% average rate, payable through 2029 337 307 ----------- ----------- Total debt 2,653 3,176 Less: Current installments of long-term debt 127 228 ----------- ----------- Long-term debt (c) $ 2,526 $ 2,948 =========== =========== Short-term borrowings (d) $ 72 $ 90 =========== ===========
(a) Such debt is secured primarily by timber and timberlands with a net book value at December 31, 1999 of approximately $224 million. (b) Unsecured variable rate debt at December 31, 1999 includes borrowings by the company's Brazilian subsidiary of $226 million. (c) The annual principal payment requirements under the terms of all long-term debt agreements for the years 2000 through 2004 are $127 million, $144 million, $30 million, $28 million and $24 million, respectively. (d) Weighted average interest rates on outstanding balances, excluding book cash overdrafts, for 1999 and 1998 were 7%. Book cash overdrafts, which are included in short-term borrowings, totaled $70 million and $86 million, respectively, at December 31, 1999 and 1998. The indentures and agreements relating to long-term debt arrangements, as well as the company's Certificate of Incorporation, contain restrictions on the payment of cash dividends. Under the most restrictive of these provisions, approximately $867 million of consolidated retained earnings at December 31, 1999 is free of such restrictions. 12 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements At December 31, 1999, the company had unused U.S. lines of credit of $1.1 billion and unused foreign bank lines of credit of approximately $145 million. At December 31, 1999, interest rates on the U.S. and foreign lines were no higher than the prime rate or its equivalent. Facility fees of .125% are required on the $1.1 billion U.S. lines of credit, which are available to May 31, 2002 on a revolving basis, at which time amounts owed, if any, become payable. Commitment fees of no more than .15% are required on the $145 million foreign lines of credit. Commitments under the credit agreements cannot be withdrawn provided the company continues to meet required conditions. The fair value of the company's long-term debt, which includes current installments and excludes lease obligations, was lower than the carrying amount by $116 million at December 31, 1999, and exceeded the carrying amount by $102 million at December 31, 1998. The fair value was estimated using discounted cash flow analyses, based on the company's incremental borrowing rates for similar types of borrowings. 13 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 6. Commitments
Future Minimum Lease Payments ----------------------------------------------- Capitalized Non-Cancelable Period (in millions of dollars) Leases Operating Leases - -------------------------------------------- ----------- ---------------- 2000 $ 22 $ 25 2001 22 24 2002 22 23 2003 22 22 2004 22 30 Thereafter 744 129 ----------- ------------ Total Payments 854 253 Less: Sublease rental receipts 58 ------------ Net operating lease payments $ 195 ============ Less: Amount representing interest 517 ----------- Present value of capitalized lease payments (all long-term) $ 337 ===========
The following schedule shows the composition of total rental expense for all operating leases:
Years Ended December 31 (in millions of dollars) 1999 1998 1997 - ----------------------------------------------- ----------- ------------ ------------ Minimum rentals $ 26 $ 32 $ 34 =========== ============ ============
14 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 7. Capital Shares and Earnings Per Share Unissued Preference Stock - ------------------------- At December 31, 1999 and 1998, 7,031,431 preference shares for which no series has been designated were authorized and unissued. At December 31, 1999 and 1998, 1,500,000 additional authorized and unissued shares were designated and reserved for the issuance of the company's Preference Stock, Participating Cumulative Series or Participating Cumulative Series B, $1.00 par value. Common Stock - ------------ Changes in common shares during the three years ended December 31, 1999 are as follows: (in shares and millions of dollars)
Treasury Shares Issued Shares (at cost) ----------------------------------------- ----------------------------- Par Capital Shares Value Surplus Shares Amount ------------- ---------- ------------ ------------- ------------- Balance at January 1, 1997 110,323,099 $ 55 $ 1,651 (14,768,311) $ (658) Exercise of stock options 566,075 1 25 - - Compensation plans 8,829 - 21 - - Other 2,209 - - 200 - ------------- ---------- ------------ ------------- ------------- Balance at December 31, 1997 110,900,212 56 1,697 (14,768,111) (658) Exercise of stock options 77,250 - 3 - - Compensation plans 10,019 - 4 - - Repurchase of stock - - - (725,000) (34) Other 38,274 - 2 54,428 2 ------------- ---------- ------------ ------------- ------------- Balance at December 31, 1998 111,025,755 56 1,706 (15,438,683) (690) Exercise of stock options 724,640 - 29 - - Compensation plans 16,713 - 4 - - Other 165 - 4 11,624 1 ------------- ---------- ------------ ------------- ------------- Balance at December 31, 1999 111,767,273 $ 56 $ 1,743 (15,427,059) $ (689) ============= ========== ============ ============= =============
15 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements At December 31, 1999, common shares of the company were reserved for issue as follows: Stock options granted or available for grant 10,267,985 Compensation plans 2,710,404 ------------- 12,978,389 =============
Earnings (Loss) Per Share - ------------------------- Basic and diluted earnings (loss) per share are calculated as follows:
Years Ended December 31 (in millions, except per share amounts) 1999 1998 1997 - ----------------------------------------------------- ------------ ------------- ------------- Basic earnings (loss) per share: Net income (loss) applicable to common stockholders $ 232 $ 75 $ (549) ============ ============= ============= Average number of common shares outstanding 95.9 95.9 95.8 ============ ============= ============= Basic earnings (loss) per share $ 2.43 $ .79 $ (5.72) ============ ============= ============= Diluted earnings (loss) per share: Net income (loss) on a diluted basis $ 232 $ 75 $ (549) ============ ============= ============= Average number of common shares outstanding 95.9 95.9 95.8 Add: Common share effect, assuming conversion of potentially dilutive securities 0.5 0.7 - ------------ ------------- ------------- Average number of common shares outstanding on a diluted basis 96.4 96.6 95.8 ============ ============= ============= Diluted earnings (loss) per share $ 2.41 $ .78 $ (5.72) ============ ============= =============
Potentially dilutive securities at December 31, 1999 included shares issuable pursuant to certain stock-based compensation arrangements (Note 8). These securities included 309,500 shares issuable upon the vesting of restricted share units as well as 136,000 shares issuable upon the exercise of stock options calculated using the treasury stock method. 16 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 8. Stock-Based Compensation Stock Options - ------------- The company has granted to officers and key employees options to purchase common shares at the market price of the shares on the date of grant. All options granted to officers prior to 1997 were accompanied by stock appreciation rights. The options expire 10 years or 10 years and 31 days from the date of grant and generally become exercisable subsequent to a period of 12 calendar months from date of grant.
Stock Option Transactions: Weighted Average Options Exercise Price ----------- ---------------- Balance at January 1, 1997 2,595,800 $35.62 Granted 684,380 44.63 Exercised (1,188,525) 33.99 Surrendered or canceled (19,100) 40.80 ----------- Balance at December 31, 1997 2,072,555 39.48 Granted 958,300 57.75 Exercised (78,250) 31.54 Surrendered or canceled (9,750) 51.55 ----------- Balance at December 31, 1998 2,942,855 45.42 Granted 982,700 33.79 Exercised (785,040) 38.04 Surrendered or canceled (98,900) 43.08 ----------- ----------- Balance at December 31, 1999 3,041,615 $43.32 =========== =========== Options exercisable at December 31 1997 1,398,775 37.01 1998 1,990,655 39.52 1999 2,109,215 47.52
At December 31, 1999, the stock options outstanding had an aggregate exercise price of $132 million, with exercise prices ranging from $26.25 to $57.75 and a weighted average remaining contractual life of 7.4 years. Other Stock-Based Compensation - ------------------------------ The company has granted restricted share units to certain officers and key employees. Each unit represents one share of common stock to be issued upon vesting (unless the issuance is deferred), provided that the awardee remains in the company's employ until the vesting date. Of the 309,500 restricted units outstanding at December 31, 1999, 131,700 units will vest in 2000 and 156,600 units will vest in 2002. 17 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements In March 1997, the company adopted a performance share plan under which share units were awarded to officers and key employees. These units entitle the recipients, upon earn-out, to receive shares of common stock. The earn-out of shares is dependent on the company's stock price appreciation plus dividend yield (i.e., total shareholder return or TSR) increasing, at any time within three years from the date of grant, to a value equivalent to approximately 15% per annum compounded for three years. If the TSR goal is achieved, the amount of the payout will depend on the company's TSR, during the performance period, relative to an industry peer group. If the TSR goal is not achieved, there will be no payout. Based on the current dividend rate, the shares would be earned if the common stock price averages $67.25 per share for 10 consecutive trading days. Additional pro rata grants, which have the same TSR goal as the March 1997 grants, were made in 1998. The total number of shares that could be earned ranges from 330,000 shares to 700,000 shares. Total compensation expense recognized for stock appreciation rights and other stock-based compensation for 1999, 1998 and 1997 was $12 million, $6 million and $35 million, respectively. Pro Forma Impact of Grant of Stock Options - ------------------------------------------ The company accounts for stock options under Accounting Principles Board Opinion No. 25, pursuant to which no compensation cost has been recognized for the options that are not accompanied by stock appreciation rights. Had compensation cost for these options been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the impact on net income and earnings per share after an extraordinary item would have been as follows:
Years Ended December 31 1999 1998 1997 - ---------------------------------------- ------------ ------------ ------------ Net Income (Loss) After Extraordinary Item (in millions) As reported $ 232 $ 75 $ (549) Pro forma $ 224 $ 69 $ (554) Basic Earnings (Loss) Per Share As reported $ 2.43 $ .79 $ (5.72) Pro forma $ 2.34 $ .71 $ (5.79) Diluted Earnings (Loss) Per Share As reported $ 2.41 $ .78 $ (5.72) Pro forma $ 2.32 $ .71 $ (5.79) Weighted Average Fair Value of Options Granted $ 10.19 $ 13.09 $ 14.90
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1999, 1998 and 1997:
Years Ended December 31 1999 1998 1997 - ---------------------------------------- ------------ ------------ ------------ Risk-free interest rates 4.75% 5.75% 6.57% Expected dividend yield 1.5% 0.4% 0.4% Expected volatility 26.6% 22.0% 20.1% Expected life (years) 6.00 5.50 5.50
18 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 9. Provision for Restructuring On October 7, 1997, the company approved a plan to maximize total shareholder return by focusing on strategic businesses, increasing profitability and improving financial discipline. As part of this plan, the company divested several non-strategic product segments and certain timberlands. The profit- improvement program included a reduction in the company's worldwide workforce in the businesses remaining after the divestitures by 11%, or approximately 2,000 positions, by the end of 1999. In the fourth quarter of 1997, the company recorded a pre-tax charge of $891 million ($552 million after-tax, or $5.76 per share) in connection with this plan. In the fourth quarter of 1998, the company recorded a pre-tax charge of $80 million ($49 million after-tax, or $.52 per share) to recognize additional costs associated with the divestiture of the non-strategic product segments. The charge included $60 million of non-cash expenses for asset impairments and $20 million of one-time cash costs. As of December 31, 1999, the company had reduced its worldwide workforce in the businesses which are not part of the planned divestitures (excluding employees added as the result of certain acquisitions in Canada, Brazil and Maine) by approximately 2,260 employees. In 1998, the company sold its newsprint business, its Texas recycling centers and its Belvidere, Illinois tray plant for a total of $481.5 million. In December 1998, the company agreed to sell approximately 300,000 acres of timberlands in the northeast to The Conservation Fund for $76.2 million. As part of the transaction, in June 1999, the company completed the sale of approximately 143,000 acres in New York for approximately $46 million. In July and August 1999, the company completed the sale of the remaining approximately 151,000 acres of timberlands in New Hampshire and Vermont for a total of approximately $30.2 million. In May 1999, the company sold its mill in Canton, North Carolina and its liquid packaging business for $200 million, consisting of $170 million in cash and a $30 million note. The contract also provides the opportunity for the company to receive an additional contingency payment in the future. In June 1999, the company sold its mill in Deferiet, New York for $34.5 million, a substantial portion of which was paid in cash. The company is continuing to actively pursue the sale of its mill in Hamilton, Ohio. In addition, the company has offered for sale approximately 35,000 acres of timberlands in North Carolina and Tennessee. Results of operations included in the accompanying consolidated statement of income for the product segments divested and to be divested are as follows:
Years Ended December 31 (in millions of dollars) 1999 1998 1997 - --------------------------------------------- ---------- ---------- ----------- Net sales $ 399 $ 1,016 $ 1,316 Costs and expenses 432 1,028 1,394 ---------- ---------- ----------- (Loss) from operations $ (33) $ (12) $ (78) ========== ========== ===========
19 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements The consolidated balance sheet includes the following amounts related to the product segments to be divested, excluding the reserve for asset impairment of $137 million:
December 31 (in millions of dollars) 1999 - ------------------------------------------------------- ------------ Current assets $ 67 Long-term assets (primarily property, plant and equipment) 130 Current liabilities (13) ----------- Net assets $ 184 ===========
Activity associated with the provision for restructuring is as follows:
Reserve for Asset (in millions of dollars) Impairment Liabilities Total - ----------------------------------------------- ----------- ----------- ------------ Balance at December 31, 1998 $ 569 $ 93 $ 662 Asset retirements and cash payments (432) (28) (460) Transfer (a) - (20) (20) ---------- ---------- ------------ Balance at December 31, 1999 $ 137 $ 45 $ 182 =========== ========== ============
(a) Certain amounts have been transferred from the restructuring liability accounts to other liabilities due to the long-term nature of the liabilities. 20 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 10. Accumulated Other Comprehensive Income Comprehensive income reflects changes in equity that result from transactions and economic events from nonowner sources. Accumulated other comprehensive income for the periods presented below represents foreign currency translation items associated with the company's Brazilian and Canadian operations. There was no tax expense or tax benefit associated with the foreign currency translation items, other than the cumulative tax effect described below. Accumulated Other Comprehensive Income (Foreign Currency Translation)
Years Ended December 31 (in millions of dollars) 1999 1998 1997 - ------------------------------------------------------ ------------ ------------ ------------ Beginning balance $ (204) $ (57) $ (33) Foreign currency translation adjustments: Cumulative tax effect of changing the Brazilian functional currency to the Real - (52) - Other foreign currency translation adjustments (248) (95) (24) ------------ ------------ ------------ Ending balance $ (452) $ (204) $ (57) =========== =========== ===========
21 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 11. Other (Income) Expense -- Net
Years Ended December 31 (in millions of dollars) 1999 1998 1997 - --------------------------------------------- ------------ ------------ ------------ Interest income $ (40) $ (24) $ (18) Foreign currency (gains) losses -- net (40) (11) (1) Equity in net income of affiliates (2) (2) (1) Royalty, rental and commission income (7) (7) (14) Net gain on disposal of fixed assets, timberlands and investments (16) (22) (24) Miscellaneous -- net 16 21 26 ----------- ----------- ----------- $ (89) $ (45) $ (32) =========== =========== ===========
22 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 12. Income Taxes The provision (benefit) for income taxes includes the following components:
Years Ended December 31 (in millions of dollars) 1999 1998 1997 - ----------------------------------------------------- ------------ ------------ ------------ Provision for income taxes currently payable (receivable): Federal $ - $ 5 $ (15) State and local - 7 3 Foreign 46 12 35 ----------- ------------ ------------ 46 24 23 ----------- ------------ ------------ Provision for deferred income taxes: Federal 17 (53) (307) State and local 2 (10) (47) Foreign 20 1 (17) ----------- ------------ ------------ 39 (62) (371) ----------- ------------ ------------ Total provision $ 85 $ (38) $ (348) =========== ============ ============
Domestic and foreign income (loss) before income taxes and extraordinary item are as follows:
Years Ended December 31 (in millions of dollars) 1999 1998 1997 - --------------------------------------------------- ------------ ------------ ------------ Domestic $ 49 $ (52) $ (983) Foreign 273 89 86 ----------- ------------ ------------ Total income (loss) before income taxes and extraordinary item $ 322 $ 37 $ (897) =========== =========== ===========
23 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Principal reasons for the variation between the statutory rate and the effective federal income tax rate are as follows:
Years Ended December 31 1999 1998 1997 - --------------------------------------------- ------------ ------------ ------------ Statutory rate -- provision (benefit) 35.0% 35.0% (35.0)% Rate difference -- foreign subsidiaries (9.3) (51.0) (2.4) Foreign dividends (0.2) (3.1) 1.3 State and local taxes, net of federal tax effect 0.3 (4.4) (3.2) Adjustment to prior years' income taxes - (41.1) - Adjustment to valuation allowance - (40.3) - All other -- net 0.6 3.5 0.5 ----------- ----------- ------------ Effective income tax rate 26.4% (101.4)% (38.8)% =========== =========== ============
Deferred tax liabilities (assets) are composed of the following:
December 31 (in millions of dollars) 1999 1998 - ------------------------------------------------------------ ----------- ------------ Depreciation and cost of timber harvested $ 1,566 $ 1,720 Capitalization of interest and deferral of other costs 31 31 Other 44 51 ---------- --------- Gross Liabilities 1,641 1,802 ---------- --------- Reserve for asset impairment (49) (225) Loss and other carryforwards (220) (195) Accrued liabilities and reserves (252) (265) Postretirement benefits other than pensions (164) (161) Other (75) (83) ---------- --------- Gross Assets (760) (929) ---------- --------- Valuation allowance 2 2 ---------- --------- 883 875 Asset arising on acquisition (194) (303) ---------- --------- $ 689 $ 572 ========== =========
24 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements As of December 31, 1999, the company had available, for U.S. income tax return purposes, alternative minimum tax credit carryforwards of $167 million, which do not expire and operating loss carryforwards of $78 million which will expire in 20 years. In addition, the company had, for Brazilian income tax return purposes, operating loss carryforwards of $153 million, which do not expire. It is the company's intention to reinvest undistributed earnings of certain of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for income taxes on undistributed earnings of $1.5 billion at December 31, 1999. Computation of the potential deferred tax liability associated with these undistributed earnings is not practicable. The valuation allowance at December 31, 1999 and 1998 primarily relates to state income tax carryforwards. During 1998, purchase accounting adjustments for various acquisitions resulted in increases in the company's deferred tax asset (included in other assets) of approximately $303 million. Effective January 1, 1998, the company changed the functional currency of its Brazilian operations to the Brazilian Real. As a result, the company recorded a one-time increase to its deferred tax liabilities of approximately $52 million. 25 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 13. Pension and Other Benefit Plans The company and its subsidiaries have a number of noncontributory pension plans covering substantially all employees. The plans covering salaried employees provide pension benefits that generally are based on the employee's compensation during the 60 months before retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The company bases domestic pension contributions on funding standards established by the Employee Retirement Income Security Act of 1974. During 1997, the company approved a plan to restructure its operations (Note 9). In connection with this plan, the company has divested several non-strategic product segments and reduced the workforce in its ongoing operations by approximately 2,260 employees, some of whom were eligible for enhanced early retirement benefits. The expense associated with such benefits, together with the curtailment gains or losses, is reflected in net periodic pension cost and net periodic postretirement benefit costs below. The net periodic pension cost of these plans in 1999, 1998 and 1997 consists of the following:
Years Ended December 31 (in millions of dollars) 1999 1998 1997 - ------------------------------------------------ ------------ ------------ ------------ Service cost-benefits earned during the period $ 24 $ 31 $ 29 Interest cost on projected benefit obligation 122 119 113 Expected return on plan assets (170) (159) (145) Net amortization and deferral 9 6 7 Curtailment and termination benefits - 1 28 ------------ ------------ ------------ Net periodic pension cost (income) $ (15) $ (2) $ 32 ============ ============ ============ - -------------------------------------------------------------------------------------------------------- Assumptions used in determining net periodic pension cost: Discount rate 7.0% 7.5% 7.75% Expected return on plan assets 10.0% 10.0% 10.00% Long-term rate of compensation increase 4.0% 4.5% 4.75% - --------------------------------------------------------------------------------------------------------
The components of net periodic pension cost include the effect of the special early retirement enhancements that were provided under the company's divestiture program. The amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. 26 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Other Retiree Benefits The company provides certain health care and life insurance benefits to eligible retired employees. Employees are generally eligible for benefits upon retirement following a specified number of years of service. These benefit plans are unfunded. Net periodic postretirement benefit cost for 1999, 1998 and 1997 includes the following components:
Years Ended December 31 (in millions of dollars) 1999 1998 1997 - --------------------------------------------- ------------ ------------ ------------ Service cost $ 3 $ 4 $ 4 Interest cost on accumulated postretirement benefit obligation 29 31 28 Amortization of prior service cost (2) (2) (2) Effect of curtailment - - 11 ------------ ------------ ------------ Net periodic postretirement benefit cost $ 30 $ 33 $ 41 ============ ============ ============ - -------------------------------------------------------------------------------------------------------- Assumptions used in determining net periodic postretirement benefit cost: Discount rate 7.25% 7.75% 8.00% Long-term rate of compensation increase 4.00% 4.50% 4.75% - --------------------------------------------------------------------------------------------------------
A one-percentage-point change in assumed health care cost trend rates would have the following effects:
Increase of Decrease of 1% 1% ------------ ------------ Effect on total service and interest cost 12% 10% Effect on accumulated postretirement benefit obligation 10% 8%
The components of net periodic postretirement benefit cost for 1997 include the effect of the special early retirement enhancements that were provided under the company's profit-improvement program. The amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. The assumed health care cost trend rate used for measurement purposes is 6.8% for 1999, declining ratably to an ultimate rate of 5.0% over a period of three years. The changes in the consolidated accrued pension asset for defined benefit plans and the accrued postretirement benefit obligation are shown below. The measurement dates used to determine the funded status were September 30, 1999 and 1998. The funded status was adjusted to record the effect of termination benefits and curtailment resulting from the company's restructuring plan. Plan assets consist primarily of listed stocks and bonds. 27 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements
Pension Benefits Other Retiree Benefits -------------------------- --------------------------- (In millions of dollars) 1999 1998 1999 1998 - --------------------------------------------- ----------- ------------ ------------ ------------ Change in Benefit Obligation: Benefit obligation at beginning of year $ 1,783 $ 1,652 $ 428 $ 415 Service cost 24 31 3 4 Interest cost 122 119 29 31 Plan amendments 18 5 (49) - Actuarial loss 58 94 10 7 Benefits paid (121) (112) (29) (29) Foreign currency exchange rate changes 2 (7) - - Termination benefits and curtailment - 1 - - ----------- ------------ ------------ ------------ Benefit obligation at end of year $ 1,886 $ 1,783 $ 392 $ 428 =========== ============ ============ ============ Change in Fair Value of Plan Assets: Fair value of plan assets at beginning of year $ 1,761 $ 1,840 $ - $ - Foreign currency exchange rate changes 2 (5) - - Actual return on plan assets 382 29 - - Company contribution 11 9 29 29 Benefits paid (121) (112) (29) (29) ----------- ------------ ------------ ------------ Fair value of plan assets at end of year $ 2,035 $ 1,761 $ - $ - =========== ============ ============ ============ Funded Status: Funded status at December 31 $ 149 $ (22) $ (392) $ (428) Actuarial and investment losses (gains) (107) 58 54 43 Prior service cost 41 37 (66) (18) Transition obligation (5) (4) - - ----------- ------------ ------------ ------------ Prepaid (accrued) benefit $ 78 $ 69 $ (404) $ (403) =========== ============ ============ ============ Amounts recognized in the consolidated balance sheet consist of: Other assets $ 132 $ 102 $ - $ - Accrued liabilities - employee benefits - - (30) (30) Other liabilities (54) (33) (374) (373) ----------- ------------ ------------ ------------ Net amount recognized $ 78 $ 69 $ (404) $ (403) =========== ============ ============ ============ - -------------------------------------------------------------------------------------------------------------------- Assumptions used in determining the prepaid (accrued) benefit as of the measurement date: Discount rate 7.5% 7.0% 7.5% 7.25% Long-term rate of compensation increase 4.5% 4.0% 4.5% 4.00% - --------------------------------------------------------------------------------------------------------------------
The company and its subsidiaries have certain pension plans which, as of September 30, 1999, had aggregate accumulated benefit obligations of $81 million and no plan assets. 28 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements The company sponsors several defined contribution plans that provide all domestic salaried employees and certain domestic hourly employees of the company an opportunity to accumulate funds for their retirement. The company matches the contributions of participating employees on the basis of the percentages specified in the respective plans. Company matching contributions to the plans, which are invested in shares of the company's common stock, were approximately $13 million in 1999, $14 million in 1998 and $14 million in 1997. Note 14. Business Segments The company's businesses are aggregated into four reportable segments (North American pulp and paper, Brazilian pulp and paper, distribution and wood products). The operations within each segment to a substantial degree are affected by similar economic conditions and have similar products, production procedures and types of customers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All intersegment sales are market based. Interest expense and interest income are excluded from the operating income of the business segments. North American Pulp and Paper: This segment consists of the company's domestic pulp and paper operations, excluding its distribution business, as well as the softwood market pulp operations of the company's Canadian subsidiary, Weldwood of Canada Limited (Weldwood). The domestic pulp and paper operations principally produce and sell coated and uncoated free sheet and groundwood papers, kraft papers, linerboard and hardwood market pulp. Brazilian Pulp and Paper: This segment consists primarily of the pulp and paper operations of the company's Brazilian subsidiary, Champion Papel e Celulose Ltda. (CPC). CPC produces and sells uncoated free sheet papers and coated groundwood papers. In addition, the segment includes CPC's wood-related operations. Distribution: This business consists of the distribution in the United States of paper, paper products and industrial products produced by the company and numerous other manufacturers. Wood Products: This segment includes the timber and wood products operations in the United States and Canada. The fiber harvested from the timberlands owned and controlled by the company helps support its pulp and paper and wood products operations. A portion of the fiber harvested by the company is sold in the domestic open market and in the export market. The wood products operations produce and sell lumber and plywood. 29 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Information about the company's operations in different businesses for each of the three years ended December 31, 1999 is as follows:
(in millions of dollars) 1999 1998 1997 --------- ------------ ----------- Net Sales to Unaffiliated Customers Pulp and Paper North America $ 2,774 $ 3,352 $ 3,659 Brazil 405 452 322 Distribution 834 836 820 --------- ------------ ----------- Total Pulp and Paper 4,013 4,640 4,801 --------- ------------ ----------- Wood Products 1,255 1,013 935 --------- ------------ ----------- Total $ 5,268 $ 5,653 $ 5,736 ========= ============ =========== Intersegment Sales Pulp and Paper North America $ 135 $ 148 $ 140 Brazil 19 13 6 Distribution 17 21 27 --------- ------------ ----------- Total Pulp and Paper 171 182 173 --------- ------------ ----------- Wood Products 376 485 518 --------- ------------ ----------- Total $ 547 $ 667 $ 691 ========= ============ =========== Income From Operations Pulp and Paper North America $ 116 $ 167 $ 85 Brazil 154 110 62 Distribution 18 12 11 --------- ------------ ----------- Total Pulp and Paper 288 289 158 --------- ------------ ----------- Wood Products 235 85 104 --------- ------------ ----------- General Corporate Expense (47) (40) (59) --------- ------------ ----------- Total $ 476 $ 334 $ 203 ========= ============ ===========
30 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements
(in millions of dollars) 1999 1998 1997 -------- ----------- ---------- Depreciation Expense and Cost of Timber Harvested Pulp and Paper North America $ 263 $ 316 $ 350 Brazil 25 37 37 Distribution 3 3 3 -------- ----------- ---------- Total Pulp and Paper 291 356 390 -------- ----------- ---------- Wood Products 110 115 113 -------- ----------- ---------- General Corporate Expense 18 16 16 -------- ----------- ---------- Total $ 419 $ 487 $ 519 ======== =========== ========== Segment Assets Pulp and Paper North America $ 3,683 $ 4,050 $ 4,754 Brazil 1,080 1,351 1,011 Distribution 205 187 186 -------- ----------- ---------- Total Pulp and Paper 4,968 5,588 5,951 -------- ----------- ---------- Wood Products 2,685 2,639 2,567 -------- ----------- ---------- Corporate and Other 665 613 594 -------- ----------- ---------- Total $ 8,318 $ 8,840 $ 9,112 ======== =========== ========== Capital Expenditures Pulp and Paper North America $ 146 $ 223 $ 204 Brazil 63 75 79 Distribution 2 7 6 -------- ----------- ---------- Total Pulp and Paper 211 305 289 -------- ----------- ---------- Wood Products 117 119 144 -------- ----------- ---------- Corporate and Other 10 8 16 -------- ----------- ---------- Total $ 338 $ 432 $ 449 ======== =========== ==========
31 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Information about the company's operations in different geographic areas for each of the three years ended December 31, 1999 is as follows:
(in millions of dollars) 1999 1998 1997 --------- ------------ ----------- Net Sales to Unaffiliated Customers United States $ 4,349 $ 4,842 $ 5,025 Brazil 405 453 322 Canada (a) 514 358 389 --------- ------------ ----------- Total $ 5,268 $ 5,653 $ 5,736 ========= ============ =========== Long-Lived Assets United States $ 5,005 $ 5,344 $ 5,929 Brazil 512 698 715 Canada 632 617 553 --------- ------------ ----------- Total $ 6,149 $ 6,659 $ 7,197 ========= ============ ===========
(a) Intercompany sales of the company's Canadian operations, consisting mainly of pulp sold to the U.S. operations, were $219 million, $207 million and $229 million, respectively, for the years ended December 31, 1999, 1998 and 1997. The summary of income (loss) before income taxes and extraordinary item for each of the three years ended December 31, 1999 is as follows:
(in millions of dollars) 1999 1998 1997 --------- ------------ ----------- Income (Loss) before Income Taxes and Extraordinary Item Pulp and paper (North American, Brazilian and Distribution) $ 288 $ 289 $ 158 Wood products 235 85 104 Provision for restructuring - (80) (891) General corporate expense (47) (40) (59) Interest and debt expense (243) (261) (240) Other income (expense) - net 89 45 32 --------- ------------ ----------- Total $ 322 $ 38 $ (896) ========= ============ ===========
The company believes that the risks associated with its foreign operations are somewhat greater than those associated with its domestic operations. Weldwood and CPC export substantial portions of their products and, as a result, are affected by currency fluctuations. In addition, Brazil has experienced high inflation rates for extended periods in the past. 32 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 15. Quarterly Results of Operations (Unaudited)
(in millions of dollars, except per share amounts) - ------------------------------------------------------------------------------------------------------------ March 31 June 30 September 30 December 31 ------------ ----------- ------------- ------------- Net Sales: 1999 $ 1,275 $ 1,301 $ 1,344 $ 1,348 1998 1,477 1,474 1,358 1,344 Gross Profit: 1999 $ 144 $ 187 $ 240 $ 280 1998 185 187 176 152 Income (Loss) Before Income Taxes and Extraordinary Item (a): 1999 $ 41 $ 52 $ 113 $ 115 1998 25 43 42 (73) Income Taxes (Benefit) (a,b): 1999 $ (1) $ 13 $ 36 $ 36 1998 6 11 11 (66) Income (Loss) Before Extraordinary Item (a,b): 1999 $ 42 $ 39 $ 77 $ 79 1998 19 32 31 (7) Extraordinary Item - Loss on Early Retirement of Debt, Net of Taxes: 1999 $ - $ - $ (2) $ (2) 1998 - - - - Net Income (Loss) (a,b): 1999 $ 42 $ 39 $ 75 $ 77 1998 19 32 31 (7) Basic Earnings (Loss) Per Common Share (a,b): 1999 $ .44 $ .41 $ .78 $ .80 1998 .20 .33 .33 (.07) Diluted Earnings (Loss) Per Common Share (a,b): 1999 $ .43 $ .41 $ .78 $ .79 1998 .20 .33 .32 (.07)
(a) In the fourth quarter of 1998, the company recorded a provision for restructuring of $80 million ($49 million after-tax, or $.52 per share). (Note 9) (b) In the fourth quarter of 1998, the company recorded a benefit of $30 million, or $.32 per share, resulting from the reversal of previously established reserves that no longer are required. 33 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 16. Environmental Liabilities The company has been designated as a potentially responsible party by the U.S. Environmental Protection Agency (the "EPA") under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, and by certain states under applicable state laws, with respect to the cleanup of hazardous substances at a number of sites. In the case of many of these sites, other potentially responsible parties also have been so designated. In addition, the company and, in certain instances, other responsible parties have entered into agreements with the EPA and certain states regarding the cleanup of hazardous substances at various other locations. Also, the company is involved in the remediation of certain other sites which are not the subject of investigation by federal or state agencies. The company cannot predict with certainty the total cost of such cleanups, the company's share of the total cost of multiparty cleanups or the extent to which contribution will be available from other parties, or the amount of time necessary to accomplish such cleanups. However, based upon, among other things, its previous experience with respect to the cleanup of hazardous substances as well as the regular detailed review of known hazardous waste sites by the company, the company has accrued $84 million at December 31, 1999, which represents its current estimate of the probable cleanup liabilities, including remediation and legal costs, at all known sites. This accrual does not reflect any possible future insurance recoveries, but does reflect a reasonable estimate of cost-sharing at multiparty sites. Although the company's probable liabilities have been accrued for currently, hazardous substance cleanup expenditures generally are paid over an extended period of time, in some cases possibly more than 30 years. Cleanup expenditures during the period from 1997 through 1999 were approximately $3 million per year. Note 17. Legal Proceedings The company is involved in legal and administrative proceedings and claims of various types. While any litigation contains an element of uncertainty, management, based upon the opinion of the company's General Counsel, presently believes that the outcome of each such proceeding or claim which is pending or known to be threatened will not have a material adverse effect on the company. 34 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 18. Acquisitions In January 1998, the company's Brazilian subsidiary acquired Inpacel for $58 million, net of cash acquired. At the time of its acquisition, Inpacel had outstanding debt of $277 million and $55 million of other liabilities. Inpacel, a Brazilian company, owns a pulp and coated groundwood papers mill, a sawmill and 125,000 acres of timberlands, all of which are located in the State of Parana, Brazil. In September 1998, the company's Canadian subsidiary acquired Sunpine Forest Products, Ltd. for $46 million. At the time of its acquisition, Sunpine had outstanding debt of $56 million and $16 million of other liabilities. Sunpine's facilities, located in Alberta, Canada, include a sawmill, a lumber-treating plant, a veneer mill and a laminated-veneer lumber plant. In addition, Sunpine is responsible for a forest management area of 1.5 million acres under license from the Province of Alberta. Both of the acquisitions were accounted for as purchases. Note 19. Subsequent Event (Unaudited) On February 17, 2000, UPM-Kymmene Corporation and Champion announced that their boards of directors had approved a definitive merger agreement. Under the terms of the agreement, UPM-Kymmene will exchange 1.99 of its ordinary shares for each outstanding share of Champion common stock. Champion's shareholders may elect to receive either UPM-Kymmene American Depositary Receipts or ordinary shares. The transaction is expected to be accounted for as a pooling of interests. The merger is conditioned upon, among other things, the approvals of the shareholders of both companies and regulatory approvals in various jurisdictions. The companies anticipate that the merger can be completed during the first half of the year 2000. 35 Report of Independent Public Accountants - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of Champion International Corporation: We have audited the accompanying consolidated balance sheets of Champion International Corporation (a New York corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, retained earnings and cash flows for each of the three years in the period ended December 31, 1999. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Champion International Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Stamford, Connecticut January 17, 2000 36 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Overall Annual Results Results for 1999 improved significantly from 1998 and 1997. In 1999, net income was $237 million, or $2.46 per diluted share, before an extraordinary charge of $5 million, or five cents per share, for the early retirement of debt. Results included earnings of $43 million, or 45 cents per share, reflecting the impact of the devaluation of the Brazilian currency on U.S.-denominated investments held by the company's Brazilian subsidiary. This compared with 1998 net income of $94 million, or 98 cents per diluted share, before special items and 1997 net income of $4 million, or four cents per share, before a special item. Special items in 1998, which were recorded in the fourth quarter, consisted of a charge related to additional costs associated with the divestiture of the company's non-strategic product segments and a benefit resulting from the reversal of reserves that no longer were required. The net effect of these special items was to reduce earnings by $19 million, or 20 cents per share. The special item in 1997 consisted of an after-tax charge of $552 million, or $5.76 per share, related to the restructuring plan. The improvement from 1998 and 1997 was primarily due to higher operating income in the company's wood products segment, reflecting higher prices for wood products and significantly increased shipments of Canadian lumber and plywood; and improved results in the Brazilian pulp and paper segment as a result of lower manufacturing costs and the January 1998 acquisition of Inpacel, a coated groundwood papers company. In addition, as compared with 1997, results reflected higher income in the North American pulp and paper segment, mainly due to lower overall manufacturing costs and the operating loss in 1997 at the newsprint business which was sold in June 1998. The company, especially in its pulp and paper segments, was adversely affected by the economic turmoil in many countries, particularly in Asia, from late 1997 into early 1999. However, prices for many of the company's key pulp and paper grades gradually improved during the last nine months of 1999, reflecting the gradual recovery in Asia, as well as strong demand attributable to economic growth in North America and Europe. In addition, on the supply side, there were relatively few capacity additions in the industry during 1999, although manufacturers increased paper production from existing facilities. This improved the demand/supply relationship and contributed to progressively higher earnings in the company's pulp and paper segments during the last three quarters of 1999. The company believes that markets for pulp and paper will continue to improve into the next several quarters. The company's wood products segment experienced strong demand during 1999 for its lumber and plywood products. Prices improved during each of the first three quarters but declined late in the year primarily due to a seasonal slowdown in the building products markets. Significant Income Statement Changes Net sales of $5.3 billion declined from $5.7 billion in 1998 and 1997. The aggregate cost of products sold also declined from 1998 and 1997. Gross profit was $851 million compared with $700 million in 1998 and $595 million in 1997. Pre-tax profit of $322 million, before the $5 million extraordinary charge, improved from $117 million, before the special items, in 1998 and a 1997 pre-tax loss of $6 million before the restructuring charge. 37 - -------------------------------------------------------------------------------- The improvements in gross profit and pre-tax income from 1998 and 1997, before special items, were due primarily to (i) higher average prices for the company's wood products and increased shipments of lumber and plywood in Canada; (ii) higher operating income at the company's Brazilian operations due to lower manufacturing costs and the contribution of Inpacel; and (iii) continued progress in the company's profit-improvement program. In addition, compared with 1997, the newsprint business, which was sold by the company in June 1998, incurred a large operating loss in 1997. The decline in net sales and cost of products sold from 1998 and 1997 was principally due to the impact of the devaluation of the Brazilian currency on revenues and manufacturing costs and to lower shipments resulting from (i) the June 1998 sale of the company's newsprint business; (ii) the May 1999 sale of the company's mill in Canton, North Carolina and the liquid packaging business (the Canton System); and (iii) the June 1999 sale of the company's groundwood specialty mill in Deferiet, New York. Selling, general and administrative expenses of $375 million compared with $367 million in 1998 and $393 million in 1997. The changes from 1998 and 1997 were primarily the result of the impact of stock price fluctuations on the value of stock appreciation rights and other stock-based compensation, including the performance share units described in Note 8 to the consolidated financial statements. Future stock price volatility would impact the expense associated with the company's stock-based compensation. The decline from 1997 also reflected corporate and sales staff reductions resulting from the company's profit-improvement program. Interest and debt expense decreased from 1998 and was approximately even with 1997. The decrease from 1998 was due to lower outstanding debt. Other (income) expense - net included a net foreign currency transaction gain of $43 million for the company's Brazilian subsidiary, Champion Papel e Celulose Ltda. (CPC). Excluding this item, other (income) expense - net was approximately even with 1998 and improved from 1997. The improvement from 1997 was mainly due to higher interest income (primarily resulting from the investment of asset divestiture proceeds). The income tax provision in 1999 reflected the impact of the $43 million net foreign currency transaction gain, which is not taxable. The income tax benefit in 1998 included a benefit of $30 million due to the reversal of reserves that no longer were required. Excluding these items, the income tax rate of 1999 was higher than 1998 but lower than 1997 due to the mix of earnings from the company's operations in North America and Brazil. The tax rate applicable to North American operations is higher than the Brazilian tax rate. Quarterly Results Earnings were 82 cents per diluted share, before an extraordinary charge of three cents per share for the early retirement of debt, for the fourth quarter of 1999. This compared with 13 cents per share, before special items, for the fourth quarter of 1998 and 80 cents per share, before an extraordinary charge, for the third quarter of 1999. The improvement from the fourth quarter of 1998 reflected higher income in the pulp and paper segments and wood products segment, as discussed below. Compared with the third quarter of 1999, higher prices for all of the company's major pulp and paper grades were substantially offset by lower lumber and plywood prices and lower other (income) expense - net. 38 - -------------------------------------------------------------------------------- Pulp, Paper and Distribution Each of the company's North American and Brazilian pulp and paper segments and its distribution segment is discussed separately below. For these segments in the aggregate, operating income of $288 million in 1999 compared with $289 million in 1998 and $158 million in 1997. Compared with 1998, lower average pulp and paper prices offset lower overall manufacturing costs and increased shipments in ongoing operations for the year. The principal reasons for the improvement from 1997 are discussed above under "Overall Annual Results." Total paper, packaging and pulp shipments of approximately 5 million tons in 1999 decreased from approximately 5.7 million tons in 1998 and approximately 6.3 million tons in 1997. The decline was primarily attributable to the divestiture of various facilities discussed above under "Significant Income Statement Changes." Fourth quarter 1999 operating income of $130 million compared with $43 million in the fourth quarter of 1998 and $90 million in the third quarter of 1999. The improvement from the fourth quarter of 1998 was due to substantially higher prices for uncoated freesheet and kraft papers and for pulp, as well as lower manufacturing costs in the company's ongoing operations. The improvement from the third quarter of 1999 was due to higher prices for all of the company's major pulp and paper grades. North American Pulp and Paper Segment The North American pulp and paper segment consists of the company's domestic pulp and paper operations, excluding its distribution business, as well as the softwood market pulp operations at the company's Canadian subsidiary, Weldwood of Canada Limited (Weldwood). Operating income for the company's North American pulp and paper segment of $116 million declined from $167 million in 1998 and increased from $85 million in 1997. Total North American paper, packaging and pulp shipments of approximately 4.4 million tons in 1999 decreased from approximately 5.1 million tons in 1998 and 5.8 million tons in 1997. The decline in shipments was due to the divestiture of various facilities discussed above under "Significant Income Statement Changes," partially offset by increased pulp and paper shipments from ongoing operations. Fourth quarter operating income of $77 million improved from $6 million in the fourth quarter of 1998 and $48 million in the third quarter of 1999. A summary of shipments and prices of the company's major U.S. paper products is as follows:
Shipments (Thousands Of Short Tons) Average Price Per Ton ------------------------ --------------------- Product 1999 1998 1997 1999 1998 1997 - ------- ---- ---- ---- ---- ---- ---- Uncoated Freesheet 1,351 1,511 1,528 $639 $655 $681 Coated Freesheet 612 577 577 $852 $923 $969 Coated Groundwood 750 732 809 $839 $918 $822 Uncoated Groundwood 155 320 390 $671 $679 $624 Kraft Papers & Linerboard 522 502 519 $368 $364 $352
The mills in the domestic coated papers business are in Bucksport, Maine; Quinnesec, Michigan; and Sartell, Minnesota. Pulp sales at Quinnesec and uncoated groundwood papers produced at Sartell also are included in the results of this business. Operating income for the domestic coated papers business declined from 1998 but improved from 1997. The decline from 1998 was principally due to lower prices for coated freesheet and coated groundwood papers, partially offset by higher overall shipments. The improvement from 1997 was mainly due to higher prices for coated groundwood papers and lower manufacturing costs, which were partially offset by lower 39 - -------------------------------------------------------------------------------- prices for coated freesheet papers and northern hardwood kraft pulp. Fourth quarter operating income was approximately even with the fourth quarter of 1998 and improved from the third quarter of 1999. The improvement from the prior quarter was due to higher prices for coated groundwood papers, coated freesheet papers and pulp. A price increase for northern hardwood kraft pulp was implemented January 1, 2000. A capital improvement outage is scheduled at the Sartell mill in the first quarter of 2000. The mills in the domestic uncoated papers business are in Pensacola, Florida and Courtland, Alabama. Pulp sales at Pensacola and Courtland and coated freesheet papers sales at Courtland also are included in the results of this business. The operating loss in the domestic uncoated papers business improved from the larger operating loss in 1998 but declined from the operating income in 1997. The improvement from 1998 was primarily due to significantly lower manufacturing costs and higher average pulp prices, which more than offset lower prices for coated and uncoated freesheet papers. The decline from 1997 was due to lower prices for coated and uncoated freesheet papers, which more than offset lower manufacturing costs and higher pulp prices. Shipments declined slightly from 1998 and 1997. Fourth quarter 1999 operating income improved significantly from the operating loss in the fourth quarter of 1998 and the small operating income in the third quarter of 1999. The improvement in operating results from both prior periods was mainly due to significantly higher prices for uncoated freesheet papers and pulp. The company has announced price increases for most uncoated grades effective late in the first quarter of 2000. A maintenance outage is scheduled at the Pensacola mill in the first quarter of 2000. Kraft papers and linerboard are produced at the Roanoke Rapids, North Carolina mill. Operating income for the kraft papers business improved significantly from 1998 and 1997. The improvement from both prior years was primarily due to higher prices and shipments of linerboard and, with respect to 1998, lower manufacturing costs. Operating income for the fourth quarter of 1999 improved from the operating loss for the fourth quarter of 1998 and the operating income for the third quarter of 1999. The improvement from both prior quarters was due to higher prices and shipments. In addition, the Roanoke Rapids mill had a scheduled capital improvement and maintenance outage in the fourth quarter of 1998. The only remaining pulp and paper operation to be divested by the company is the Hamilton, Ohio mill. Divested operations also include the Canton System and the Deferiet, New York mill, which were sold in May 1999 and June 1999, respectively, and the newsprint business, which was sold in June 1998. For these operations, including the Hamilton mill, the operating loss was slightly larger than the loss for 1998 but significantly improved from the operating loss for 1997. The decline from 1998 was primarily due to lower prices for premium uncoated freesheet and coated groundwood papers and the operating profit at the newsprint business in 1998. The improvement from 1997 was principally due to the operating loss in 1997 at the newsprint business. The fourth quarter 1999 operating loss was larger than the operating losses in the fourth quarter of 1998 and the third quarter of 1999. The larger loss compared with the year-ago and prior quarter was mainly due to market-related downtime at the Hamilton mill in the fourth quarter of 1999. Weldwood's market pulp operations consist of its mill in Hinton, Alberta and a 50% interest in a joint venture pulp mill in Quesnel, British Columbia. The operating loss for these operations was approximately even with last year but represented a significant decline from the operating income in 1997. Compared with 1998, slightly higher prices and shipments of northern bleached softwood kraft (NBSK) pulp were offset by higher manufacturing costs as a result of the scheduled maintenance outages at both pulp mills and a two-week strike at the Hinton mill which ended on April 5, 1999. The decline from 1997 was mainly due to lower prices and shipments for NBSK pulp. The average price for NBSK pulp was (U.S.) $365 per ton in 1999 compared with $358 per ton in 1998 and $419 per ton in 1997. Shipments were 606,000 tons in 1999 compared with 582,000 tons in 1998 and 622,000 tons in 1997. Fourth quarter 1999 operating income improved significantly from the operating loss for the fourth quarter of 1998 and the operating income for the prior quarter, principally due to higher prices for NBSK pulp. A price increase for NBSK pulp was implemented January 1, 2000. 40 - -------------------------------------------------------------------------------- Brazilian Pulp and Paper Segment In January 1999, the government of Brazil ceased its efforts to control the rate of devaluation of the Brazilian currency, the Real, and allowed the exchange rate for the Real to float freely. As a result, the Real devalued 30% against the U.S. dollar in the first quarter of 1999. During the last nine months of 1999, the exchange rate began to stabilize, devaluing only an additional 3% against the U.S. dollar. This devaluation reduced the cost of manufacturing, thereby improving the competitive position, for exports by CPC. At any given time, exports account for between 30% and 60% of CPC's sales. However, the devaluation has reduced domestic selling prices on a U.S. dollar basis. Overall, the effect of the devaluation on CPC's operating income for 1999 was slightly positive. The Brazilian pulp and paper segment consists primarily of the pulp and paper operations of CPC. In addition, the segment includes CPC's wood-related operations. Operating income of $154 million improved from $110 million in 1998 and $62 million in 1997. The improvement in 1999 was due to the full year of operations at Inpacel, which was acquired in January 1998, and lower manufacturing costs. The improvement from 1997 was mainly due to the operating income from Inpacel. The overall average price for uncoated freesheet papers declined to $593 per ton in 1999 from $707 per ton in 1998 and $722 per ton in 1997. The average price for coated groundwood papers at Inpacel was $710 per ton in 1999 compared with $852 per ton in 1998. Shipments of uncoated freesheet papers of 410,000 tons increased from 400,000 tons in 1998 and 392,000 tons in 1997. Coated groundwood papers shipments at Inpacel were 196,000 tons in 1999 compared with 156,000 tons in 1998. Fourth quarter operating income of $50 million improved from $34 million in the fourth quarter of 1998 and $36 million in the prior quarter. The improvement from the fourth quarter of 1998 was primarily due to lower manufacturing costs. The improvement from the prior quarter was due to higher prices and shipments for uncoated freesheet and coated groundwood papers. See "Foreign Operations" below. Distribution Segment For the company's distribution segment, income from operations of $18 million in 1999 improved from $12 million in 1998 and $11 million in 1997 primarily due to improved margins. Fourth quarter 1999 operating income of $3 million compared with $3 million in the fourth quarter of 1998 and $5 million in the third quarter of 1999. The decline from the prior quarter was mainly due to the seasonal decline in shipments. Wood Products Segment A summary of shipments and prices of the company's major wood products is as follows:
Shipments Price Per Unit ------------------------- --------------------------- Product 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- U.S. Lumber - MMBF* 483 452 384 $333 $320 $346 Softwood Plywood - MMSF 3/8"** 914 922 906 $272 $233 $229 Canada Lumber - MMBF* 1,026 809 781 $314 $279 $347 Softwood Plywood - MMSF 3/8"** 423 339 278 $266 $219 $255
* millions of board feet ** millions of square feet 3/8" 41 - -------------------------------------------------------------------------------- For the company's wood products segment, which includes the wood-related operations of Weldwood, income from operations of $235 million in 1999 improved from $84 million in 1998 and $104 million in 1997. The improvement from 1998 was primarily the result of higher prices for lumber and plywood and higher shipments in Canada. The improvement from 1997 was principally due to higher plywood prices and increased shipments of lumber and plywood in Canada. Prices for lumber and plywood improved during the first three quarters of 1999 but experienced seasonal declines in the fourth quarter. Fourth quarter 1999 operating income of $53 million compared with $23 million in the fourth quarter of 1998 and $71 million in the third quarter of 1999. The improvement from the fourth quarter of 1998 was due to significantly higher lumber prices and higher Canadian plywood prices, increased Canadian lumber shipments and an increase in the volume of timber sales in the United States. The decline from the prior quarter was due to lower lumber and plywood prices, which was partially offset by higher shipments. Foreign Operations The company's major foreign operations, which are discussed above under their respective segment headings, are in Brazil and Canada. Net sales (including intracompany transfers) for CPC and Weldwood for 1999 were (U.S.) $424 million and (U.S.) $733 million, respectively, accounting for 8% and 14%, respectively, of consolidated net sales of the company. Pre-tax income for CPC and Weldwood of $172 million and $101 million, respectively, accounted for 53% and 31%, respectively, of consolidated pre-tax income of the company. Net income for 1999 of CPC and Weldwood was $143 million and $64 million, respectively, accounting for 61% and 28%, respectively, of consolidated net income of the company. Long- lived assets held by CPC and Weldwood at December 31, 1999 were $512 million and $632 million, respectively, accounting for 8% and 10%, respectively, of long- lived assets of the company. With the divestiture of the Canton System and the Deferiet mill in 1999 and the plan to divest certain other non-strategic assets in the United States, the company's Brazilian and Canadian operations could account for a large percentage of the company's sales. The company believes that the risks associated with its foreign operations are somewhat greater than those associated with its domestic operations. Weldwood and CPC export substantial portions of their products and, as a result, are affected by currency fluctuations. In addition, Brazil has experienced high inflation rates for extended periods in the past. The conversion to a common European currency, the euro, by 11 of the 15 members of the European Union, which occurred on January 1, 1999, did not significantly impact the company's competitive position in Europe or require significant modifications to its business-information systems. Labor Contracts The company has labor agreements, which expire between 2000 and 2005, at six of its seven domestic paper mills. The only such mills whose labor contracts expire in 2000 are the Bucksport, Maine and Sartell, Minnesota groundwood papers mills. The Quinnesec, Michigan mill is a non-traditional facility. The labor agreements that cover the company's various operations in Brazil are renegotiated each year. At Weldwood, union contracts covering the wood products facilities, except for the plant in Hinton, Alberta, will expire in 2000. The union contracts covering the joint venture pulp mill at Quesnel, British Columbia and the Hinton, Alberta pulp mill and wood products plant will expire in 2003. The wood products plants of Weldwood subsidiaries Decker Lake Forest Products Limited and Sunpine Forest Products Ltd. (Sunpine) are non-union facilities. 42 - -------------------------------------------------------------------------------- Financial Condition General The company's current ratio was 1.6 to 1 at year-end 1999 compared with 1.4 to 1 at year-end 1998 and year-end 1997. Total debt to total capitalization was 40% at year-end 1999 compared with 45% at year-end 1998 and year- end 1997 as a result of lower outstanding domestic and foreign debt. Significant Balance Sheet Changes The May 1999 sale of the Canton System, the June 1999 sale of the Deferiet mill and the 33% devaluation of the Brazilian currency relative to the U.S. dollar were the main reasons for the decreases from December 31, 1998 in inventories; property, plant and equipment-net; other assets and deferred charges; and accounts payable and accrued liabilities. The sale of approximately 300,000 acres of timberlands in the Northeast, described below, and the 33% devaluation of the Brazilian currency were the principal reasons for the decline from December 31, 1998 in timber and timberlands-net. The net effect of foreign currency fluctuations relative to the U.S. dollar was a $248 million increase in the cumulative translation adjustment since December 31, 1998 in the accumulated other comprehensive income component of shareholders' equity. For a discussion of changes in long-term debt (including current installments), short-term borrowings, and cash and cash equivalents, see below. Cash Flows Statement - General 1999 - ---- In 1999, the company's net cash provided by operating activities and asset sales, principally the sales of the Canton System, the Deferiet mill and approximately 300,000 acres of timberlands in the Northeast, exceeded the requirements of its investing activities (principally capital expenditures). The excess was used to pay dividends, to pay a portion of the company's long-term debt (including current installments) and to increase cash and cash equivalents. Cash and cash equivalents increased by $118 million in 1999 to a total of $418 million, $245 million of which was held by the company's Brazilian and Canadian subsidiaries. In 1999, net debt payments were $441 million. Long-term debt (including current installments) and short-term borrowings in the aggregate decreased by $541 million, mainly due to the net debt payments and the impact of the devaluation of the Real on the debt of the company's Brazilian subsidiary. See "New Profit-Improvement and Shareholder-Value Plan" below for a description of the company's plans to further reduce debt and to increase the dividend rate. 1998 - ---- In 1998, the company's net cash provided by operating activities and asset sales, principally the June 1998 sale of the company's newsprint operations, exceeded the requirements of its investing activities (principally capital expenditures and the acquisitions of Sunpine, a Canadian forest products company, and Inpacel). The excess was used primarily to pay a portion of the company's long-term debt (including current installments). In 1998, net long- term and short-term debt payments were $420 million. Long-term debt (including current installments) and short- term borrowings in the aggregate decreased by $144 million, as the reduction in U.S. debt outstanding was partially offset by the $277 million of debt of Inpacel and $56 million of debt of Sunpine outstanding at the time of their acquisitions. Cash and cash equivalents increased by $25 million to a total of $300 million. 43 - -------------------------------------------------------------------------------- 1997 - ---- In 1997, the company's net cash provided by operating activities, asset sales and financing activities exceeded the requirements of its investing activities (principally capital expenditures) and financing activities (principally debt payments and cash dividends). The excess was used to increase cash and cash equivalents by $100 million to a total of $275 million. In 1997, net borrowings generated cash proceeds of $89 million; long-term debt (including current installments) and short-term borrowings in the aggregate increased by $116 million. The approximately equal increases in cash and cash equivalents and debt were attributable largely to a financing in December 1997, a portion of the proceeds of which was used to repay debt as it matured in early 1998. Cash Flows Statement - Operating Activities Net cash provided by operating activities of $634 million increased from $555 million in 1998 and $485 million in 1997. The increase from both prior years was primarily due to higher earnings, excluding special items; an increase in accounts payable and accrued liabilities and income taxes payable; and, with respect to 1998, a decrease in inventories, partially offset by lower depreciation expense and an increase in receivables. Cash Flows Statement - Investing Activities Net cash used in investing activities of $83 million increased from $67 million in 1998 and decreased from $466 million in 1997. The increase from 1998 mainly reflected lower proceeds from the 1999 sales of divested operations, partially offset by lower capital expenditures this year as well as the acquisition of Inpacel and Sunpine in 1998. The decrease from 1997 primarily reflected the sales of divested facilities and lower capital expenditures in 1999. In 1998, CPC acquired Inpacel for $75 million before netting $17 million of cash and cash equivalents owned by Inpacel (as well as outstanding debt of $277 million and $55 million of other liabilities); and Weldwood acquired Sunpine for $46 million (as well as outstanding debt of $56 million and $16 million of other liabilities). Inpacel owns a pulp and coated groundwood papers mill, a small sawmill and 132,000 acres of timberlands, all of which are located in the State of Parana, Brazil. Sunpine's facilities, located in Alberta, Canada, include a sawmill, a lumber- treating plant, a veneer mill and a laminated-veneer lumber plant. In addition, Sunpine is responsible for a forest management area of 1.5 million acres under license from the Province of Alberta. In 1997, the company purchased from Fort James Corporation 140,000 acres of forestlands in central Maine as well as a stud mill in Passadumkeag, Maine for $46 million. Cash Flows Statement - Financing Activities Net cash used in financing activities of $433 million compared with $463 million in 1998 and net cash provided by financing activities of $81 million in 1997. The change from 1998 was mainly due to the acquisition of treasury stock in 1998. The change from 1997 was primarily due to the reduction in long-term debt in 1999. At December 31, 1999 and December 31, 1998, the company had no U.S. commercial paper, current maturities of long-term debt and other short-term obligations classified as long-term debt compared with $345 million at year-end 1997. At December 31, 1999, December 31, 1998 and December 31, 1997, no notes were outstanding under the company's U.S. bank lines of credit. Domestically, at December 31, 1999, the company had unused bank lines of credit of $1.1 billion. At December 31, 1999, Weldwood had unused bank lines of credit of approximately (U.S.) $145 million. 44 - -------------------------------------------------------------------------------- During 1999, the company borrowed $31 million through the issuance of long-term, tax-exempt bonds and $17 million of long-term variable rate debt. The annual principal payment requirements under the terms of all long-term debt agreements for the years 2000 through 2004 are $127 million, $144 million, $30 million, $28 million and $24 million, respectively. Capital Expenditures Capital expenditures, including contract timber, reforestation and capitalized interest, were $338 million in 1999 compared with $432 million in 1998 and $449 million in 1997. The company presently anticipates that capital expenditures will be approximately $486 million in 2000, all of which is expected to be financed through internally generated funds and the use of cash and cash equivalents. In 1998, various pre-construction activities began with respect to a gas-fired turbine cogeneration project at the Bucksport, Maine mill. The company will own 28% of the project, which is expected to provide lower-cost electricity and steam to the mill and significantly reduce the mill's air emissions when completed in 2000. The company's share of the total project cost will be approximately $33 million, of which approximately $21 million had been expended as of December 31, 1999. In 1999, the company began construction of a sawmill in western Florida. This project is expected to be completed in 2000 at a total cost of approximately $61 million, of which approximately $6 million had been expended as of December 31, 1999. In 1999, the company began a project to modernize the No. 3 paper machine at the Sartell, Minnesota mill. The project is expected to be completed in 2000 at a cost of approximately $48 million, of which approximately $29 million had been expended as of December 31, 1999. In 1999, the company began an alkaline-conversion project and various production improvement projects at the Mogi Guacu, Brazil mill. These projects are expected to be completed in 2000 at a cost of approximately $48 million of which approximately $20 million had been expended as of December 31, 1999. The company has under consideration the possible establishment of a new chipping operation in the State of Amapa, Brazil, and the possible construction of a pulp and paper mill at Tres Lagoas, State of Mato Grosso do Sul, Brazil. Approximately $290 million had been expended as of December 31, 1999 in connection with these projects, including land acquisition and reforestation. Approximately $18 million will be expended in 2000. Divestiture Program On October 7, 1997, the company approved a plan to divest several non-strategic operations. As part of the divestiture, the company offered for sale the Canton freesheet papers and bleached paperboard mill; the newsprint mills at Lufkin and Sheldon, Texas; the groundwood papers mill at Deferiet; and the premium freesheet papers mill at Hamilton, Ohio. Also offered for sale were the liquid packaging operations (the DairyPak unit) that consisted of the Waynesville, North Carolina plant and six paperboard converting plants; the recycling business; and approximately 300,000 acres of timberlands. In 1998, the company sold the Lufkin and Sheldon mills, one of the paperboard converting plants and a portion of the recycling business for a total of $481.5 million. In 1999, the company sold the Canton mill, the Waynesville plant, and the five remaining paperboard converting plants for $200 million, consisting of $170 million in cash and a $30 million note; the Deferiet mill for $34.5 million, a substantial portion of which was paid in cash; and the approximately 300,000 acres of timberlands for $76.2 million. The company is continuing to actively pursue the sale of the Hamilton mill. In addition, the company has offered for sale approximately 35,000 acres of timberlands in North Carolina and Tennessee. 45 - -------------------------------------------------------------------------------- New Profit-Improvement and Shareholder-Value Plan On October 14, 1999, the company announced that the goal of its Profit- Improvement Program introduced in October 1997 -- to increase annual pre-tax earnings by $400 million -- would be achieved by year-end 1999, one year ahead of schedule. The company also announced that the next steps it will take to improve profitability and maximize shareholder value include a program targeted to further increase the annual pre-tax earnings of the company at a rate of $285 million by the end of 2001, a total-debt-to-total-capitalization ratio target of 35% or less to be achieved by the end of 2001 and an increase in the dividend paid on its common stock. Value-Creation Program The company has identified a number of value-creation initiatives that are targeted to further improve annual pre-tax earnings at a rate of $285 million by the end of 2001. These initiatives, called "Target 285," include $100 million in productivity improvements, $140 million from new top-line improvements, and $45 million from projects currently under way but not yet completed or fully optimized. Total-Debt-to-Total-Capitalization Ratio Targeted at 35% The company has targeted a total-debt-to-total-capitalization ratio of 35% or less by the end of 2001. A significant portion of this balance sheet improvement was achieved in 1999. During 1999, the company paid down its long-term debt by approximately $441 million. This includes the repurchase before maturity of approximately $200 million of debt. Planned Increases in Dividend Rate The company has adopted a new dividend policy. For several years, the company's dividend rate has been five cents per common share per quarter. Under the new policy, the rate will increase by five cents per quarter until it reaches a quarterly level of 25 cents per share. The new policy became effective with the regular quarterly dividend declared in November 1999 and paid in January 2000. The Environment Environmental Capital Expenditures The company is subject to various federal, state and local laws and regulations relating to the discharge of materials into the environment and to the disposal of solid waste. These laws and regulations require the company to obtain permits and licenses from appropriate governmental authorities with respect to its facilities and to operate its facilities in compliance with such permits and licenses. 46 - -------------------------------------------------------------------------------- In order to meet the standards established by the various federal, state and local environmental laws and regulations to which the company is subject, the company is required to invest substantial amounts in pollution abatement facilities. During the period from 1995 through 1999, the company spent approximately $208 million in its domestic operations to purchase and install systems to control the discharge of pollutants into air and water and to dispose of solid wastes. In 1999, capital expenditures incurred in the United States for environmental purposes were $25 million. In view of changing environmental laws and regulations and their interpretation, as well as the uncertainties and variables inherent in business planning, it is not possible for the company to predict with certainty the amount of capital expenditures to be incurred for environmental purposes in the future. However, the company estimates that capital expenditures for air and water pollution control systems and solid waste disposal systems in the United States will be approximately $16 million in 2000 and $15 million in 2001. In carrying forward its environmental program, the company will commit additional amounts for environmental purposes in years subsequent to 2001. Preliminary estimates indicate that for the period from 2002 through 2004, capital expenditures for air and water pollution control facilities and solid waste disposal facilities in the United States will aggregate approximately $50 million. The environmental capital expenditures described in this paragraph are included in the respective past and estimated 2000 capital expenditure amounts set forth above under "Capital Expenditures." Although some pollution control and solid waste disposal facilities produce improvements in operating efficiency, most increase product costs without enhancing capacity or operating efficiency. However, since other paper and forest products companies also are subject to environmental laws and regulations, the company does not believe that compliance with such laws and regulations will have a material adverse effect on its competitive position. Effluent Discharge from Pensacola, Florida Mill As previously reported, the company has been evaluating alternative options for the discharge of effluent from its Pensacola, Florida mill. These evaluations remain ongoing. The results of a scientific report were submitted to the Florida Department of Environmental Protection in February 1999. Additional study is being conducted with respect to certain issues raised in the scientific report. New EPA Air and Water Regulations In 1997, the United States Environmental Protection Agency (EPA) promulgated regulations, known as the "Cluster Rule," pursuant to the federal Clean Air Act Amendments of 1990 and the federal Clean Water Act. Compliance is required as early as 2001 for certain provisions and as late as 2006 for other provisions of the Cluster Rule. Further regulations are expected to be proposed in the future. Compliance with such further regulations is expected to be required within three years after each becomes final. As previously reported, trace amounts of dioxin were found in the pulp, sludge and effluent at some bleached kraft mills in the United States and Canada, including certain of the company's mills. The water-related provisions of the Cluster Rule are based upon the substitution of chlorine dioxide for elemental chlorine, which reduces the potential for the formation of dioxin in the pulp- bleaching process. This technology already has been installed and is operating at all of the company's fully bleached kraft mills in the United States. The company presently expects that it will incur capital expenditures to meet the requirements of the Cluster Rule and state air toxics regulations, additional to those set forth above under "Capital Expenditures" and "Environmental Capital Expenditures," in the range of $25 million to $50 million over the period of approximately 2000 through 2005. 47 - -------------------------------------------------------------------------------- Nitrogen Oxide Regulations As previously reported, in September 1998, the EPA issued final regulations requiring a 60% reduction in Nitrogen Oxide (NOx) emissions in 22 states. As the result of a lawsuit, those regulations were overturned and, in response, the EPA granted previously filed petitions from various northeastern states to impose NOx reductions on certain of the original 22 states. Two of the company's mills are located in the affected states. Based upon a preliminary review of the regulations, the company presently anticipates that it could incur capital expenditures of $5 million over a multiyear period and ongoing operating costs to comply with the regulations. The cost of this project is not included in the capital expenditure information set forth above under "Capital Expenditures" or "Environmental Capital Expenditures." Hazardous Substance Cleanup The company has been designated as a potentially responsible party by the EPA under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, and by certain states under applicable state laws, with respect to the cleanup of hazardous substances at a number of sites. In the case of many of these sites, other potentially responsible parties also have been so designated. In addition, the company and, in certain instances, other responsible parties have entered into agreements with the EPA and certain states regarding the cleanup of hazardous substances at various other locations. Also, the company is involved in the remediation of certain other sites which are not the subject of investigation by federal or state agencies. The cost of all such cleanups is not capitalized and, accordingly, is not included in the capital expenditure information set forth above under "Capital Expenditures" and "Environmental Capital Expenditures." The company cannot predict with certainty the total cost of such cleanups, the company's share of the total cost of multiparty cleanups or the extent to which contribution will be available from other parties, or the amount of time necessary to accomplish such cleanups. However, based upon, among other things, its previous experience with respect to the cleanup of hazardous substances as well as the regular detailed review of known hazardous waste sites by the company, the company has developed an estimate of its probable cleanup liabilities. This estimate includes remediation and legal costs with respect to properties presently or formerly owned or operated by the company or its predecessors as well as properties, such as municipal or county landfills, owned and operated by third parties to which the company or its contractor sent waste material. The company has accrued $84 million at December 31, 1999, on a non- discounted basis, which represents its current estimate of the probable cleanup liabilities at all known sites. This accrual does not reflect any possible insurance recoveries, which are not expected to be significant, but does reflect a reasonable estimate of cost-sharing at multiparty sites. Although the company's probable liabilities have been accrued for currently, hazardous substance cleanup expenditures generally are paid over an extended period of time, in some cases possibly more than 30 years. Annual cleanup expenditures during the period from 1997 through 1999 were approximately $3 million each year. Environmental Legal Proceedings On December 30, 1999, the company entered into a Consent Order with the Florida Department of Environmental Protection relating to alleged violations of the wastewater discharge permit at the company's Pensacola mill. The Consent Order requires the company to take additional steps to control the discharge of suspended solids, nutrients and oxygen-consuming material in the mill's wastewater and to pay a civil penalty of $137,730. The Consent Order has not yet become effective due to the filing of administrative appeals by third parties. 48 - -------------------------------------------------------------------------------- While any litigation contains an element of uncertainty, management, based upon the opinion of the company's General Counsel, presently believes that the outcome of this action will not have a material adverse effect on the company. Environmental Information Request As part of a national enforcement initiative by the United States Environmental Protection Agency, several forest products companies have received requests for information under Section 114 of the Clean Air Act (Act) and/or notices of violation relating to compliance with permitting requirements under the Act. The company has received a Section 114 request at its Quinnesec, Michigan mill and is preparing a response. Other Year 2000 Computer Issue The company experienced no material problems with its information systems or with its customers, suppliers or the financial institutions and government entities with which it deals, as a result of the date change to the year 2000. Manufacturing continued without disruption during the period of the date change. The company spent approximately $20 million to make the required modifications and replacements to its own systems. There was no material effect on the company's results of operations as a result of the year 2000 issue. No significant information technology projects or capital spending were deferred as a result of the company's year 2000 program. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement, which will be effective for the company beginning in the fiscal year 2001, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. The Statement requires that changes in each derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The company has not yet quantified the anticipated impact on the financial statements of adopting the Statement. However, given the current level of the company's derivative and hedging activities, the impact is not expected to be material. Financial Market Risk The company's financial market risk arises from fluctuations in interest rates and foreign currencies. Most of the company's debt obligations at year-end 1999 were at fixed interest rates. Consequently, a 10% change in market interest rates would not have a material effect on the company's 2000 pre-tax earnings or cash flows. At December 31, 1999, the company had no significant forward exchange contracts outstanding. The company has no material sensitivity to changes in foreign currency exchange rates on its derivative financial instrument position. The company does not hold financial instruments for trading purposes. 49 - -------------------------------------------------------------------------------- Asset Replacement Value The industry in which the company operates is capital intensive. Due to inflation, the company's property, plant and equipment, and timber and timberlands, could not be replaced for the historical cost value at which they are reflected in the company's financial statements. On a current cost basis, depreciation expense and cost of timber harvested would be greater than reported on a historical cost basis. Subsequent Event On February 17, 2000, UPM-Kymmene Corporation and Champion announced that their boards of directors had approved a definitive merger agreement. Under the terms of the agreement, UPM-Kymmene will exchange 1.99 of its ordinary shares for each outstanding share of Champion common stock. Champion's shareholders may elect to receive either UPM-Kymmene American Depositary Receipts or ordinary shares. The transaction is expected to be accounted for as a pooling of interests. The merger is conditioned upon, among other things, the approvals of the shareholders of both companies and regulatory approvals in various jurisdictions. The companies anticipate that the merger can be completed during the first half of the year 2000. The combined company will be called Champion International and will be headquartered in Helsinki, Finland. If the merger had occurred at December 31, 1999, the combined company would have had total revenues of approximately EUR 13 billion ($14 billion) and a total papermaking capacity of approximately 12.1 million tons per year. The combined company will have the responsibility for the sustainable management of 15.8 million acres of forestlands. UPM-Kymmene and Champion together have approximately 49,000 employees. 50
Champion International Corporation and Subsidiaries - ------------------------------------------------------------------------------------------------------------------ Eleven-Year Selected Financial Data (in millions, except per share amounts and ratio data) 1999 1998 1997 1996 - ----------------------------------------------------- --------- --------- ---------- --------- Earnings: Net sales $ 5,268 $ 5,653 $ 5,736 $ 5,880 Depreciation expense and cost of timber harvested 419 487 518 502 Gross profit 851 700 595 756 Provision for restructuring - 80 891 - Interest and debt expense 243 261 240 222 Other (income) expense - net (89) (45) (32) (35) Income (loss) before income taxes, extraordinary item and cumulative effect of accounting changes 322 37 (897) 205 Income taxes (benefit) 85 (38) (348) 64 Income (loss) before extraordinary item and cumulative effect of accounting changes 237 75 (549) 141 Extraordinary item, net of taxes (5) - - - Cumulative effect of accounting changes, net of taxes - - - - Net income (loss) 232 75 (549) 141 Per Common Share (a): Basic earnings (loss) $ 2.43 $ 0.79 $ (5.72) $ 1.48 Diluted earnings (loss) 2.41 0.78 (5.72) 1.48 Cash dividends declared 0.25 0.20 0.20 0.20 Cash dividends paid 0.20 0.20 0.20 0.20 Shareholders' equity 32.14 32.39 33.39 39.30 Financial Position: Current assets $ 1,482 $ 1,439 $ 1,448 $ 1,316 Timber and timberlands - net 2,273 2,430 2,397 2,365 Property, plant and equipment - net 3,876 4,229 4,800 5,653 Other assets and deferred charges 687 742 466 486 --------- --------- ---------- --------- Total assets $ 8,318 $ 8,840 $ 9,111 $ 9,820 ========= ========= ========== ========= Current liabilities $ 923 $ 1,048 $ 1,020 $ 944 Long-term debt 2,526 2,948 3,194 3,085 Other liabilities 813 787 693 671 Deferred income taxes 961 961 994 1,364 Convertible preference stock - - - - Shareholders' equity 3,095 3,096 3,210 3,756 --------- --------- ---------- --------- Total liabilities and shareholders' equity $ 8,318 $ 8,840 $ 9,111 $ 9,820 ========= ========= ========== ========= Other Statistics: Expenditures for property, plant and equipment $ 232 $ 305 $ 321 $ 461 Timber and timberlands expenditures $ 106 $ 127 $ 128 $ 121 U.S. timber acreage owned or controlled 5.0 5.0 5.4 5.3 Common shares outstanding at year-end 96 96 96 96 Dividends declared on preference shares $ - $ - $ - $ - Dividends declared on common shares $ 23 $ 19 $ 19 $ 19 Current ratio 1.6 1.4 1.4 1.4 Ratio of total debt to total capitalization .40:1 .45:1 .45:1 .39:1 Return on average shareholders' equity and convertible preference stock before extraordinary item and cumulative effect of accounting changes (b) 7.7 % 2.4 % (15.7)% 3.8 %
(a) Basic and diluted earnings (loss) per share for 1998 and 1997 include the provisions for restructuring of ($.52) and ($5.76), respectively. (b) Return on average shareholder's equity for 1998 and 1997 includes the provision for restructuring of $80 million ($49 million after-tax) and $891 million ($552 million after-tax), respectively. 51
1995 1994 1993 1992 1991 1990 1989 - --------- --------- --------- --------- --------- --------- --------- $ 6,972 $ 5,318 $ 5,069 $ 4,926 $ 4,786 $ 5,090 $ 5,163 471 459 443 411 342 323 279 1,816 565 359 362 454 800 1,048 - - - - - - - 226 235 224 206 211 156 136 (33) (57) 7 (143) (110) (85) (93) 1,237 88 (165) 10 78 420 726 465 25 (31) (4) 38 197 294 772 63 (134) 14 40 223 432 - - (14) - - - - - - (8) (454) - - - 772 63 (156) (440) 40 223 432 $ 8.01 $ 0.38 $ (1.98) $ (5.05) $ 0.14 $ 2.11 $ 4.56 7.67 0.38 (1.98) (5.05) 0.14 2.08 4.43 0.20 0.20 0.20 0.20 0.20 1.10 1.10 0.20 0.20 0.20 0.20 0.43 1.10 1.08 38.12 31.25 31.23 33.53 39.02 39.10 38.12 $ 1,583 $ 1,179 $ 1,114 $ 1,142 $ 1,162 $ 1,104 $ 1,074 2,008 1,847 1,839 2,012 1,666 1,645 1,613 5,514 5,603 5,802 5,763 5,386 5,117 4,404 438 335 388 464 442 485 440 - --------- --------- --------- --------- --------- --------- --------- $ 9,543 $ 8,964 $ 9,143 $ 9,381 $ 8,656 $ 8,351 $ 7,531 ========= ========= ========= ========= ========= ========= ========= $ 1,080 $ 1,034 $ 772 $ 786 $ 794 $ 801 $ 804 2,828 2,889 3,316 3,291 2,978 2,689 2,025 769 740 728 686 235 231 208 1,219 1,040 1,077 1,159 678 651 605 - 300 300 300 300 300 300 3,647 2,961 2,950 3,159 3,671 3,679 3,589 - --------- --------- --------- --------- --------- --------- --------- $ 9,543 $ 8,964 $ 9,143 $ 9,381 $ 8,656 $ 8,351 $ 7,531 ========= ========= ========= ========= ========= ========= ========= $ 368 $ 225 $ 476 $ 623 $ 604 $ 959 $ 916 $ 257 $ 104 $ 130 $ 95 $ 58 $ 88 $ 78 5.3 5.1 5.1 6.0 6.2 6.4 6.4 96 93 93 93 93 93 93 $ 13 $ 28 $ 28 $ 28 $ 28 $ 28 $ 2 $ 19 $ 19 $ 19 $ 19 $ 19 $ 102 $ 104 1.5 1.1 1.4 1.5 1.5 1.4 1.3 .38:1 .43:1 .44:1 .42:1 .40:1 .38:1 .32:1 22.6 % 2.0 % (4.0)% 0.4 % 1.0 % 5.6 % 12.2 %
52 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Common Stock Prices and Dividends Declared Quarterly sales prices for the company's common stock as reported on the New York Stock Exchange composite tape, and quarterly dividends declared, in 1999 and 1998 were:
March 31 June 30 Sept. 30 Dec. 31 - ----------------------- ------------ ------------ ----------- ------------- 1999 High $45 $61 3/4 $64 1/2 $64 Low 33 3/8 41 47 9/16 48 9/16 Dividends Declared .05 .05 .05 .10 - ----------------------- 1998 High $57 1/2 $58 7/16 $49 15/16 $44 1/2 Low 43 3/8 44 3/4 29 1/2 25 11/16 Dividends Declared .05 .05 .05 .05
53 EX-21 6 LIST OF SIGNIFICANT SUBSIDIARIES OF THE COMPANY EXHIBIT 21 LIST OF SIGNIFICANT SUBSIDIARIES -------------------------------- Subsidiary Jurisdiction of Incorporation - ---------- ----------------------------- Champion Pacific Timberlands Inc.............................. Delaware Champion Papel e Celulose Ltda................................ Brazil Weldwood of Canada Limited.................................... British Columbia _________________________________ All subsidiaries of the Company other than those listed above, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary as of December 31, 1999. EX-23.1 7 OPINION AND CONSENT OF SENIOR VICE PRESIDENT EXHIBIT 23.1 CHAMPION INTERNATIONAL CORPORATION One Champion Plaza Stamford, CT 06921 March 15, 2000 Champion International Corporation One Champion Plaza Stamford, CT 06921 Dear Sirs: As Senior Vice President and General Counsel of Champion International Corporation (the "Company"), I advise you as follows in connection with legal and administrative claims and proceedings which are pending or known to be threatened against the Company. I call your attention to the fact that, as Senior Vice President and General Counsel of the Company, I have general supervision of the Company's legal affairs. In such capacity, I have reviewed litigation and claims threatened or asserted involving the Company and have consulted with outside legal counsel with respect thereto where I have deemed it appropriate. On March 1, 2000, an action was filed against the Company, each of the Company's directors and UPM-Kymmene Corporation in the Supreme Court of the State of New York for the County of New York. The action, which purports to be a class action on behalf of the Company's shareholders, alleges breach of fiduciary duty by the directors of the Company in approving the Company's proposed merger with UPM-Kymmene. The action seeks compensatory damages in an unspecified amount and an injunction against the merger. The Company intends to vigorously defend this action. While any litigation contains an element of uncertainty, subject to the foregoing, it is my opinion that the outcome of each such proceeding or claim which is now pending or known to be threatened, or all of them combined, including the action described above, will not have a material adverse effect on the Company. March 15, 2000 Page 2 I hereby consent to the reference to this opinion in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1999, and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Form 10-K"), and to the filing of this opinion as an exhibit to the Form 10-K. Very truly yours, /s/ Stephen B. Brown Senior Vice President and General Counsel SBB:col EX-23.2 8 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 17, 2000 incorporated by reference in this Form 10-K into the Company's previously filed Registration Statements on Form S-3 (Registration No. 333-19929) and on Form S-8 (Registration No. 333-34069 and No. 333-87201). /s/ Arthur Andersen LLP Stamford, Connecticut March 15, 2000 EX-24 9 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY ----------------- Each of the undersigned Directors and Officers of CHAMPION INTERNATIONAL CORPORATION (the "Company") hereby constitutes and appoints STEPHEN B. BROWN, LAWRENCE A. FOX and RICHARD E. OLSON his or her true and lawful attorneys-in- fact and agents, each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and any and all amendments and other documents relating thereto, and to file such Annual Report on Form 10-K and such amendments with all exhibits thereto, and any and all other information and documents in connection therewith, with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys- in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the 13th day of March, 2000. /s/ RICHARD E. OLSON /s/ KENWOOD C. NICHOLS - ------------------------------- ----------------------------------- Richard E. Olson Kenwood C. Nichols Chairman of the Board, Chief Vice Chairman and Executive Officer Executive Officer and Director and Director (Principal Executive Officer) (Principal Accounting Officer) /s/ THOMAS L. HART ----------------------------------- Thomas L. Hart Vice President - Finance and Treasurer (Principal Financial Officer) /s/ LAWRENCE A. BOSSIDY - ---------------------------------- Lawrence A. Bossidy, Director /s/ ROBERT A. CHARPIE - ---------------------------------- Robert A. Charpie, Director /s/ H. CORBIN DAY - ---------------------------------- H. Corbin Day, Director /s/ ALICE F. EMERSON - ---------------------------------- Alice F. Emerson, Director /s/ ALLAN E. GOTLIEB - ---------------------------------- Allan E. Gotlieb, Director /s/ HENRIQUE C. MEIRELLES - ---------------------------------- Henrique C. Meirelles, Director /s/ WALTER V. SHIPLEY - ---------------------------------- Walter V. Shipley, Director /s/ RICHARD E. WALTON - ---------------------------------- Richard E. Walton, Director EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 418 0 557 17 421 1,482 9,757 3,608 8,318 923 2,526 0 0 56 3,039 8,318 5,268 5,268 4,417 4,417 0 0 243 322 85 237 0 (5) 0 232 2.43 2.41 Includes timber and timberlands.
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