-----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, IFkzwHMYeWlQMSG+EiwyHbROY97Qo22f82WZPiCwmljr+aFl+ujXbJc2JnIN5hKs qT/hypQFbv5c3NcXBvyMAg== 0000950130-99-001731.txt : 19990330 0000950130-99-001731.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950130-99-001731 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: 99575399 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 FOR THE PERIOD ENDED DECEMBER 31, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1998 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 DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF FEBRUARY 26, 1999 WAS APPROXIMATELY $3,534,000,000. AS OF FEBRUARY 26, 1999, 95,596,872 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, 1998 ARE INCORPORATED BY REFERENCE IN PARTS I, II AND IV HEREOF. PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS SCHEDULED TO BE HELD ON MAY 20, 1999 ARE INCORPORATED BY REFERENCE IN PART III 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, 1998, unless the context otherwise requires. 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 5,038,000 acres of timberlands in the United States (excluding the 300,000 acres of timberlands which the Company has agreed to sell, as discussed below). 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 15 of "Notes to Financial Statements" on pages 44 and 45 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1998 (the "Company's 1998 Annual Report"), which Note is incorporated by reference herein, for information concerning the Company's business segments and operations in different geographic areas for 1996, 1997 and 1998. 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 free sheet papers and bleached paperboard mill, the newsprint mills at Lufkin and Sheldon, Texas, the groundwood papers mill at Deferiet, New York and the premium free sheet 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 300,000 acres of timberlands. In 1998, the Company sold the Lufkin and Sheldon, Texas mills, one of the paperboard converting plants and a portion of the recycling business, and agreed to sell the 300,000 acres of timberlands. The remaining operations and assets to be divested are not included in the discussion under "North American Pulp and Paper" and "Timber Properties" below except as set forth under "North American Pulp and Paper - Operations to Be Divested" and "Timber Properties - Timberlands 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 1998 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 1996, 1997 and 1998. UNCOATED PAPERS The uncoated papers business manufactures and sells uncoated free sheet papers, pulp and, to a lesser extent, coated free sheet 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, 1998, these mills had an annual capacity of approximately 1,469,000 tons of pulp and 1,510,000 tons of free sheet papers. 1 Most of the fiber requirements of the uncoated papers business is supplied by its own mills and approximately 5% of its fiber requirements in 1998 was purchased from third-party suppliers. In addition, approximately 10% of the pulp produced at the Courtland and Pensacola mills was sold in the open market in 1998. 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 free sheet papers distributed by the Company pursuant to an agreement with Asia Pacific Resources International Holdings 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 free sheet 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, 1998, these mills had an annual capacity of approximately 783,000 tons of pulp, 772,000 tons of groundwood papers and 314,000 tons of coated free sheet 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 31% of its fiber requirements in 1998 was purchased from third-party suppliers. The Company manufactures pulp for sale in the open market at the Quinnesec mill. In 1998, approximately 56% of the pulp production of this mill, or 234,000 tons, was sold in 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 free sheet 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. 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, 1998, this mill had an annual capacity of approximately 500,000 tons of pulp, 381,000 tons of linerboard and 125,000 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 5% of its fiber requirements in 1998 was purchased from third-party suppliers. 2 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, 1998, this mill had an annual capacity of approximately 463,000 tons. In 1998, approximately 18% of the mill's pulp production was used in the Company's own free sheet papers and groundwood papers mills. The balance was sold in the open market through the Company's headquarters in Stamford, Connecticut and a Company sales office in Appleton, Wisconsin. See "Employees" below regarding a strike-related shutdown of the Hinton mill. 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, 1998, this mill had an annual capacity of approximately 377,000 tons. In 1998, approximately 20% 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 in 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 in the open market, the Company and Weldwood overall are net sellers of pulp. Excluding the operations to be divested, the Company and Weldwood in the aggregate in 1998 produced approximately 892,000 tons of pulp for sale to unaffiliated purchasers, while the Company used approximately 214,000 tons of pulp purchased from third-party suppliers, resulting in net market pulp of approximately 678,000 tons. Operations to Be Divested The following is a description of the paper operations that have been offered for sale by the Company. The Canton, North Carolina integrated pulp and paper mill manufactures pulp and manufactures and sells uncoated free sheet papers and bleached paperboard. As of December 31, 1998, this mill had an annual capacity of approximately 499,000 tons of pulp and 514,000 tons of free sheet papers and bleached paperboard. In 1998, 65% of this operation's bleached paperboard production was used by the Company's DairyPak unit, which converts polyethylene-coated paperboard into milk and juice cartons. The balance either was sold to independent purchasers, primarily for conversion to cups, or was exported. The Company leases a printing facility at the Athens, Georgia DairyPak plant. The lease, which expires in 2015, provides for rental payments over its term sufficient to pay interest on and to retire the industrial development revenue bonds issued to finance the acquisition of that facility. The lessee under the lease has the option to purchase the facility for a nominal sum at the time the bonds are retired. The Deferiet, New York integrated pulp and paper mill manufactures pulp and manufactures and sells coated and uncoated groundwood papers. As of December 31, 1998, this mill had an annual capacity of approximately 103,000 tons of pulp and 230,000 tons of groundwood papers. The Hamilton, Ohio paper mill manufactures and sells premium free sheet papers. As of December 31, 1998, this mill had an annual capacity of approximately 134,000 tons of free sheet papers. 3 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. See the "Paper Net Sales" table on page 24 of the Company's 1998 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 1996, 1997 and 1998. Champion Papel is a major integrated manufacturer of uncoated free sheet papers, coated groundwood papers and pulp in Brazil. As of December 31, 1998, its two mills had an annual capacity of approximately 402,000 tons of uncoated free sheet papers, 188,000 tons of coated groundwood papers and 412,000 tons of pulp. In addition to being a leading supplier of free sheet and groundwood papers in Brazil, Champion Papel exports a substantial portion of its paper production. As of December 31, 1998, Champion Papel had approximate annual capacities of 700,000 tons of softwood chips, most of which is exported to Europe and Japan, and 8 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 27 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 1998, approximately 70% 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 free sheet 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, 1998, the Company's domestic wood products operations had approximate annual capacities of 945 million square feet (3/8" basis) of softwood plywood and 485 million board feet of softwood lumber. As of December 31, 1998, Weldwood had approximate annual capacities of 370 million square feet (3/8" basis) of softwood plywood and 1,077 million board feet of softwood lumber. In addition, with the September 1998 purchase of Sunpine Forest Products Ltd. ("Sunpine"), Weldwood acquired a laminated-veneer lumber ("LVL") plant with an approximate annual capacity of 2.6 million cubic feet of LVL. Sunpine also owns a softwood lumber mill with an approximate annual capacity of 200 million board feet of softwood lumber (which is included in the Weldwood softwood lumber capacity amount above), a lumber- treating operation and a veneer mill. 4 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 (including a 50%-owned building materials distribution company), industrial users and retailers throughout North America. See the "Wood Products Net Sales" table on page 26 of the Company's 1998 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 1996, 1997 and 1998. TIMBER PROPERTIES The Company owns 4,577,804 acres and controls 460,192 acres of timberlands in the United States. The Company's owned and controlled timberlands contain in the aggregate approximately 18,440,000 cunits (one cunit equals one hundred cubic feet of solid wood) of merchantable sawtimber and approximately 39,435,000 cunits of pulpwood. In 1998, the Company harvested approximately 36% of its domestic fiber requirements from its owned and controlled timberlands. A portion of the fiber harvested by the Company is sold in 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 298,699 acres and controls 306 acres of timberlands. These timberlands contain in the aggregate approximately 7,609,000 cunits of merchantable sawtimber and approximately 1,395,000 cunits of pulpwood. In the South, primarily in Texas, North Carolina, South Carolina, Alabama, Georgia, Florida, Tennessee and Virginia, the Company owns 2,587,146 acres and controls 437,680 acres of timberlands containing in the aggregate approximately 5,182,000 cunits of merchantable sawtimber and approximately 23,301,000 cunits of pulpwood. The Company owns 1,691,959 acres and controls 22,206 acres of timberlands in the North, primarily in Maine, Michigan, Minnesota, New Hampshire and Wisconsin. These timberlands contain in the aggregate approximately 5,649,000 cunits of merchantable sawtimber and approximately 14,739,000 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 one-third 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 65 million trees planned for planting in 1999. 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 8,365,000 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 5 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, with the September 1998 purchase of Sunpine, Weldwood acquired 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 laminated-veneer lumber plant remains in operation. Weldwood has the right to harvest approximately 251,000 cunits of merchantable sawtimber and pulpwood annually under this agreement. 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 1,511,683 acres of timberlands and savannah in Brazil. The owned or controlled acreage includes 1,051,454 acres in the State of Amapa, of which 189,567 acres are pine and eucalyptus plantations. Champion Papel expects to plant additional eucalyptus and pine trees on its land in Amapa until approximately 36% 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 131,801 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 117,590 acres, of which 20% is legally required to be left undisturbed and an additional 6% will be left for natural features and improvements. In the State of Mato Grosso do Sul, Champion Papel owns or controls 210,838 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 319,000 acres of such land. These subsidiaries have sold approximately 259,000 acres, of which approximately 16,000 acres were sold during 1998, 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, Michigan, Minnesota and North Carolina. TIMBERLANDS TO BE DIVESTED The Company has offered for sale approximately 300,000 acres of timberlands located in New York, Vermont and New Hampshire. These timberlands contain in the aggregate approximately 1,000,000 cunits of merchantable sawtimber and approximately 3,980,000 cunits of pulpwood. On December 9, 1998, the Company announced that it had entered into an agreement to sell these timberlands to The Conservation Fund. The sale is expected to be completed by mid-1999. 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 6 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 Florida, Alabama, Texas, Louisiana and Mississippi. 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 1,500,000 barrels of oil and 4,000,000 Mcf (thousand cubic feet) of natural gas as of December 31, 1998. The Company's share of production from such fields was approximately 265,000 barrels of oil, 674,000 Mcf of natural gas and 3,000,000 gallons of gas products in 1998. 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. CAPITAL PROGRAM The Company presently anticipates that capital spending, including contract timber, reforestation and capitalized interest, will be approximately $490 million in 1999, a significant portion of which will be devoted to incremental improvements, routine capital replacements and environmental compliance. In 1998, the Company completed a project to modernize the No. 5 paper machine at the Bucksport, Maine mill. The total project cost was approximately $34 million. In 1998, the Company completed an alkaline-conversion project and a project to modernize the No. 5 paper machine at the Pensacola, Florida mill. The total cost of these projects was approximately $40 million. In 1997, the Company began an alkaline-conversion project and various environmental improvement projects at the Courtland, Alabama mill. These projects are expected to be completed in 1999 at a total cost of approximately $103 million, of which approximately $83 million had been expended as of December 31, 1998. 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 be completed in 2000 at a cost of approximately $110 million (the Company's share of which will be approximately $31 million). Approximately $12 million had been expended as of December 31, 1998, with approximately $55 million expected to be expended in 1999. The Company's 28% share of the expected 1999 expenditures is not included in the Company's anticipated 1999 capital expenditures amount set forth above. In 1999, the Company will begin 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 $47 million, of which approximately $34 million will be expended in 1999. In 1999, the Company will begin 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 $49 million, of which approximately $33 million will be expended in 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, Brazil. Approximately $275 7 million had been expended as of December 31, 1998 in connection with these projects, including land acquisition and reforestation. Approximately $22 million is expected to be expended in 1999 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 milk and juice cartons and 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 free sheet and groundwood papers, milk and juice cartons, 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 free sheet 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 1998 Annual Report. EMPLOYEES The Company had 21,137 employees at December 31, 1998. Of these, 14,264 were domestic employees, 54% of whom were covered by contracts with labor unions. Overall, 63% of the Company's employees were covered by contracts with labor unions. Union contracts relating to the Deferiet, New York groundwood papers mill, which is among the facilities to be divested by the Company, and the Roanoke Rapids, North Carolina kraft mill, will expire on June 1, 1999 and August 31, 1999, respectively. Union contracts covering other domestic operations will expire as follows: 2000 - the Canton, North Carolina free sheet papers and bleached paperboard mill, the Bucksport, Maine and Sartell, Minnesota groundwood papers mills and the Florida and Georgia wood products operations; 2001 - the Pensacola, Florida free sheet papers mill and the Hamilton, Ohio premium free sheet papers mill; 2002 - the Courtland, Alabama free sheet papers mill and a Maine wood products operation; 2005 - 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. The union contract covering the joint venture pulp mill at Quesnel, British Columbia will expire in 2003. Labor agreements covering the Hinton, Alberta pulp mill and wood products plant have expired. On March 19, 1999, the union representing the employees at those facilities informed Weldwood of its intention to strike those facilities beginning on March 22. As a result, on March 20, Weldwood began a shutdown of those facilities. On March 22, the union struck the facilities and Weldwood completed the shutdown. The impact on the Company of the shutdown will depend primarily on its duration as well as the market for softwood kraft pulp and softwood lumber. 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 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 1998 Annual Report. 8 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 1998, the Company's domestic and foreign manufacturing facilities operated at 97% of capacity in the North American and Brazilian pulp and paper segments and at 96% of capacity in the wood products segment. Production curtailments in the Company's North American and Brazilian pulp and paper segments were attributable primarily to weak market conditions and scheduled maintenance. Production curtailments in the wood products segment were attributable primarily to weak market conditions and 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. NORTH AMERICAN PULP AND PAPER UNCOATED PAPERS (a) Integrated pulp and free sheet papers mills: (i) Courtland, Alabama/1/; (ii) Canton, North Carolina (which the Company has offered for sale as discussed in Item 1 in the section captioned "North American Pulp and Paper"); and (iii) Pensacola, Florida. (b) The Company operates a plant in Waynesville, North Carolina (which the Company has offered for sale as discussed in Item 1 in the section captioned "North American Pulp and Paper") which applies polyethylene coating to bleached paperboard produced at the Canton, North Carolina mill and which also converts roll stock into cutsize paper. (c) The Company operates five plants which convert polyethylene-coated paperboard into milk and juice cartons (all of which the Company has offered for sale as discussed in Item 1 in the section captioned "North American Pulp and Paper"). All of these plants are located in the United States/2/. COATED PAPERS (d) Integrated pulp and groundwood papers mills: (i) Bucksport, Maine; (ii) Sartell, Minnesota/3/; and _________________________ /1/ For Courtland, Alabama mill lease information, see Item 1 - "North American Pulp and Paper" of this Report. /2/ For lease information regarding one of these plants, located in Athens, Georgia, see Item 1 - "North American Pulp and Paper" of this Report. /3/ For Sartell, Minnesota mill lease information, see Item 1 - "North American Pulp and Paper" of this Report. 9 (iii) Deferiet, New York (which the Company has offered for sale as discussed in Item 1 in the section captioned "North American Pulp and Paper"). (e) The Company operates an integrated pulp and free sheet papers mill in Quinnesec, Michigan. KRAFT (f) The Company operates an integrated pulp, linerboard and kraft papers mill in Roanoke Rapids, North Carolina. PREMIUM PAPERS (g) The Company operates a premium free sheet 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 (h) Market pulp is produced at the Company's free sheet papers mills in Pensacola, Florida, Courtland, Alabama and Quinnesec, Michigan. (i) 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 free sheet 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 a wholly owned subsidiary, 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. (b) Weldwood operates two softwood plywood plants in Canada. One of these plants is located on leased land. (c) The Company operates six 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, 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. 10 (h) Sunpine operates an LVL plant in Canada. ITEM 3. 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, 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 56) is an Executive Vice President of the Company, a position which he has held since 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 59) 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 46) 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 55) 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, 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 63) 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 56) 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 free sheet 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 59) 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 61) 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. ________________________ /1/ The term of office for each executive officer expires at the Annual Meeting of the Board of Directors of the Company scheduled to be held on May 20, 1999. 11 Richard L. Porterfield (age 52) 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 15,070 record holders of its Common Stock as of February 26, 1999. 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, 1998, 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 $869 million of tangible net worth at December 31, 1998 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. 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 paid on the Company's Common Stock in each quarterly period during the last two years, see the section on page 62 of the Company's 1998 Annual Report captioned "Common Stock Prices and Dividends Paid". Said section is incorporated by reference herein. Item 6. SELECTED FINANCIAL DATA There is incorporated by reference herein the table on pages 58 and 59 of the Company's 1998 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 49 to 57 of the Company's 1998 Annual Report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations". There is incorporated by reference herein the third, fourth, fifth, sixth and seventh sentences of the fourth paragraph of "Employees" under Item 1 of this Report. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There is incorporated by reference herein the section on page 57 of the Company's 1998 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 1998 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 47 and 48, respectively, of the Company's 1998 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 12 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. For information concerning the directors of the Company, see the sections captioned "The Board of Directors-The Nominees", "Information on the Nominees and Directors", and "Committees" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 20, 1999 (the "Company's 1999 Proxy Statement"). Said sections are incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION There is incorporated by reference herein from the Company's 1999 Proxy Statement the sections therein captioned "The Board of Directors-Directors' Compensation", and "Executive Compensation-Compensation Committee Interlocks and Insider Participation", "Summary Compensation Table", "Option Grant Table", "Option/SAR Exercise and Year-End Values Table", "Long-Term Incentive Plan Awards Table", "Pension Plan Table" and "Employment and Severance Agreements". Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is incorporated by reference herein from the Company's 1999 Proxy Statement the sections therein captioned "Principal Shareholders" and "Stock Ownership by Directors, Nominees and Executive Officers". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is incorporated by reference herein from the Company's 1999 Proxy Statement the section therein captioned "Transactions". 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 1998 Annual Report:
CAPTION IN COMPANY'S DESCRIPTION 1998 ANNUAL REPORT (PAGE NUMBER) ----------- -------------------------------- Consolidated Statements of Income for each of the three years in the period ended December 31, 1998................... Consolidated Statement of Income (page 29) Consolidated Balance Sheets at December 31, 1998 and 1997............. Consolidated Balance Sheet (page 30) Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998............... Consolidated Cash Flows (page 31) Consolidated Statements of Retained Earnings for each of the three years in the period ended December 31, 1998............... Consolidated Retained Earnings (page 32)
13 Consolidated Statements of Comprehensive Income for each.............. Consolidated Statement of of the three years in the period ended December 31, 1998............ Comprehensive Income (page 32) Notes to Financial Statements......................................... Notes to Financial Statements (pages 33 to 47) Report of Independent Public Accountants with respect to the financial statements listed above.................... Report of Independent Public Accountants (page 48)
(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 10.28, which are preceded by a plus sign (+), are management contracts or compensatory plans or arrangements. EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 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 September 30, 1996, 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). 14 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 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). +10.5 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). +10.6 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). +10.7 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). +10.8 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). +10.9 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). +10.10 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). +10.11 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). +10.12 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). +10.13 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). 15 EXHIBIT NUMBER DESCRIPTION - -------------- ----------- +10.14 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). +10.15 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). +10.16 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). +10.17 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). +10.18 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). +10.19 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). +10.20 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). +10.21 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). +10.22 Trust Agreement dated as of February 19, 1987 between the Company and Fleet National Bank of Connecticut securing certain payments under the contracts listed as Exhibit numbers 10.11 through 10.21, 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). +10.23 Amendment dated as of August 18, 1988 to Trust Agreement dated as of February 19, 1987 between the Company and Fleet National Bank of Connecticut (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). 16 EXHIBIT NUMBER DESCRIPTION - -------------- ----------- +10.24 Champion International Corporation Executive Life Insurance Plan (filed by incorpor-ation 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). +10.25 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). +10.26 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). +10.27 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). +10.28 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 1998 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. (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 17 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. Without limiting the generality of the foregoing, the disclosure incorporated by reference in this Report concerning the Year 2000 computer issue includes estimates of remediation costs and completion dates, projections of the possible effects of any non-compliance, possible contingency plans and other statements that are based on the Company's current estimate of future events. All of these statements constitute forward-looking statements and are subject to risks and uncertainties including, but not limited to, the ability of the Company to identify and remediate on a timely basis Year 2000 issues that affect its own systems; the availability of resources including, in particular, timely assistance by the vendors of certain process-control systems; and the ability of the Company's suppliers and customers and other third parties with which it deals to identify and remediate on a timely basis Year 2000 issues that affect their systems. 18 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 29TH DAY OF MARCH, 1999. 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 29, 1999 - ----------------------- (RICHARD E. OLSON) Vice Chairman and Executive Officer and Director (Principal Kenwood C. Nichols* Accounting Officer) March 29, 1999 - ----------------------- (KENWOOD C. NICHOLS) Vice President-Finance and Treasurer (Principal Thomas L. Hart* Financial Officer) March 29, 1999 - ----------------------- (THOMAS L. HART) Lawrence A. Bossidy* Director March 29, 1999 - ----------------------- (LAWRENCE A. BOSSIDY) Robert A. Charpie* Director March 29, 1999 - ----------------------- (ROBERT A. CHARPIE) H. Corbin Day* Director March 29, 1999 - ----------------------- (H. CORBIN DAY) Alice F. Emerson* Director March 29, 1999 - ----------------------- (ALICE F. EMERSON) Allan E. Gotlieb* Director March 29, 1999 - ----------------------- (ALLAN E. GOTLIEB) 19 Signature TITLE DATE --------- ----- ---- Henrique de Campos Meirelles* Director March 29, 1999 - --------------------------------- (HENRIQUE DE CAMPOS MEIRELLES) Walter V. Shipley* Director March 29, 1999 - --------------------------------- (WALTER V. SHIPLEY) Richard E. Walton* Director March 29, 1999 - --------------------------------- (RICHARD E. WALTON) *By /s/ Lawrence A. Fox March 29, 1999 - --------------------------------- (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. 20 EX-11 2 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, ----------------------------------------------- 1998 1997 1996 ------------ ------------- ------------ Basic earnings (loss) per common share (1): Net income (loss) applicable to common stock $ 75.3 $ (548.5) $ 141.3 ============ ============= ============ Average number of common shares outstanding 95.9 95.8 95.5 ============ ============= ============ Basic earnings (loss) per share $ .79 $ (5.72) $ 1.48 ============ ============= ============ Diluted earnings (loss) per common share (1, 2): Net income (loss) on a diluted basis $ 75.3 $ (548.5) $ 141.3 ============ ============= ============ Average number of common shares outstanding 95.9 95.8 95.5 Add common share effect, assuming conversion of potentially dilutive securities 0.7 - 0.3 ------------ ------------- ------------ Average number of common shares outstanding on a diluted basis 96.6 95.8 95.8 ============ ============= ============ Diluted earnings (loss) per share $ .78 $ (5.72) $ 1.48 ============ ============= ============
(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, 1998 included shares issuable pursuant to certain stock-based compensation arrangements. These securities included 319,500 shares issuable upon the vesting of the restricted share units as well as 305,000 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 3 PORTIONS OF THE COMPANY'S 1998 ANNUAL REPORT EXHIBIT 13 Paper - -------------------------------------------------------------------------------- Years Ended December 31
Net Sales (in millions of dollars) 1998 % 1997 % 1996 % - ----------------------------------------- ----------- ----------- ----------- ---------- ----------- ----------- Product Category: Uncoated free sheet (U.S. & Brazil) $1,327 29 $1,329 28 $1,422 29 Coated free sheet 529 11 557 12 555 11 Coated groundwood (U.S. & Brazil) 809 17 668 14 659 13 Uncoated groundwood 218 5 261 5 309 6 Newsprint 177 4 362 7 395 8 Bleached board business 285 6 299 6 311 6 Kraft paper and linerboard 188 4 189 4 199 4 Market pulp 372 8 411 9 360 7 Resale of outside purchases 694 15 680 14 737 15 Other 41 1 45 1 18 1 ----------- ----------- ----------- ---------- ----------- ----------- $4,640 100 $4,801 100 $4,965 100 =========== =========== =========== ========== =========== ===========
Wood Products - -------------------------------------------------------------------------------- Years Ended December 31
Net Sales (in millions of dollars) 1998 % 1997 % 1996 % - ----------------------------------------- ----------- ----------- ----------- ---------- ----------- ----------- Product Category: Lumber $ 400 40 $ 404 43 $ 382 42 Softwood plywood and waferboard 234 23 230 25 237 26 Logs and stumpage 256 25 203 22 201 22 Sidings and industrial plywood 53 5 54 6 54 6 Chips 43 4 35 3 30 3 Miscellaneous products 27 3 9 1 12 1 ----------- ----------- ----------- ---------- ----------- ----------- $1,013 100 $ 935 100 $ 916 100 =========== =========== =========== ========== =========== ===========
1 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Statement of Income (in millions, except per share amounts)
Years Ended December 31 1998 1997 1996 - ---------------------------------------------------------------- ------------- ------------- ------------- Net Sales $ 5,653.0 $ 5,735.5 $ 5,880.4 Costs and Expenses: Cost of products sold 4,953.0 5,140.1 5,124.7 Selling, general and administrative expenses 366.2 392.8 363.0 Provision for restructuring (Note 10) 80.0 891.0 - Interest and debt expense (Notes 4 and 6) 260.9 240.1 222.2 Other (income) expense __ net (Note 12) (44.5) (31.9) (34.5) ------------- ------------- ------------- Total Costs and Expenses 5,615.6 6,632.1 5,675.4 Income (Loss) before Income Taxes 37.4 (896.6) 205.0 Income Taxes (Benefit) (Note 13) (37.9) (348.1) 63.7 ------------- ------------- ------------- Net Income (Loss) $ 75.3 $ (548.5) $ 141.3 ============= ============= ============= Average Number of Common Shares Outstanding 95.9 95.8 95.5 ============= ============= ============= Basic Earnings (Loss) Per Common Share $ .79 $ (5.72) $ 1.48 ============= ============= ============= Diluted Earnings (Loss) Per Common Share $ .78 $ (5.72) $ 1.48 ============= ============= =============
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 1998 1997 - ---------------------------------------------------------------- ------------- ------------- Current Assets: Cash and cash equivalents $ 300.4 $ 275.0 Receivables - net 520.5 594.9 Inventories (Note 3) 503.5 451.1 Prepaid expenses 27.5 25.6 Deferred income taxes (Note 13) 86.6 101.4 ------------- ------------- Total Current Assets 1,438.5 1,448.0 ------------- ------------- Timber and Timberlands, at cost -- less cost of timber harvested 2,430.4 2,397.3 ------------- ------------- Property, Plant and Equipment, at cost (Notes 4, 6 and 7) 8,585.3 9,473.4 Less - accumulated depreciation 4,356.5 4,673.3 ------------- ------------- 4,228.8 4,800.1 ------------- ------------- Other Assets and Deferred Charges 742.2 465.2 ------------- ------------- $ 8,839.9 $ 9,110.6 ============= =============
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 1998 1997 - ----------------------------------------------------------------------- ------------- ------------- Current Liabilities: Current installments of long-term debt (Note 6) $ 228.0 $ 143.7 Short-term borrowings (Note 6) 89.8 71.1 Accounts payable and accrued liabilities (Note 5) 720.3 794.2 Income taxes (Note 13) 10.4 10.5 ------------- ------------- Total Current Liabilities 1,048.5 1,019.5 ------------- ------------- Long-Term Debt (Note 6) 2,947.5 3,194.4 ------------- ------------- Other Liabilities (Notes 14 and 17) 786.8 693.1 ------------- ------------- Deferred Income Taxes (Note 13) 961.2 993.6 ------------- ------------- Commitments and Contingent Liabilities (Notes 7, 17 and 18) - - ------------- ------------- Shareholders' Equity: Capital Shares (Notes 8 and 9): Preference stock, 8,531,431 shares authorized but unissued - - Common stock, $.50 par value: 250,000,000 authorized shares; 111,025,755 and 110,900,212 issued shares 55.5 55.5 Capital surplus 1,705.5 1,697.2 Retained Earnings (Note 6) 2,228.4 2,172.5 ------------- ------------- 3,989.4 3,925.2 Treasury Shares, at cost (Note 8) (689.7) (657.9) Accumulated Other Comprehensive Income (Note 11) (203.8) (57.3) ------------- ------------- 3,095.9 3,210.0 ------------- ------------- $ 8,839.9 $ 9,110.6 ============= =============
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 1998 1997 1996 - ---------------------------------------------------------------- ------------- ------------- ------------- Cash flows from operating activities: Net Income (Loss) $ 75.3 $ (548.5) $ 141.3 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for restructuring 80.0 891.0 - Depreciation expense 395.3 424.6 407.8 Cost of timber harvested 91.6 93.4 94.1 Gain on disposal of assets (22.4) (24.0) (23.1) Pension contributions (8.7) (16.4) (70.2) Deferred income taxes (61.6) (370.9) 3.2 Changes in assets and liabilities, net of acquisitions and divestitures: Receivables 72.2 (15.7) 65.0 Inventories (59.8) 6.6 (34.4) Prepaid expenses 10.0 4.2 (4.6) Accounts payable and accrued liabilities (42.5) (23.0) (38.2) Income taxes payable (13.6) (12.2) (102.1) Other liabilities 15.1 9.5 (13.9) All other - net 35.1 66.9 13.5 ------------- ------------- ------------- Net cash provided by operating activities 566.0 485.5 438.4 ------------- ------------- ------------- Cash flows from investing activities: Expenditures for property, plant and equipment (304.9) (321.1) (460.5) Timber and timberlands expenditures (127.3) (128.4) (121.2) Acquisition of timberlands and mills (Note 2) (103.7) (46.9) (130.4) Purchase of investments - (22.1) - Proceeds from redemptions of investments - 25.0 101.2 Proceeds from sales of divested operations 481.6 - - Proceeds from sales of property, plant and equipment and timber and timberlands 26.7 43.1 39.8 All other - net (39.4) (15.0) 16.6 ------------- ------------- ------------- Net cash used in investing activities (67.0) (465.4) (554.5) ------------- ------------- ------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 571.6 473.9 834.2 Payments of current installments of long-term debt and long-term debt (991.3) (385.0) (645.1) Purchase by Weldwood of minority interest - - (191.4) Cash dividends paid (19.5) (19.2) (19.2) Payments to acquire treasury stock (34.3) - (7.8) All other - net (0.1) 10.6 2.9 ------------- ------------- ------------- Net cash provided by (used in) financing activities (473.6) 80.3 (26.4) ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents 25.4 100.4 (142.5) Cash and cash equivalents: Beginning of period 275.0 174.6 317.1 ------------- ------------- ------------- End of period $ 300.4 $ 275.0 $ 174.6 ============= ============= ============= Supplemental cash flow disclosures: Cash paid during the year for: Interest (net of capitalized amounts) $ 271.7 $ 241.2 $ 210.0 Income taxes (net of refunds) (Note 13) 17.1 42.1 178.8
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 1998 1997 1996 - ---------------------------------------------------------------- ------------- ------------- ------------- Beginning Balance $ 2,172.5 $ 2,740.2 $ 2,618.0 Net Income (Loss) 75.3 (548.5) 141.3 Cash Dividends Declared: Common Stock - $.20 per share in 1998, 1997 and 1996 (19.4) (19.2) (19.1) ------------- ------------- ------------- Ending Balance $ 2,228.4 $ 2,172.5 $ 2,740.2 ============= ============= =============
The accompanying notes are an integral part of this statement. 6 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Statement of Comprehensive Income (in millions of dollars)
Years Ended December 31 1998 1997 1996 - ---------------------------------------------------------------- ------------- ------------- ------------- Net income (loss) $ 75.3 $ (548.5) $ 141.3 Foreign currency translation adjustments: Cumulative tax effect of changing the Brazilian functional currency to the Real (51.5) - - Other foreign currency translation adjustments (95.0) (24.1) (3.3) ------------- ------------- ------------- Net foreign currency translation adjustments (146.5) (24.1) (3.3) ------------- ------------- ------------- Comprehensive Income (Loss) $ (71.2) $ (572.6) $ 138.0 ============= ============= =============
The accompanying notes are an integral part of this statement. 7 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. 8 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, since 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 6. The company occasionally enters into forward exchange contracts to hedge certain assets that are denominated in foreign currencies. At December 31, 1998, the company had no significant forward exchange contracts outstanding. The company does not hold financial instruments for trading purposes. J. Pensions and Other Postretirement Benefits In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." This Statement, which is effective in 1998, revises employers' disclosures about pensions and other postretirement benefit plans. It does not change the measurement or recognition of these plans. 9 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements K. 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 2000, 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. 10 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 2. 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. Net sales of Inpacel for the eleven months of 1998 subsequent to the acquisition, including intracompany sales, were $137 million. 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 3. Inventories
December 31 (in millions of dollars) 1998 1997 - ------------------------------------------------------ ------------- --------------- Paper, pulp and packaging products $ 291.1 $ 244.3 Wood products 46.6 35.4 Logs 45.8 46.5 Pulpwood 25.3 23.0 Raw materials, parts and supplies 94.7 101.9 ------------- --------------- $ 503.5 $ 451.1 ============= ===============
At December 31, 1998 and 1997, inventories stated using the last-in, first-out (LIFO) method, representing approximately 35% and 29% of total inventories, were $174.3 million and $129.8 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 $56.6 million and $65.4 million at December 31, 1998 and 1997, respectively. 11 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 4. Property, Plant and Equipment
December 31 (in millions of dollars) 1998 1997 - ------------------------------------------------------ ------------- --------------- Land and land improvements $ 315.3 $ 356.4 Buildings and leasehold improvements 912.9 993.3 Machinery and equipment 7,194.2 7,965.5 Construction in progress 162.9 158.2 ------------- --------------- 8,585.3 9,473.4 Accumulated depreciation (4,356.5) (4,673.3) ------------- --------------- $ 4,228.8 $ 4,800.1 ============= ===============
Interest capitalized into construction in progress during 1998, 1997 and 1996 was $8.8 million, $8.0 million and $10.6 million, respectively. Accumulated depreciation at December 31, 1998 includes $569 million of asset impairment and asset write-off charges related to assets to be divested pursuant to the company's restructuring plan (Note 10). Depreciation expense includes the following components:
Years Ended December 31 (in millions of dollars) 1998 1997 1996 - ------------------------------------------------------------------------- ------------- ------------- --------------- Land improvements $ 14.2 $ 13.0 $ 14.3 Buildings and leasehold improvements 28.0 29.2 27.8 Machinery and equipment 353.1 382.4 365.7 ------------- ------------- --------------- $ 395.3 $ 424.6 $ 407.8 ============= ============= ===============
12 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 5. Accounts Payable and Accrued Liabilities
December 31 (in millions of dollars) 1998 1997 - ------------------------------------------------------ ------------- --------------- Accounts payable $ 280.1 $ 285.3 ------------- --------------- Accrued liabilities: Payrolls and commissions 118.9 125.4 Employee benefits 107.4 133.2 Interest 46.6 56.3 Taxes, other than income taxes 25.0 33.1 Other 137.5 156.1 ------------- --------------- Total accrued liabilities 435.4 504.1 ------------- --------------- Dividends payable 4.8 4.8 ------------- --------------- $ 720.3 $ 794.2 ============= ===============
Note 6. Indebtedness
December 31 (in millions of dollars) 1998 1997 - ------------------------------------------------------------------------------------------ ------------- --------------- Secured debt, 7.7% average rate, payable through 2012 (a) $ 44.6 $ 48.0 Unsecured fixed rate debt, 7.6% average rate, payable through 2037 2,433.9 2,674.2 Unsecured variable rate debt, 11.1% average rate, payable through 2029 (b) 390.2 318.7 Lease obligations, 6.7% average rate, payable through 2029 306.8 297.2 ------------- --------------- Total debt 3,175.5 3,338.1 Less: Current installments of long-term debt 228.0 143.7 ------------- --------------- Long-term debt (c) $ 2,947.5 $ 3,194.4 ============= =============== Short-term borrowings (d) $ 89.8 $ 71.1 ============= ===============
13 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements (a) Such debt is secured by assets with a net book value at December 31, 1998 of approximately $203 million, primarily assets of Lake Superior Land Company, a wholly owned subsidiary of the company. (b) Unsecured variable rate debt at December 31, 1998 includes borrowings by the company's Brazilian subsidiary of $322 million. (c) The annual principal payment requirements under the terms of all long-term debt agreements for the years 1999 through 2003 are $228 million, $236 million, $244 million, $41 million and $36 million, respectively. (d) Weighted average interest rates on outstanding balances, excluding book cash overdrafts, for 1998 and 1997 were 7.0% and 7.7%, respectively. Book cash overdrafts, which are included in short-term borrowings, totaled $86 million and $70 million, respectively, at December 31, 1998 and 1997. 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 $869 million of consolidated retained earnings at December 31, 1998 is free of such restrictions. At December 31, 1998, the company had unused U.S. lines of credit of $1.1 billion and unused foreign bank lines of credit of approximately $50 million. At December 31, 1998, 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 .125% are required on the $50 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, exceeded the carrying amount by $102 million and $180 million, at December 31, 1998 and 1997, respectively. The fair value was estimated using discounted cash flow analyses, based on the company's incremental borrowing rates for similar types of borrowings. 14 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 7. Commitments
Future Minimum Lease Payments ------------------------------------------------------ Capitalized Non-Cancelable Period (in millions of dollars) Leases Operating Leases - ------------------------------------------------------ --------------- -------------------- 1999 $ 20.7 $ 29.7 2000 20.7 26.9 2001 20.7 25.8 2002 20.7 24.7 2003 20.7 23.3 Thereafter 682.2 164.3 --------------- ---------------- Total Payments 785.7 294.7 Less: Sublease rental receipts 60.0 ---------------- Net operating lease payments $ 234.7 ================ Less: Amount representing interest 478.9 --------------- Present value of capitalized lease payments (all long-term) $ 306.8 ===============
The following schedule shows the composition of total rental expense for all operating leases:
Years Ended December 31 (in millions of dollars) 1998 1997 1996 - --------------------------------------------------------- --------------- --------------- ---------------- Minimum rentals $ 31.9 $ 34.1 $ 29.8 Less: Sublease rental income 0.1 0.2 0.2 --------------- --------------- ---------------- $ 31.8 $ 33.9 $ 29.6 =============== =============== ================
15 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 8. Capital Shares and Earnings Per Share Unissued Preference Stock - ------------------------- At December 31, 1998 and 1997, 7,031,431 preference shares for which no series has been designated were authorized and unissued. At December 31, 1998 and 1997, 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, 1998 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, 1996 110,230,379 $ 55.1 $ 1,653.4 (14,573,011) $ (650.0) Exercise of stock options 79,800 0.1 2.4 - - Compensation plans 9,184 - 1.5 - - Repurchase of stock - - - (195,300) (7.9) Other 3,736 - (5.9) - - ----------------- ------------- -------------- ---------------- --------------- Balance at December 31, 1996 110,323,099 55.2 1,651.4 (14,768,311) (657.9) Exercise of stock options 566,075 0.3 24.4 - - Compensation plans 8,829 - 21.4 - - Other 2,209 - - 200 - ----------------- ------------- -------------- ---------------- --------------- Balance at December 31, 1997 110,900,212 55.5 1,697.2 (14,768,111) (657.9) Exercise of stock options 77,250 - 2.9 - - Compensation plans 10,019 - 4.3 - - Repurchase of stock - - - (725,000) (34.2) Other 38,274 - 1.1 54,428 2.4 ----------------- ------------- -------------- ---------------- --------------- Balance at December 31, 1998 111,025,755 $ 55.5 $ 1,705.5 (15,438,683) $ (689.7) ================= ============= ============== ================ ===============
16 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements At December 31, 1998, common shares of the company were reserved for issue as follows: Stock options granted or available for grant 4,139,425 Compensation plans 2,704,746 --------------- 6,844,171 ===============
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) 1998 1997 1996 - ------------------------------------------------------------ -------------- ---------------- --------------- Basic earnings (loss) per share: Net income (loss) applicable to common stockholders $ 75.3 $ (548.5) $ 141.3 ============== ================ =============== Average number of common shares outstanding 95.9 95.8 95.5 ============== ================ =============== Basic earnings (loss) per share $ .79 $ (5.72) 1.48 ============== ================ =============== Diluted earnings (loss) per share: Net income (loss) on a diluted basis $ 75.3 $ (548.5) $ 141.3 ============== ================ =============== Average number of common shares outstanding 95.9 95.8 95.5 Add: Common share effect, assuming conversion of potentially dilutive securities 0.7 - 0.3 -------------- ---------------- --------------- Average number of common shares outstanding on a diluted basis 96.6 95.8 95.8 ============== ================ =============== Diluted earnings (loss) per share $ .78 $ (5.72) $ 1.48 ============== ================ ===============
Potentially dilutive securities at December 31, 1998 included shares issuable pursuant to certain stock-based compensation arrangements (Note 9). These securities included 319,500 shares issuable upon the vesting of restricted share units as well as 305,000 shares issuable upon the exercise of stock options calculated using the treasury stock method. 17 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 9. 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, 1996 2,279,150 $32.42 Granted 556,350 46.63 Exercised (215,400) 30.45 Surrendered or canceled (24,300) 33.16 --------------- Balance at December 31, 1996 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 =============== ================== Options exercisable at December 31 - ---------------------------------- 1996 2,043,550 $32.65 1997 1,398,775 37.01 1998 1,990,655 39.52
At December 31, 1998, the stock options outstanding had an aggregate exercise price of $133.7 million, with exercise prices ranging from $26.25 to $57.75 and a weighted average remaining contractual life of 7.3 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 319,500 restricted units outstanding at December 31, 1998, 131,700 units will vest in 2000 and 156,600 units will vest in 2002. 18 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 reaches $67.25 per share. 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 332,000 shares to 705,000 shares. Total compensation expense recognized for stock appreciation rights and other stock-based compensation for 1998, 1997 and 1996 was $6 million, $35 million and $3 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 would have been as follows:
Years Ended December 31 1998 1997 1996 - ------------------------------------------------- --------------- --------------- --------------- Net Income (Loss) (in millions) As reported $ 75.3 $ (548.5) $ 141.3 Pro forma $ 68.5 $ (554.3) $ 137.7 Basic Earnings (Loss) Per Share As reported $ .79 $ (5.72) $ 1.48 Pro forma $ .71 $ (5.79) $ 1.44 Diluted Earnings (Loss) Per Share As reported $ .78 $ (5.72) $ 1.48 Pro forma $ .71 $ (5.79) $ 1.44 Weighted Average Fair Value of Options Granted $ 13.09 $ 14.90 $ 14.92
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 1998, 1997 and 1996.
Years Ended December 31 1998 1997 1996 - ------------------------------------------------- --------------- --------------- --------------- Risk-free interest rates 5.75% 6.57% 6.31% Expected dividend yield 0.4% 0.4% 0.4% Expected volatility 22.0% 20.1% 20.4% Expected life (years) 5.50 5.50 5.25
19 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 10. 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 is divesting several non-strategic product segments and certain timberlands. The profit-improvement program includes 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. Through December 31, 1998, the company had spent approximately $18 million for severance and associated costs and reduced its world-wide workforce in the businesses which are not part of the planned divestitures (excluding positions added as the result of acquisitions in Canada and Brazil and certain operations in Maine) by 1,674 positions. In addition, the company paid approximately $14 million for other accrued costs. Results of operations reflected in the consolidated statement of income for the product segments divested and to be divested are as follows:
Years Ended December 31 (in millions of dollars) 1998 1997 1996 - ------------------------------------------------------- -------------- -------------- -------------- Net sales $ 1,016.0 $ 1,316.0 $ 1,391.0 Costs and expenses 1,028.0 1,394.4 1,438.7 -------------- -------------- -------------- (Loss) from operations $ (12.0) $ (78.4) $ (47.7) ============== ============== ==============
Activity associated with the provision for restructuring is as follows:
Asset Pension Balance at Retirements and Other Balance at December 31, 1998 and Cash Postretirement December 31, 1997 Provision Payments Benefits (a) 1998 ----------------- -------------- -------------- ------------------ ---------------- Reserve for asset impairment $ 741.1 $ 59.5 $ (231.6) $ - $ 569.0 Liabilities 149.9 20.5 (32.0) (45.9) 92.5 ----------------- -------------- -------------- ------------------ ---------------- $ 891.0 $ 80.0 $ (263.6) $ (45.9) $ 661.5 ----------------- -------------- -------------- ------------------ ----------------
(a) Amounts have been transferred from the restructuring liabilities to pension and other postretirement benefit liabilities due to the long-term nature of the liabilities. 20 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 $569 million:
December 31 (in millions of dollars) 1998 - ------------------------------------------------------- -------------- Current assets $ 172.2 Long-term assets (primarily property, plant and equipment) 739.6 Current liabilities (48.1) Long-term liabilities (0.6) -------------- Net assets $ 863.1 ==============
In June 1998, the company sold its newsprint business, including related working capital, and its Texas recycling centers for $459 million. In September 1998, the company sold its Belvidere, Illinois tray plant for $22.5 million. No gains or losses from these sales were recorded. In December 1998, the company agreed to sell approximately 300,000 acres of timberlands for $76.2 million. The transaction is expected to close in mid-1999. The company is continuing to actively pursue the sale of its mill in Canton, North Carolina, including its liquid packaging business; its mill in Hamilton, Ohio; and its mill in Deferiet, New York. In addition, the company has offered for sale approximately 54,000 acres of timberlands in North Carolina and Tennessee. 21 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 11. Accumulated Other Comprehensive Income Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," effective in 1998, requires the disclosure of comprehensive income to reflect 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) 1998 1997 1996 - ------------------------------------------------- ----------- ---------- ----------- Beginning balance $ (57.3) $ (33.2) $ (29.9) Foreign currency translation adjustments: Cumulative tax effect of changing the Brazilian functional currency to the Real (51.5) - - Other foreign currency translation adjustments (95.0) (24.1) (3.3) ---------- -------- -------- Ending balance $ (203.8) $ (57.3) $ (33.2) ========== ========= ========
Note 12. Other (Income) Expense -- Net
Years Ended December 31 (in millions of dollars) 1998 1997 1996 - --------------------------------------- ----------- --------- ----------- Interest income $ (24.4) $ (17.8) $ (32.4) Foreign currency (gains) losses -- net (10.5) (1.1) 3.4 Equity in net income of affiliates (2.0) (1.0) (1.0) Royalty, rental and commission income (6.6) (13.6) (13.9) Net gain on disposal of fixed assets, timberlands and investments (22.4) (24.0) (23.1) Miscellaneous -- net 21.4 25.6 32.5 ---------- --------- ----------- $ (44.5) $ (31.9) $ (34.5) ========== ========= ===========
22 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 13. Income Taxes The provision (benefit) for income taxes includes the following components:
Years Ended December 31 (in millions of dollars) 1998 1997 1996 - --------------------------------------------------- --------- ------- ---------- Provision for income taxes currently payable (receivable): Federal $ 5.0 $ (14.6) $ 6.1 State and local 7.2 2.6 2.4 Foreign 11.5 34.8 52.0 ---------- -------- --------- 23.7 22.8 60.5 ---------- -------- --------- Provision for deferred income taxes: Federal (52.6) (306.5) 8.0 State and local (9.7) (47.3) 1.3 Foreign 0.7 (17.1) (6.1) ---------- -------- --------- (61.6) (370.9) 3.2 ---------- -------- --------- Total provision $ (37.9) $ (348.1) $ 63.7 ========== ======== =========
Domestic and foreign income (loss) before income taxes are as follows:
Years Ended December 31 (in millions of dollars) 1998 1997 1996 - ----------------------------------------------------- ---------- -------- --------- Domestic $ (52.1) $ (982.9) $ 30.6 Foreign 89.5 86.3 174.4 ---------- -------- ---------- Total income (loss) before income taxes $ 37.4 $ (896.6) $ 205.0 ========== ======== ==========
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 1998 1997 1996 - ------------------------------------------------------ ------------ ------------ ------------ Statutory rate -- provision (benefit) 35.0 % (35.0) % 35.0 % Rate difference -- foreign subsidiaries (51.0) (2.4) (7.5) Foreign dividends (3.1) 1.3 4.3 State and local taxes, net of federal tax effect (4.4) (3.2) 0.1 Adjustment to prior years' income taxes (41.1) - - Adjustment to valuation allowance (40.3) - - All other -- net 3.5 0.5 (0.8) ----------- ----------- ----------- Effective income tax rate (101.4) % (38.8) % 31.1 % ========== =========== ===========
Deferred tax liabilities (assets) are composed of the following:
December 31 (in millions of dollars) 1998 1997 - ---------------------------------------------------------- ------------- ------------ Depreciation and cost of timber harvested $ 1,719.7 $ 1,763.9 Capitalization of interest and deferral of other costs 30.9 30.4 Other 51.1 79.4 ------------- ------------ Gross Liabilities 1,801.7 1,873.7 ------------- ------------ Reserve for asset impairment (224.9) (277.7) Loss and other carryforwards (195.0) (266.2) Accrued liabilities and reserves (265.3) (207.6) Postretirement benefits other than pensions (161.3) (155.6) Other (82.4) (91.3) ------------- ------------ Gross Assets (928.9) (998.4) ------------- ------------ Valuation allowance 1.8 16.9 ------------- ------------ 874.6 892.2 Asset arising on acquisition (302.8) - ------------- ------------ $ 571.8 $ 892.2 ============= ============
24 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements As of December 31, 1998, the company had available, for U.S. income tax return purposes, alternative minimum tax credit carryforwards of $167 million, which do not expire. In addition, the company had, for Brazilian income tax return purposes, operating loss carryforwards of $181 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 $1.3 billion at December 31, 1998. Computation of the potential deferred tax liability associated with these undistributed earnings is not practicable. The valuation allowance at December 31, 1998 primarily relates to state income tax carryforwards. The decrease in the valuation allowance of $15.1 million for 1998 is primarily due to the resolution of issues with respect to the utilization of general business and other credit carryforwards. During 1998 and 1997, purchase accounting adjustments for various acquisitions resulted in increases in the company's deferred tax asset (included in other assets) in 1998 of approximately $303 million and decreases in the company's deferred tax liability of $14 million in 1997. 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 $51.5 million. 25 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 14. 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 10). In connection with this plan, the company is in the process of divesting several non-strategic product segments and intends to reduce the workforce in its ongoing operations by approximately 2,000 employees, some of whom will be 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 costs below. The net periodic pension cost of these plans in 1998, 1997 and 1996 consisted of the following:
Years Ended December 31 (in millions of dollars) 1998 1997 1996 - ---------------------------------------------------------- --------------- --------------- --------------- Service cost--benefits earned during the period $ 30.8 $ 29.2 $ 26.4 Interest cost on projected benefit obligation 119.4 112.6 106.4 Expected return on plan assets (158.6) (144.5) (121.4) Net amortization and deferral 5.7 7.1 4.8 Curtailment and termination benefits 0.6 27.6 - --------------- --------------- --------------- Net periodic pension cost (income) $ (2.1) $ 32.0 $ 16.2 =============== =============== =============== - ------------------------------------------------------------------------------------------------------------------------------- Assumptions used in determining 1998, 1997 and 1996 net periodic pension cost were: Expected long-term rate of return on assets 10.0% 10.00% 10.0% Discount rate 7.5% 7.75% 7.5% Long-term rate of increase in compensation levels 4.5% 4.75% 4.5% - -------------------------------------------------------------------------------------------------------------------------------
The components of net periodic pension cost for 1998 and 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. 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 1998, 1997 and 1996 includes the following components:
Years Ended December 31 (in millions of dollars) 1998 1997 1996 - ----------------------- --------- ---------- ----------- Service cost $ 4.2 $ 3.6 $ 3.8 Interest cost on accumulated postretirement benefit obligation 30.5 28.5 26.9 Amortization of prior service cost (1.8) (2.0) (2.0) Effect of curtailment - 10.8 - --------- ---------- ----------- Net periodic postretirement benefit cost $ 32.9 $ 40.9 $ 28.7 ========= ========== ===========
================================================================================ Assumptions used in determining 1998, 1997 and 1996 net periodic postretirement benefit cost were: Discount Rate 7.75% 8.00% 7.75% ================================================================================ A one-percentage-point change in assumed health care cost trend rates would have the following effects:
Increase of Decrease of One Percent One Percent --------------- --------------- Effect on total service and interest cost 13% 10% Effect on accumulated postretirement benefit obligation 11% 9%
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 7.4% for 1998, declining ratably to an ultimate rate of 5.0% over a period of four 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, 1998 and 1997. The funded status was adjusted to record the effect of termination benefits and curtailment resulting from the company's restructuring plan. Pension benefit obligations for 1998 and 1997 were determined using an assumed discount rate of 7.0% and 7.5%, respectively, and an assumed average long-term rate of increase in compensation levels of 4.0% and 4.5%, respectively. The accumulated postretirement benefit obligation at December 31, 1998 and 1997 was determined using an assumed discount rate of 7.25% and 7.75%, respectively. Plan assets consist primarily of listed stocks and bonds. 27 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements
Pension Benefits Other Retiree Benefits -------------------------------- ---------------------------------- 1998 1997 1998 1997 -------------- --------------- --------------- --------------- Change in Benefit Obligation: Benefit obligation at beginning of year $ 1,651.8 $ 1,509.7 $ 415.3 $ 379.6 Service cost 30.8 29.2 4.2 3.6 Interest cost 119.4 112.6 30.5 28.5 Termination benefits and curtailment 0.6 27.6 - 13.1 Plan amendments 4.8 10.2 - - Actuarial loss 94.1 73.3 7.2 18.6 Benefits paid (111.6) (106.1) (29.5) (28.1) Foreign currency exchange rate changes (6.8) (4.7) - - ------------- ------------- ------------ ------------- Benefit obligation at end of year $ 1,783.1 $ 1,651.8 $ 427.7 $ 415.3 ============= ============= ============ ============= Change in Fair Value of Plan Assets: Fair value of plan assets at beginning of year $ 1,839.6 $ 1,549.4 $ - $ - Foreign currency exchange rate changes (5.0) (3.8) - - Actual return on plan assets 29.3 383.7 - - Employer contribution 8.7 16.4 29.5 28.1 Benefits paid (111.6) (106.1) (29.5) (28.1) ------------- ------------- ------------ ------------- Fair value of plan assets at end of year $ 1,761.0 $ 1,839.6 $ - $ - ============= ============= ============= ============= Funded Status: Funded status at December 31 $ (22.1) $ 187.8 $ (427.7) $ (415.3) Actuarial and investment losses (gains) 57.7 (162.5) 43.1 35.9 Prior service cost 36.9 38.0 (18.3) (20.1) Transition obligation (3.5) (4.6) - - ------------- ------------- ------------ ------------- Prepaid (accrued) benefit $ 69.0 $ 58.7 $ (402.9) $ (399.5) ============= ============= ============ ============= Amounts recognized in the consolidated balance sheet consist of: Other assets $ 86.5 $ 70.9 $ - $ - Accrued liabilities - employee benefits - - (30.0) (30.0) Other liabilities (17.5) (12.2) (372.9) (369.5) ------------- ------------- ------------ ------------- Net amount recognized $ 69.0 $ 58.7 $ (402.9) $ (399.5) ============= ============= ============ =============
The company and its subsidiaries have certain pension plans which, as of September 30, 1998, had aggregate accumulated benefit obligations of $86 million and plan assets of $27 million. 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 $14 million in 1998, $14 million in 1997 and $13 million in 1996. 28 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 15. Business Segments In accordance with Statement of Financial Accounting Standards No. 131, which became effective in 1998, the company has changed the way it reports information about its business segments. The information for 1997 and 1996 has been restated from the prior years' presentation in order to conform to the 1998 presentation. The company's businesses have been 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 the three years in the period ended December 31, 1998 is as follows:
(in millions of dollars) 1998 1997 1996 -------------- ---------------- --------------- NET SALES TO UNAFFILIATED CUSTOMERS PULP AND PAPER North America $ 3,351.6 $ 3,659.0 $ 3,769.7 Brazil 452.6 322.0 337.4 Distribution 836.0 819.7 857.7 -------------- ---------------- --------------- TOTAL PULP AND PAPER 4,640.2 4,800.7 4,964.8 -------------- ---------------- --------------- WOOD PRODUCTS 1,012.8 934.8 915.6 -------------- ---------------- --------------- TOTAL $ 5,653.0 $ 5,735.5 $ 5,880.4 ============== ================ =============== INTERSEGMENT SALES PULP AND PAPER North America $ 148.2 $ 140.0 $ 171.1 Brazil 12.9 5.8 6.5 Distribution 21.2 27.4 28.8 -------------- ---------------- --------------- TOTAL PULP AND PAPER 182.3 173.2 206.4 -------------- ---------------- --------------- WOOD PRODUCTS 484.8 517.5 492.2 -------------- ---------------- --------------- TOTAL $ 667.1 $ 690.7 $ 698.6 ============== ================ =============== INCOME FROM OPERATIONS PULP AND PAPER North America $ 166.6 $ 85.0 $ 207.3 Brazil 109.8 61.4 84.9 Distribution 12.5 11.3 14.0 -------------- ---------------- --------------- TOTAL PULP AND PAPER 288.9 157.7 306.2 -------------- ---------------- --------------- WOOD PRODUCTS 84.5 104.0 119.4 -------------- ---------------- --------------- GENERAL CORPORATE EXPENSE (39.6) (59.1) (32.9) -------------- ---------------- --------------- TOTAL $ 333.8 $ 202.6 $ 392.7 ============== ================ ===============
30 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements
(in millions of dollars) 1998 1997 1996 -------------- ---------------- --------------- DEPRECIATION EXPENSE AND COST OF TIMBER HARVESTED PULP AND PAPER North America $ 316.3 $ 349.5 $ 341.5 Brazil 37.3 37.3 30.5 Distribution 3.1 2.8 2.5 -------------- ---------------- ---------------- TOTAL PULP AND PAPER 356.7 389.6 374.5 -------------- ---------------- ---------------- WOOD PRODUCTS 114.7 112.5 113.1 -------------- ---------------- ---------------- GENERAL CORPORATE EXPENSE 15.5 15.9 14.3 -------------- ---------------- ---------------- TOTAL $ 486.9 $ 518.0 $ 501.9 ============== ================ ================ SEGMENT ASSETS PULP AND PAPER North America $ 4,050.1 $ 4,753.6 $ 5,668.2 Brazil 1,350.5 1,010.8 976.3 Distribution 187.3 185.8 187.5 -------------- ---------------- ---------------- TOTAL PULP AND PAPER 5,587.9 5,950.2 6,832.0 -------------- ---------------- ---------------- WOOD PRODUCTS 2,639.2 2,566.9 2,517.6 -------------- ---------------- ---------------- CORPORATE AND OTHER 612.8 593.5 470.4 -------------- ---------------- ---------------- TOTAL $ 8,839.9 $ 9,110.6 $ 9,820.0 ============== ================ ================ CAPITAL EXPENDITURES PULP AND PAPER North America $ 223.6 $ 204.1 $ 283.5 Brazil 74.9 78.8 74.1 Distribution 7.0 6.0 10.1 -------------- ---------------- ---------------- TOTAL PULP AND PAPER 305.5 288.9 367.7 -------------- ---------------- ---------------- WOOD PRODUCTS 118.8 144.5 177.5 -------------- ---------------- ---------------- CORPORATE AND OTHER 7.9 16.1 36.5 -------------- ---------------- ---------------- TOTAL $ 432.2 $ 449.5 $ 581.7 ============== ================ ================
31 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Information about the company's operations in different geographic areas for the three years ended December 31, 1998 is as follows:
(in millions of dollars) 1998 1997 1996 -------------- ---------------- ---------------- NET SALES TO UNAFFILIATED CUSTOMERS United States $ 4,842.7 $ 5,024.6 $ 5,096.6 Brazil 452.6 322.0 337.4 Canada (a) 357.7 388.9 446.4 -------------- ---------------- ---------------- TOTAL $ 5,653.0 $ 5,735.5 $ 5,880.4 ============== ================ ================ LONG-LIVED ASSETS United States $ 5,344.0 $ 5,929.2 $ 6,766.7 Brazil 698.3 715.4 709.3 Canada 616.9 552.8 542.3 -------------- ---------------- ---------------- TOTAL $ 6,659.2 $ 7,197.4 $ 8,018.3 ============== ================ ================
(a) Intracompany sales of the company's Canadian operations, consisting mainly of pulp sold to the U.S. operations, were $207 million, $229 million and $208 million, respectively, for the years ended December 31, 1998, 1997 and 1996. The summary of income (loss) before income taxes for the three years in the period ended December 31, 1998 is as follows:
(in millions of dollars) 1998 1997 1996 -------------- ---------------- ---------------- INCOME (LOSS) BEFORE INCOME TAXES Pulp and paper (North American, Brazilian and Distribution) $ 288.9 $ 157.7 $ 306.2 Wood products 84.5 104.0 119.4 Provision for restructuring (80.0) (891.0) - General corporate expense (39.6) (59.1) (32.9) Interest and debt expense (260.9) (240.1) (222.2) Other income (expense) - net 44.5 31.9 34.5 -------------- ---------------- ---------------- TOTAL $ 37.4 $ (896.6) $ 205.0 ============== ================ ================
32 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- 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. 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. The resulting devaluation of the Real improves CPC's competitive position for its exports, which at any given time account for between 35% and 60% of CPC's sales. However, the devaluation increases the cost of materials purchased by CPC from suppliers outside of Brazil. In addition, the economic turmoil in Brazil and possible stringent austerity measures in response thereto could result in higher taxes, interest rates and inflation and limitations on government spending. These, in turn, could cause a substantial economic slowdown in Brazil, with adverse consequences to CPC's domestic business. The company is not yet in a position to determine the extent of any such adverse effects on its Brazilian operations. The company, especially in its pulp and paper segments, continues to be adversely affected by the economic turmoil in many countries, particularly in Asia. Exports of pulp and paper by the company, including its Brazilian and Canadian operations, to the affected countries are not material. However, there has been an increase in imports of uncoated free sheet papers resulting from a shift in sales from those troubled markets to North America by various paper producers; this, in turn, caused a significant decline in North American uncoated free sheet paper prices during 1998. In addition, the company has experienced a decline in exports of logs and wood products to the affected countries. 33 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 16. Quarterly Results of Operations (Unaudited) (in millions of dollars, except per share amounts) - --------------------------------------------------------------------------------
March 31 June 30 September 30 December 31 -------------- -------------- ---------------- --------------- Net Sales: 1998 $ 1,477.0 $ 1,473.8 $ 1,358.0 $ 1,344.2 1997 1,366.7 1,407.5 1,478.4 1,482.9 Gross Profit: 1998 $ 184.6 $ 186.7 $ 176.4 $ 152.3 1997 87.1 129.2 185.4 193.7 Income (Loss) Before Taxes (a): 1998 $ 25.1 $ 43.0 $ 41.9 $ (72.6) 1997 (59.6) (25.6) 30.2 (841.6) Income Taxes (Benefit) (a,b): 1998 $ 6.1 $ 10.9 $ 10.6 $ (65.5) 1997 (22.5) (14.3) 10.1 (321.4) Net Income (Loss) (a,b): 1998 $ 19.0 $ 32.1 $ 31.3 $ (7.1) 1997 (37.1) (11.3) 20.2 (520.2) Basic Earnings (Loss) Per Common Share (a,b): 1998 $ .20 $ .33 $ .33 $ (.07) 1997 (.39) (.12) .21 (5.42) Diluted Earnings (Loss) Per Common Share (a,b): 1998 $ .20 $ .33 $ .32 $ (.07) 1997 (.39) (.12) .21 (5.42)
(a) In the fourth quarter of 1997, the company recorded a provision for restructuring of $891 million ($552 million after-tax, or $5.76 per share). (Note 10). 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 10). (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 are no longer required. 34 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Financial Statements Note 17. 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 $89 million at December 31, 1998, 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. Annual cleanup expenditures during the period from 1996 through 1998 were approximately $4 million, $3 million and $3 million, respectively. Note 18. 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. 35 Report of Independent Public Accountants - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of Champion International Corporation: We have audited the accompanying consolidated balance sheet of Champion International Corporation (a New York corporation) and subsidiaries as of December 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/Arthur Andersen LLP Stamford, Connecticut January 18, 1999 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 1998 improved significantly from 1997 but declined from 1996. In 1998, net income was $94 million, or 98 cents per diluted share, before special items. This compared with 1997 net income of $4 million, or four cents per share, before a special item, and 1996 net income of $141 million, or $1.48 per share. Special items in 1998, which were recorded in the fourth quarter, consisted of a provision for restructuring to recognize additional costs associated with the divestiture of the company's non-strategic product segments and a benefit resulting from the reversal of reserves, established in prior years, that are no longer required. The net effect of these special items was to reduce earnings by $19 million or 20 cents per share. Including these special items, the company's net income for 1998 was $75 million, or 78 cents per diluted 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 1997 was primarily due to higher prices for coated and uncoated groundwood papers and to the progress the company has made in its profit-improvement program. The decline from 1996 reflected lower operating income in the wood products segment, mainly due to lower average prices for Canadian lumber and plywood; lower average prices for all of the company's major pulp and paper grades; and higher interest and debt expense principally due to the increased debt associated with the January 1998 acquisition of Inpacel, a coated groundwood paper company in Brazil. The company, especially in its pulp and paper segments, continues to be adversely affected by the economic turmoil in many countries, particularly in Asia. Exports of pulp and paper by the company, including its Brazilian and Canadian operations, to the affected countries are not material. However, there has been an increase in imports of uncoated free sheet papers resulting from a shift in sales from those troubled markets to North America by various paper producers; this, in turn, caused a significant decline in North American uncoated free sheet papers prices during 1998. In addition, the company has experienced a decline in exports of logs and wood products to the affected countries. The company believes that these factors, together with the decline in prices for domestic coated groundwood and free sheet papers and for pulp since mid-1998, most likely will result in continuing weakness in its pulp and paper businesses into 1999. Significant Income Statement Changes Net sales of $5.7 billion for 1998 and 1997 declined from $5.9 billion in 1996. Gross profit was $700 million, compared to $595 million in 1997 and $756 million in 1996. Pre-tax profit of $117 million, before the special items, improved from a 1997 pre-tax loss of $6 million before the restructuring charge but declined from pre-tax income of $205 million in 1996. The improvements in gross profit and pre-tax income from 1997, before special items, were due primarily to (i) higher prices for coated and uncoated groundwood papers, (ii) higher operating income at the company's Brazilian operations due in part to the contribution of Inpacel, and (iii) progress in the company's profit-improvement program. 37 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- In addition, the newsprint business, which was sold by the company in June 1998, incurred a large operating loss in 1997. The declines in gross profit and pre-tax income from 1996, before special items, were principally due to higher wood costs in Canada and lower average prices for lumber and plywood in Canada and for all of the company's major pulp and paper grades, which more than offset lower manufacturing costs for pulp, paper and wood products. In addition, compared to 1996, the decline in net sales reflected the 1998 divestiture of the newsprint business, and the decline in pre-tax income reflected higher interest and debt expense. The aggregate cost of products sold declined from 1997 and 1996, principally due to lower paper shipments resulting from the sale of the company's newsprint business. Selling, general and administrative expenses of $366 million compared to $393 million in 1997 and $363 million in 1996. The decrease from 1997 was principally 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 9 to the consolidated financial statements. Future stock price volatility would impact the expense associated with the company's stock-based compensation. The decline also reflected corporate and sales staff reductions resulting from the company's profit- improvement program. Selling, general and administrative expenses increased slightly from 1996 due to the late-1996 acquisition of AMCEL, a forest plantation and chipping operation in Brazil, and the January 1998 acquisition of Inpacel. Interest and debt expense increased from both 1997 and 1996, primarily due to increased debt associated with the acquisition of Inpacel. The income tax benefit in 1998 included a benefit of $30 million due to the reversal of reserves, established prior to 1998, that are no longer required. Excluding this item, the income tax provision for 1998 was impacted more favorably than in 1997 and 1996 by 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. 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 is divesting several non-strategic product segments and certain timberlands. The plan also includes a profit-improvement program, one portion of which is a reduction in the company's world-wide workforce in the businesses remaining after the divestitures discussed below by 11%, or approximately 2,000 positions, by the end of 1999. As a result of the plan, 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 the fourth quarter of 1998, the company recorded a pre-tax charge of $80 million ($49 million after-tax or 52 cents per share) to recognize additional costs associated with the divestiture of the company's non-strategic product segments and certain timberlands. The charge included $60 million of non-cash expenses for asset impairments and $20 million of one-time cash costs. 38 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Quarterly Results Earnings per share of 13 cents, before the special items, for the fourth quarter of 1998 compared to 34 cents per share before the restructuring charge for the fourth quarter of 1997 and 32 cents per share for the third quarter of 1998. The decline from the prior quarterly periods reflected lower operating income in the paper segments, mainly due to lower prices for most of the company's paper grades and for pulp. The decline from the third quarter also reflected lower operating profits in the wood products segment primarily due to lower West Coast log and timber sales, lower lease income and higher purchased wood costs in the United States. 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 $289 million in 1998 increased from $158 million in 1997 and declined from $306 million in 1996. The principal reasons for the improvement from 1997 and the decline from 1996 are discussed above under "Significant Income Statement Changes." Total paper, packaging and pulp shipments of approximately 5.7 million tons in 1998 decreased from approximately 6.3 million tons in 1997 and 6 million tons in 1996. The decline was primarily attributable to the sale of the company's newsprint business on June 1, 1998. Fourth quarter 1998 operating income of $43 million compared with $98 million in the fourth quarter of 1997 and $69 million in the third quarter of 1998. The decline from the prior quarterly periods was due to lower prices for most of the company's paper grades and for pulp as well as market-related and scheduled capital improvement and maintenance outages. 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 $167 million increased from $85 million in 1997 and declined from $207 million in 1996. Total North American paper, packaging and pulp shipments of approximately 5.1 million tons in 1998 decreased from approximately 5.8 million tons in 1997 and 5.6 million tons in 1996. Fourth quarter operating income of $6 million declined from $80 million in the fourth quarter of 1997 and $40 million in the third quarter of 1998. 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 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Uncoated Free Sheet 1,511 1,528 1,506 $655 $681 $728 Coated Free Sheet 577 577 548 $923 $969 $1,013 Coated Groundwood 732 809 698 $918 $822 $944 Uncoated Groundwood 320 390 422 $679 $624 $732 Kraft Paper & Linerboard 502 519 503 $364 $352 $397
39 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- 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 improved substantially from 1997 and was up from 1996. The improvement from 1997 was principally due to higher prices for coated and uncoated groundwood papers and lower manufacturing costs, which were partially offset by lower prices for coated free sheet papers and northern hardwood kraft pulp and lower shipments of coated groundwood papers. The improvement from 1996 was primarily attributable to higher shipments of coated groundwood and free sheet papers and lower manufacturing costs, which more than offset lower prices for all grades and lower pulp shipments. Fourth quarter operating income was approximately even with the fourth quarter of 1997 and declined slightly from the third quarter of 1998. The decline from the prior quarter was mainly due to lower prices for coated groundwood papers, coated free sheet papers and pulp. Prices for coated groundwood and coated free sheet papers continued to weaken in early 1999. In order to reduce inventory levels resulting from weak markets for coated groundwood papers, the company temporarily curtailed production at its Bucksport mill in January 1999, eliminating approximately 10,000 tons of production. The mills in the domestic uncoated papers business are in Pensacola, Florida and Courtland, Alabama. Pulp sales at Pensacola and Courtland and coated free sheet papers sales at Courtland also are included in the results of this business. The operating loss in the domestic uncoated papers business represented a substantial decline from the operating income of both 1997 and 1996. The decline from both prior years was principally due to lower prices for uncoated free sheet papers, the principal product of the uncoated papers business, and for pulp. Shipments declined slightly from 1997 and were approximately even with 1996. The fourth quarter 1998 operating loss represented a significant decrease from the operating income in the fourth quarter of 1997 and from the smaller operating loss in the third quarter of 1998. The decline in operating results from both prior periods was due mainly to substantially lower prices for uncoated free sheet papers and market-related downtime during the quarter, which reduced production by approximately 12,000 tons of pulp and 7,800 tons of uncoated free sheet papers. Prices for uncoated free sheet papers and pulp remained weak early in 1999. Linerboard and kraft papers are produced at the Roanoke Rapids, North Carolina mill. Operating income for the kraft papers business declined slightly from 1997 and was down significantly from 1996. The decline from 1997 was principally due to lower prices for kraft papers and lower overall shipments, partially offset by higher linerboard prices. The decline from 1996 was mainly due to lower prices for kraft papers and linerboard. The operating loss for the fourth quarter of 1998 represented a decline from the operating income of the fourth quarter of 1997 and the approximately break-even results for the third quarter 1998. The decline from both prior quarters was due to lower shipments and prices as well as a scheduled capital improvement and maintenance outage at the Roanoke Rapids mill. The pulp and paper operations to be divested by the company include the mills at Canton, North Carolina, including the liquid packaging business; Deferiet, New York; and Hamilton, Ohio. For these operations, together with the newsprint business which was sold on June 1, 1998, the operating loss represented an improvement from the operating losses in 1997 and 1996. The improvement from 1997 was principally due to the operating loss in 1997 at the newsprint business and higher prices for coated groundwood papers produced at the Deferiet mill. The improvement from 1996 was mainly due to lower manufacturing costs at the Canton mill, which more than offset lower prices for most of the major paper grades. The fourth quarter 1998 operating loss was larger than the operating loss in the fourth quarter of 1997 but was smaller than the operating loss of the prior quarter. The larger loss compared to the year- ago quarter was due principally to lower overall prices for coated and uncoated free sheet papers. The improvement from the third quarter of 1998 was due to a market-related outage at the Canton mill that quarter, which more than offset lower prices for most of the major paper grades in the fourth quarter of 1998. Prices for coated groundwood papers continued to weaken early in 1999. 40 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- 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 represented a significant decline from the operating income in 1997 and in 1996. The decline from both prior years was mainly due to the lower price and lower shipments of northern bleached softwood kraft ("NBSK") pulp. The average price for NBSK pulp was (U.S.) $358 per ton in 1998, down from $419 per ton in 1997 and $422 per ton in 1996. Shipments were 582,000 tons in 1998, compared to 622,000 tons in 1997 and 634,000 tons in 1996. The operating loss for the fourth quarter of 1998 represented a decline from the operating income for the year-ago quarter and the prior quarter. The decline was principally due to lower prices and a ten-day outage at the Hinton pulp mill due to weak markets, which reduced production by approximately 14,000 tons. Brazilian Pulp and Paper Segment The Brazilian pulp and paper segment consists primarily of the pulp and paper operations of the company's Brazilian subsidiary, Champion Papel e Celulose Ltda. ("CPC"). In addition, the segment includes CPC's wood-related operations. Operating income of $110 million improved from $61 million in 1997 and $85 million in 1996. The improvement from both prior years was mainly due to the operating income from Inpacel, which was acquired in January 1998, and lower manufacturing costs at CPC's uncoated free sheet papers mill. The overall average price for uncoated free sheet papers was $707 per ton in 1998, compared to $722 per ton in 1997 and $838 per ton in 1996. The average price for coated groundwood papers at Inpacel was $852 per ton in 1998. Shipments of uncoated free sheet papers of 400,000 tons increased from 392,000 tons in 1997 and 389,000 tons in 1996. Coated groundwood papers shipments were 156,000 tons in 1998. Fourth quarter operating income of $34 million improved from $16 million in the fourth quarter 1997 and $27 million in the prior quarter. The improvement from fourth quarter 1997 was primarily due to the operating income from Inpacel. The improvement from the prior quarter was due to lower manufacturing costs, higher shipments and higher coated groundwood papers prices. See "Foreign Operations" below. Distribution Segment For the company's distribution segment, income from operations of $12 million in 1998 improved from $11 million in 1997 primarily due to higher prices, and declined from $14 million in 1996 primarily due to lower prices. Fourth quarter 1998 operating income of $3 million improved from $2 million in both the fourth quarter of 1997 and the third quarter of 1998, primarily due to improved margins. Wood Products Segment A summary of shipments and prices of the company's major wood products is as follows:
Shipments Price Per Unit ------------------------------- ---------------------------------- Product 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- U.S. Lumber - MMBF 452 384 358 $320 $346 $317 Softwood Plywood - MMSF 3/8" 922 906 885 $233 $229 $222 Canada Lumber - MMBF 809 781 769 $279 $347 $338 Softwood Plywood - MMSF 3/8" 339 278 319 $219 $255 $251
41 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- For the company's wood products segment, which includes the wood-related operations of Weldwood, income from operations of $85 million in 1998 declined from $104 million in 1997 and $119 million in 1996. The decline from 1997 was primarily due to lower income from West Coast log and timber sales, lower prices for lumber in the United States and Canada and for plywood in Canada and the third quarter, market-related downtime at Weldwood's five sawmills and two plywood plants in British Columbia. The decline from 1996 was mainly due to lower lumber and plywood prices in Canada, lower West Coast log and timber sales and higher wood costs in Canada. Shipments were up from both prior years. Fourth quarter 1998 operating income of $23 million improved from $11 million in the fourth quarter of 1997 and declined from $34 million in the third quarter of 1998. The improvement from the fourth quarter of 1997 was due to higher shipments of lumber and plywood and lower wood costs in Canada. The decline from last quarter was due mainly to lower West Coast log and timber sales, lower lease income and higher purchased wood costs in the United States. 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 1998 were (U.S.) $466 million and (U.S.) $565 million, respectively, accounting for 8% and 10%, respectively, of consolidated net sales of the company. Excluding the 1998 restructuring provision, pre-tax income for CPC and Weldwood of $85 million and $5 million, respectively, accounted for 72% and 4%, respectively, of consolidated pre-tax income of the company. Net income for 1998 of CPC and Weldwood was $74 million and $4 million, respectively, which, excluding the 1998 fourth quarter special items, accounted for 79% and 4%, respectively, of consolidated net income of the company. Long-lived assets held by CPC and Weldwood at December 31, 1998 were $698 million and $617 million, respectively, accounting for 11% and 9%, respectively, of long-lived assets of the company. With the acquisition of Inpacel and the divestiture of the newsprint business in 1998 and the plan to divest certain other non-strategic assets in the United States, foreign operations overall and Brazilian operations in particular will account for a larger 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. 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. The resulting devaluation of the Real improves CPC's competitive position for its exports, which at any given time account for between 35% and 60% of CPC's sales. However, the devaluation increases the cost of materials purchased by CPC from suppliers outside of Brazil. In addition, the economic turmoil in Brazil and possible stringent austerity measures in response thereto could result in higher taxes, interest rates and inflation and limitations on government spending. These, in turn, could cause a substantial economic slowdown in Brazil, with adverse consequences to CPC's domestic business. The company is not yet in a position to determine the extent of any such adverse effects on its Brazilian operations. Due to the devaluation of the Real relative to the U.S. dollar, the dollar value of the company's net Real-denominated assets in Brazil will decrease, with a corresponding decrease in shareholders' equity. Depreciation and depletion expense will decrease due to the decline in the recorded net book value of fixed assets. In addition, as a result of the devaluation, CPC will record a translation gain on U.S. dollar-denominated investments and a reduction in Real-denominated costs. 42 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- The company does not anticipate that 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, will significantly impact the company's competitive position in Europe or require significant modifications to its business- information systems. For 1998, export sales to Europe not denominated in U.S. dollars, excluding the newsprint operations which were divested in June 1998, were less than 1% of consolidated net sales. Labor Contracts The company has labor agreements, which expire between 1999 and 2002, at eight of its nine domestic paper mills. The only such mills whose labor contracts expire in 1999 are the Roanoke Rapids, North Carolina kraft mill and the Deferiet, New York groundwood papers mill. The Quinnesec, Michigan mill is a non-union 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 the Hinton, Alberta sawmill, will expire in 2000. The union contract covering the joint venture pulp mill at Quesnel, British Columbia will expire in 2003. Efforts to reach new labor agreements continue at the Hinton, Alberta pulp mill and sawmill, which presently are operating under the terms of their expired contracts. Financial Condition General The company's current ratio was 1.4 to 1 at year-end 1998, year-end 1997 and year-end 1996. Total debt to total capitalization was 45% at year-end 1998 and year-end 1997, compared to 39% at year-end 1996. Significant Balance Sheet Changes Receivables - net decreased from December 31, 1997 principally due to lower prices for pulp and paper. Inventories increased from December 31, 1997 mainly due to decreased shipments of pulp and paper reflecting weak markets. Timber and timberlands - net increased from December 31, 1997 primarily due to the acquisition of Sunpine Forest Products Ltd. ("Sunpine") in September 1998. The sale of the newsprint business in June 1998 was the primary reason for the decreases from December 31, 1997 in property, plant and equipment and accumulated depreciation. The acquisition of Inpacel in January 1998 was the principal reason for the increase from December 31, 1997 in other assets and deferred charges, and other liabilities. Accounts payable and accrued liabilities decreased from year-end 1997 mainly due to the timing of payments and the sale of the newsprint business. Effective January 1, 1998, the company changed the functional currency of its Brazilian operations to the Brazilian Real. As a result of this change, the company recorded a one-time balance sheet adjustment, increasing its deferred tax liability by $52 million with a corresponding increase in cumulative translation adjustment in the accumulated other comprehensive income component of shareholders' equity. The decrease from December 31, 1997 in the deferred income tax liability was mainly due to the deferred income tax benefit of $62 million included in the 1998 income tax provision and the impact of changes in the Canadian and Brazilian currencies relative to the U.S. dollar, partially offset by the one-time balance sheet adjustment resulting from the change in the functional currency of the Brazilian operations. The weakening of the Canadian and Brazilian currencies relative to the U.S. dollar resulted in a $95 million increase in cumulative translation adjustment from December 31, 1997 in the accumulated other comprehensive income component of shareholders' equity. 43 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- 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 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 Inpacel and Sunpine). 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, $150 million of which was held by the company's Brazilian subsidiary. 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. 1996 - ---- In 1996, the company's net cash provided by operating activities and asset sales was not sufficient to meet the requirements of its investing activities (principally capital expenditures and the acquisitions of Lake Superior Land Company ("Lake Superior") and Amapa Florestal e Celulose ("AMCEL")) and the company's financing activities (principally debt payments, cash dividends, the purchase of shares of the company's common stock and the purchase by Weldwood of all of its publicly held shares). The difference was financed through borrowings and the use of cash and cash equivalents. In 1996, net borrowings generated cash proceeds of $189 million; long-term debt (including current installments) increased by $260 million, including a $44 million mortgage loan of Lake Superior and $35 million of debt from AMCEL which were outstanding at the time of their respective acquisitions. Cash and cash equivalents decreased by $142 million in 1996 to a total of $175 million. A substantial portion of the company's cash deficit in 1996 was attributable to the acquisitions of Lake Superior and AMCEL and to Weldwood's share purchase. Cash Flows Statement - Operating Activities Net cash provided by operating activities of $566 million increased from $485 million in 1997 and $438 million in 1996. The increase from 1997 was mainly due to higher earnings, excluding special items, a decrease in receivables and lower income tax payments, partially offset by an increase in inventories and lower non-cash expenses for amortization and stock-based compensation. The increase from 1996 was mainly due to lower income tax payments, an increase in other liabilities and a decrease in pension contributions, which more than offset lower earnings, a higher increase in inventories and a decrease in deferred income taxes. 44 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Cash Flows Statement - Investing Activities Net cash used in investing activities of $67 million decreased from $465 million in 1997 and $554 million in 1996. The decrease from 1997 primarily reflected the divestiture of certain facilities, principally the company's newsprint operations, for an aggregate of $482 million, which more than offset net cash payments of $104 million in connection with the acquisitions of Inpacel and Sunpine. The decrease from 1996 was primarily due to the divestitures and lower capital expenditures, which were partially offset by proceeds from the sale of investments in 1996. 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, a Brazilian company, owns a pulp and coated groundwood papers mill, a small sawmill and 125,000 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. In 1996, the company acquired Lake Superior for $76 million (as well as an outstanding $44 million mortgage loan), and CPC acquired AMCEL for $60 million (as well as $35 million of outstanding debt). Lake Superior owns 290,000 acres of forestlands in Michigan and Wisconsin. AMCEL is a Brazilian company that owns 438,000 acres of land and a chip mill in the State of Amapa, Brazil. In 1997, the company received $43 million of proceeds from sales of timberlands and fixed assets. In 1996, the company received $101 million of proceeds from redemptions of investments and $40 million from sales of timberlands and fixed assets. Cash Flows Statement - Financing Activities Net cash used in financing activities of $474 million compared to net cash provided by financing activities of $80 million in 1997 and net cash used in financing activities of $26 million in 1996. The change from 1997 was primarily due to the reduction in long-term debt (including current installments) and the acquisition of treasury stock in 1998. The change from 1996 was primarily due to the reduction in long- term debt (including current installments) in 1998, which more than offset the purchase of the Weldwood shares in 1996. At 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 to $345 million at year-end 1997 and $7 million at year-end 1996. At December 31, 1998, December 31, 1997 and December 31, 1996, no notes were outstanding under the company's U.S. bank lines of credit. Domestically, at December 31, 1998, the company had unused bank lines of credit of $1.1 billion. At December 31, 1998, Weldwood had unused bank lines of credit of approximately (U.S.) $50 million. During 1998, the company borrowed $17 million through the issuance of long-term, tax-exempt bonds. The annual principal payment requirements under the terms of all long-term debt agreements for the years 1999 through 2003 are $228 million, $236 million, $244 million, $41 million and $36 million, respectively. 45 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- Capital Expenditures Capital expenditures, including contract timber, reforestation and capitalized interest, were $432 million in 1998 compared to $449 million in 1997 and $582 million in 1996. The company presently anticipates that capital expenditures will be approximately $490 million in 1999, all of which is expected to be financed through internally generated funds and the use of cash and cash equivalents. At the Bucksport, Maine mill, the company completed a project to modernize the No. 5 paper machine in 1998. The total project cost was approximately $34 million. At the Pensacola, Florida mill, in 1998 the company completed an alkaline-conversion project and a project to modernize the No. 5 paper machine. The total cost of these projects was approximately $40 million. In 1997, the company began an alkaline-conversion project and various environmental improvement projects at the Courtland, Alabama mill. These projects are expected to be completed in 1999 at a total cost of approximately $103 million, of which approximately $83 million had been expended as of December 31, 1998. 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. The project is expected to be completed in 2000 at a cost of approximately $110 million (the company's share of which will be approximately $31 million). Approximately $55 million will be expended in 1999. The company's 28% share of the expected 1999 expenditures is not included in the anticipated capital expenditures amount set forth above. In 1999, the company will begin 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 $47 million, of which approximately $34 million will be expended in 1999. In 1999, the company will begin 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 $49 million. Approximately $33 million will be expended in 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 $275 million had been expended as of December 31, 1998 in connection with these projects, including land acquisition and reforestation. Approximately $22 million will be expended in 1999. Divestiture Program In June 1998, the company sold its newsprint business, including related working capital, and its Texas recycling centers for $459 million. In September 1998, the company sold its tray plant in Belvidere, Illinois for $22.5 million. No gains or losses from these sales were recorded. In December 1998, the company agreed to sell approximately 300,000 acres of timberlands in the northeast for $76.2 million. The transaction is expected to close in mid-1999. The company is continuing to actively pursue the sale of its mill in Canton, North Carolina, including its liquid packaging business; its mill in Hamilton, Ohio; and its mill in Deferiet, New York. In addition, the company has offered for sale approximately 54,000 acres of timberlands in North Carolina and Tennessee. 46 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- 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. 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 1994 through 1998, the company spent approximately $206 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 1998, capital expenditures incurred in the United States for environmental purposes were $48 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 $22 million in 1999 and $26 million in 2000. In carrying forward its environmental program, the company will commit additional amounts for environmental purposes in years subsequent to 2000. Preliminary estimates indicate that for the period from 2001 through 2003 capital expenditures for air and water pollution control facilities and solid waste disposal facilities in the United States will aggregate approximately $24 million. The environmental capital expenditures described in this paragraph are included in the respective past and estimated 1999 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 relocating the point of discharge for the effluent from its Pensacola, Florida mill. The results of a scientific report were submitted to the Florida Department of Environmental Protection in February 1999. The company has decided to seek a renewal of its wastewater discharge permit at the existing point of discharge while additional study is 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 (the "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. 47 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- 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 at most, and by the end of 2000 will be in place 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 1999 through 2006. Great Lakes Initiative The company may incur capital expenditures, additional to those set forth above under "Capital Expenditures" and "Environmental Capital Expenditures," in order to meet the requirements of the Great Lakes Water Quality Agreement of 1978 and the Great Lakes Critical Programs Act of 1990. Pursuant thereto, in March 1995, the EPA issued guidance to the states regarding water quality standards for the waters of the Great Lakes and their tributaries. The company is awaiting the issuance of implementing regulations by the environmental agencies of the affected states in order to determine the extent of any additional costs and the period over which they will be incurred. As a result, the company is not yet in a position to provide a meaningful estimate of any such costs. Nitrogen Oxide Regulations 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 by September 1999 for reducing NOx emissions from industrial sources and to implement their plans by 2003. Six 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 million to $40 million over a multi-year period to comply with the regulations. Approximately one-third of the estimated costs are attributable to the Canton, North Carolina and Hamilton, Ohio mills, 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." 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." 48 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- 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 $89 million at December 31, 1998, 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, 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 1996 through 1998 were approximately $4 million, $3 million and $3 million, respectively. Other Year 2000 Computer Issue The company, as well as its customers and suppliers and the financial institutions and governmental entities with which it deals (collectively, "Third Parties"), utilize information systems that will be affected by the date change to the year 2000. Many of these systems, if not modified or replaced, will be unable to properly recognize and process date-sensitive information before, on and after January 1, 2000. State of Readiness In early 1996, the company organized a Year 2000 project team to assess the impact of the Year 2000 issue on its operations, develop plans to address the issue and implement compliance. The project team developed a company-wide Year 2000 remediation plan which consists of a five-step process with respect to the company's own systems: (1) planning; (2) inventory (identification of systems that require reprogramming or replacement); (3) analysis (assessment of risks, identification of where failures may occur and development of solutions); (4) programming (remediation and/or replacement of non- compliant systems); and (5) testing. The project team also developed plans to seek information regarding and to assess the Year 2000 compliance status and remediation efforts of major Third Parties. The company's information systems consist of business-information systems and process-control systems. The business-information systems support financial and administrative processes such as order entry, payroll, accounts payable and accounts receivable. The process-control systems are used primarily in manufacturing operations; they include information-technology systems as well as embedded technology, such as chips embedded in various machine components. With respect to the business-information systems, the planning, inventory, analysis and programming stages are completed and the testing stage is substantially completed. The company expects to finish testing by mid-1999. 49 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- With respect to the process-control systems, the planning and inventory stages are completed and the analysis and programming stages are substantially completed. The company expects to complete those stages and conduct and finish testing by mid-1999. This schedule assumes timely assistance by the vendors of certain process-control systems in the remediation of such systems. The vendors of those systems that are essential to the company's operations have provided or agreed to provide such assistance. The Year 2000 issue also will impact the information systems of Third Parties. The company, through meetings in some cases and written requests in others, is in the process of seeking to ascertain and assess the progress of major Third Parties in identifying and addressing problems with respect to the Year 2000 issue. Many of these Third Parties have indicated that they expect to successfully address the issue in timely fashion. Some others, however, have not yet provided information regarding their state of readiness or have provided responses deemed unsatisfactory by the company. The company will continue to seek and to assess information regarding Year 2000 compliance by major Third Parties. No significant information technology projects have been deferred as a result of the company's Year 2000 program. Estimated Cost of Remediation The company currently estimates total expenditures of approximately $20 million, of which approximately $10 million had been expended as of December 31, 1998, to make the required Year 2000 modifications and replacements to its own systems. Approximately two-thirds of the estimated total cost is associated with the remediation and replacement of process-control systems. All modification and maintenance costs, including costs to replace embedded technology that does not significantly extend the life or improve the performance of the related asset, are expensed as incurred. Costs to purchase new hardware and software and to replace embedded technology that does significantly extend the life or improve the performance of the related asset are capitalized and depreciated over the assets' useful lives. All of these costs are being funded through internal cash flow. The estimated total cost does not include any expenditures that may be incurred in connection with the implementation of contingency plans, discussed below. Most Reasonably Likely Worst-Case Scenario The company currently believes that it will be able to modify or replace its own affected systems in timely fashion so as to minimize detrimental effects on its operations, subject to timely assistance by the vendors of certain process-control systems. The company has received written assurances regarding Year 2000 compliance from some, but not all, Third Parties with respect to their own systems and is not in a position to reliably predict whether Third Parties will experience remediation problems. If the company or major Third Parties fail to successfully address the Year 2000 issue, there could be a material adverse impact on the business and results of operations of the company. For example, while the company self-generates approximately 55% of its electrical power requirements, it purchases the balance from outside sources. If the electrical power grid is disrupted as the result of Year 2000 systems failures, the company expects to curtail production until the grid is restored. The company has not determined the most reasonably likely worst-case scenario that would result from any failure by the company or Third Parties to resolve the Year 2000 issue. The company is considering this matter in connection with its development of contingency plans, discussed below. However, such a scenario could include a temporary curtailment or cessation of manufacturing operations at one or more of the company's facilities, with a resulting loss of production; safety and environmental exposures; a temporary inability on the part of the company to process orders and deliver finished products to customers on a timely basis; and, in the event of Year 2000 disruptions in the 50 Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------- operations of the company's customers, increased inventory and receivable levels. If these various events were to occur, they would result in lower sales, earnings and cash flows. However, failure to meet critical milestones identified in company plans would provide advance notice and steps would be taken to prevent injuries to employees and others, to prevent environmental contamination and to minimize the loss of production. Contingency Plans The company is in the process of developing contingency plans to address and mitigate the potential risks associated with the most reasonably likely worst-case scenario, and expects to have such plans in place by mid-1999. Such plans may include, among other things, seeking alternative sources of supply, stockpiling raw materials and increasing inventory levels. The company's Year 2000 program is an ongoing process. Estimates of remediation costs and completion dates as well as projections of the possible effects of any non-compliance are subject to change. 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 2000, 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 1998 were at fixed interest rates. Consequently, a 10% change in market interest rates would not have a material effect on the company's 1999 pre-tax earnings or cash flows. 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. 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. 51
Champion International Corporation and Subsidiaries - -------------------------------------------------------------------------------------------------------------------------------- Eleven-Year Selected Financial Data (in millions, except per share amounts and ratio data) 1998 1997 1996 1995 1994 - ------------------------------------------------------ ----------- ----------- ---------- ---------- ---------- Earnings: Net Sales $ 5,653 $ 5,736 $ 5,880 $ 6,972 $ 5,318 Depreciation expense and cost of timber harvested 487 518 502 471 459 Gross profit 700 595 756 1,816 565 Provision for restructuring 80 891 - - - Interest and debt expense 261 240 222 226 235 Other (income) expense - net (45) (32) (35) (33) (57) Income (loss) before income taxes, extraordinary item and cumulative effect of accounting changes 37 (897) 205 1,237 88 Income taxes (benefit) (38) (348) 64 465 25 Income (loss) before extraordinary item and cumulative effect of accounting changes 75 (549) 141 772 63 Extraordinary item, net of taxes - - - - - Cumulative effect of accounting changes, net of taxes - - - - - Net income (loss) 75 (549) 141 772 63 Per Common Share (a): Basic earnings (loss) $ 0.79 $ (5.72) $ 1.48 $ 8.01 $ 0.38 Diluted earnings (loss) 0.78 (5.72) 1.48 7.67 0.38 Cash dividends declared 0.20 0.20 0.20 0.20 0.20 Cash dividends paid 0.20 0.20 0.20 0.20 0.20 Shareholders' equity 32.39 33.39 39.30 38.12 31.25 Financial Position: Current assets $ 1,439 $ 1,448 $ 1,316 $ 1,583 $ 1,179 Timber and timberlands - net 2,430 2,397 2,365 2,008 1,847 Property, plant and equipment - net 4,229 4,800 5,653 5,514 5,603 Other assets and deferred charges 742 466 486 438 335 --------- ---------- --------- --------- --------- Total assets $ 8,840 $ 9,111 $ 9,820 $ 9,543 $ 8,964 ========= ========== ========= ========= ========= Current liabilities $ 1,048 $ 1,020 $ 944 $ 1,080 $ 1,034 Long-term debt 2,948 3,194 3,085 2,828 2,889 Other liabilities 787 693 671 769 740 Deferred income taxes 961 994 1,364 1,219 1,040 $92.50 convertible preference stock - - - - 300 Shareholders' equity 3,096 3,210 3,756 3,647 2,961 --------- ---------- --------- --------- --------- Total liabilities and shareholders' equity $ 8,840 $ 9,111 $ 9,820 $ 9,543 $ 8,964 ========= ========== ========= ========= ========= Other Statistics: Expenditures for property, plant and equipment $ 305 $ 321 $ 461 $ 368 $ 225 Timber and timberlands expenditures $ 127 $ 128 $ 121 $ 257 $ 104 U.S. timber acreage owned or controlled 5.0 5.4 5.3 5.3 5.1 Common shares outstanding at year-end 96 96 96 96 93 Dividends declared on preference shares $ - $ - $ - $ 13 $ 28 Dividends declared on common shares $ 19 $ 19 $ 19 $ 19 $ 19 Current ratio 1.4 1.4 1.4 1.5 1.1 Ratio of total debt to total capitalization .45:1 .45:1 .39:1 .38:1 .43:1 Return on average shareholders' equity and $92.50 convertible preference stock before extraordinary item and cumulative effect of accounting changes 2.4% (b) (15.7)% (b) 3.8% 22.6 % 2.0% - ------------------------------------------------------------------------------------------------------------------------------------ Eleven-Year Selected Financial Data (in millions, except per share amounts and ratio data) 1993 1992 1991 1990 1989 - ------------------------------------------------------------ ----------- ----------- ---------- ---------- ----------- Earnings: Net Sales $ 5,069 $ 4,926 $ 4,786 $ 5,090 $ 5,163 Depreciation expense and cost of timber harvested 443 411 342 323 279 Gross profit 359 362 454 800 1,048 Provision for restructuring - - - - - Interest and debt expense 224 206 211 156 136 Other (income) expense - net 7 (143) (110) (85) (93) Income (loss) before income taxes, extraordinary item and cumulative effect of accounting changes (165) 10 78 420 726 Income taxes (benefit) (31) (4) 38 197 294 Income (loss) before extraordinary item and cumulative effect of accounting changes (134) 14 40 223 432 Extraordinary item, net of taxes (14) - - - - Cumulative effect of accounting changes, net of taxes (8) (454) - - - Net income (loss) (156) (440) 40 223 432 Per Common Share (a): Basic earnings (loss) $ (1.98) $ (5.05) $ 0.14 $ 2.11 $ 4.56 Diluted earnings (loss) (1.98) (5.05) 0.14 2.08 4.43 Cash dividends declared 0.20 0.20 0.20 1.10 1.10 Cash dividends paid 0.20 0.20 0.43 1.10 1.08 Shareholders' equity 31.23 33.53 39.02 39.10 38.12 Financial Position: Current assets $ 1,114 $ 1,142 $ 1,162 $ 1,104 $ 1,074 Timber and timberlands - net 1,839 2,012 1,666 1,645 1,613 Property, plant and equipment - net 5,802 5,763 5,386 5,117 4,404 Other assets and deferred charges 388 464 442 485 440 ---------- ---------- ----------- ---------- -------- Total assets $ 9,143 $ 9,381 $ 8,656 $ 8,351 $ 7,531 ========== ========== =========== ========== ======== Current liabilities $ 772 $ 786 $ 794 $ 801 $ 804 Long-term debt 3,316 3,291 2,978 2,689 2,025 Other liabilities 728 686 235 231 208 Deferred income taxes 1,077 1,159 678 651 605 $92.50 convertible preference stock 300 300 300 300 300 Shareholders' equity 2,950 3,159 3,671 3,679 3,589 ---------- ---------- ----------- ---------- -------- Total liabilities and shareholders' equity $ 9,143 $ 9,381 $ 8,656 $ 8,351 $ 7,531 ========== ========== =========== ========== ======== Other Statistics: Expenditures for property, plant and equipment $ 476 $ 623 $ 604 $ 959 $ 916 Timber and timberlands expenditures $ 130 $ 95 $ 58 $ 88 $ 78 U.S. timber acreage owned or controlled 5.1 6.0 6.2 6.4 6.4 Common shares outstanding at year-end 93 93 93 93 93 Dividends declared on preference shares $ 28 $ 28 $ 28 $ 28 $ 2 Dividends declared on common shares $ 19 $ 19 $ 19 $ 102 $ 104 Current ratio 1.4 1.5 1.5 1.4 1.3 Ratio of total debt to total capitalization .44:1 .42:1 .40:1 .38:1 .32:1 Return on average shareholders' equity and $92.50 convertible preference stock before extraordinary item and cumulative effect of accounting changes (4.0)% 0.4% 1.0% 5.6% 12.2% - ----------------------------------------------------------------------------- Eleven-Year Selected Financial Data (in millions, except per share amounts and ratio data) 1988 - ------------------------------------------------------------- ------------ Earnings: Net Sales $ 5,129 Depreciation expense and cost of timber harvested 260 Gross profit 1,141 Provision for restructuring - Interest and debt expense 161 Other (income) expense - net (30) Income (loss) before income taxes, extraordinary item and cumulative effect of accounting changes 730 Income taxes (benefit) 274 Income (loss) before extraordinary item and cumulative effect of accounting changes 456 Extraordinary item, net of taxes - Cumulative effect of accounting changes, net of taxes - Net income (loss) 456 Per Common Share (a): Basic earnings (loss) $ 4.80 Diluted earnings (loss) 4.65 Cash dividends declared 0.95 Cash dividends paid 0.90 Shareholders' equity 35.06 Financial Position: Current assets $ 986 Timber and timberlands - net 1,581 Property, plant and equipment - net 3,702 Other assets and deferred charges 431 ---------- Total assets $ 6,700 ========== Current liabilities $ 699 Long-term debt 1,909 Other liabilities 273 Deferred income taxes 474 $92.50 convertible preference stock - Shareholders' equity 3,345 ---------- Total liabilities and shareholders' equity $ 6,700 ========== Other Statistics: Expenditures for property, plant and equipment $ 585 Timber and timberlands expenditures $ 88 U.S. timber acreage owned or controlled 6.4 Common shares outstanding at year-end 95 Dividends declared on preference shares $ - Dividends declared on common shares $ 91 Current ratio 1.4 Ratio of total debt to total capitalization .34:1 Return on average shareholders' equity and $92.50 convertible preference stock before extraordinary item and cumulative effect of accounting changes 14.5%
(a) Basic and diluted earnings (loss) per share for 1998 and 1997 include the provisions for restructuring of ($.52) and ($5.76), respectively. Basic and diluted earnings (loss) per share for 1993 include the cumulative effect of an accounting change of ($.08) and an extraordinary item for early retirement of debt of ($.15). Basic and diluted earnings (loss) per share for 1992 include the cumulative effect of accounting changes of ($4.90). (b) Includes the 1998 provision for restructuring of $80 million ($49 million after-tax) and the 1997 provision for restructuring of $891 million ($552 million after-tax). 52 Common Stock Prices and Dividends Paid Quarterly sales prices for the company's common stock as reported on the New York Stock Exchange composite tape, and quarterly dividends paid, in 1998 and 1997 were: - --------------------------------------------------------------------------------
March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 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 Paid .05 .05 .05 .05 - -------------------------------------------------------------------------------- 1997 - ---- High $ 47 3/8 $ 55 7/16 $ 65 5/16 $ 66 1/2 Low 41 3/8 42 1/4 55 1/4 43 1/16 Dividends Paid .05 .05 .05 .05 - --------------------------------------------------------------------------------
53 EX-21 4 LIST OF SIGNIFICANT SUBSIDIARIES 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, 1998. EX-23.1 5 OPINION & CONSENT OF THE SR. VP & GENERAL COUNSEL EXHIBIT 23.1 CHAMPION INTERNATIONAL CORPORATION One Champion Plaza Stamford, CT 06921 March 29, 1999 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. There are currently no material legal or administrative claims or proceedings pending or known to be threatened against the Company. I hereby consent to the reference to this opinion in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1998, and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (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 EX-23.2 6 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 18, 1999 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. 33-63126 and No. 333-34069). /s/ Arthur Andersen LLP Stamford, CT March 29, 1999 EX-24 7 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, 1998 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 29th day of March, 1999. /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 de CAMPOS MEIRELLES - -------------------------------- Henrique de Campos Meirellas, Director /s/ WALTER V. SHIPLEY - -------------------------------- Walter V. Shipley, Director /s/ RICHARD E. WALTON - -------------------------------- Richard E. Walton, Director EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 300 0 539 18 504 1,439 11,016 4,357 8,840 1,049 2,948 0 0 56 3,040 8,840 5,653 5,653 4,953 4,953 0 0 261 37 (38) 75 0 0 0 75 0.79 0.78 INCLUDES TIMBER AND TIMBERLANDS.
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