<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
---------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-3053
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CHAMPION INTERNATIONAL CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-1427390
- -------------------------------------- ------------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
One Champion Plaza, Stamford, Connecticut 06921
----------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
203-358-7000
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- ---------------------------------------- -----------------------------------
Common stock, $.50 par value 95,634,592
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
- ------------------------------
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (unaudited)
(in millions, except per share)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -----------------------------
1998 1997 1998 1997
---------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Net Sales $2,950.8 $2,774.2 $1,473.8 $1,407.5
Costs and Expenses
Cost of products sold 2,579.6 2,557.9 1,287.1 1,278.3
Selling, general and administrative expenses 190.0 198.6 96.1 104.7
Interest and debt expenses 134.8 121.6 67.3 60.8
Other (income) expense - net (Note 2) (21.7) (18.7) (19.7) (10.7)
---------- ------------ -------------- -------------
Total costs and expenses 2,882.7 2,859.4 1,430.8 1,433.1
Income (Loss) Before Income Taxes 68.1 (85.2) 43.0 (25.6)
Income Taxes (Benefit) 17.0 (36.8) 10.9 (14.3)
---------- ------------ -------------- -------------
Net Income (Loss) $ 51.1 $ (48.4) $ 32.1 $ (11.3)
========== ============ ============== ==============
Average Number of Common Shares Outstanding 96.2 95.6 96.2 95.7
========== ============ ============== ==============
Earnings (Loss) Per Common Share (Exhibit 11):
Basic $ .53 $ (.51) $ .33 $ (.12)
=========== ============ ============== ==============
Diluted $ .53 $ (.51) $ .33 $ (.12)
=========== ============ ============== ==============
Cash dividends declared $ .10 $ .10 $ .05 $ .05
=========== ============ ============== ==============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
2
<PAGE>
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
ASSETS: (Unaudited)
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 238.9 $ 275.0
Short-term investments 2.7 ---
Receivables - net 632.4 594.9
Inventories 444.7 451.1
Prepaid expenses 36.5 25.6
Deferred income taxes 98.1 101.4
------------- ------------
Total Current Assets 1,453.3 1,448.0
------------- ------------
Timber and timberlands, at cost - less cost of
timber harvested 2,396.4 2,397.3
------------- ------------
Property, plant and equipment, at cost 8,539.5 9,473.4
Less - Accumulated depreciation 4,142.2 4,673.3
------------- ------------
4,397.3 4,800.1
------------- ------------
Other assets and deferred charges 463.2 465.2
------------- ------------
Total Assets $ 8,710.2 $ 9,110.6
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current installments of long-term debt $ 57.7 $ 143.7
Short-term borrowings 72.8 71.1
Accounts payable and accrued liabilities 701.5 794.2
Income taxes 22.8 10.5
------------- ------------
Total Current Liabilities 854.8 1,019.5
------------- ------------
Long-term debt 3,074.3 3,194.4
------------- ------------
Other liabilities 725.8 693.1
------------- ------------
Deferred income taxes 888.8 993.6
------------- ------------
Shareholders' Equity:
Capital Shares:
Common (110,977,311 and 110,900,212 shares issued
at June 30, 1998 and December 31, 1997, respectively) 55.5 55.5
Capital Surplus 1,704.9 1,697.2
Retained Earnings 2,213.9 2,172.5
--------------- --------------
3,974.3 3,925.2
--------------- ---------------
Treasury shares, at cost (657.5) (657.9)
Cumulative translation adjustment (150.3) (57.3)
-------------- ---------------
Total Shareholders' Equity 3,166.5 3,210.0
-------------- ---------------
Total Liabilities and Shareholders' Equity $ 8,710.2 $ 9,110.6
============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
3
<PAGE>
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOWS (unaudited)
(in millions of dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 51.1 $ (48.4)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 207.4 210.7
Cost of timber harvested 46.0 43.9
Net gain on sale of assets (16.5) (10.6)
(Increase) decrease in:
Receivables (31.0) 8.1
Inventories (0.1) 56.3
Prepaid expenses 3.2 (4.3)
Increase (decrease) in:
Accounts payable and accrued liabilities (54.8) (54.7)
Income taxes 10.4 (14.5)
Other liabilities 3.9 27.8
Deferred income taxes (6.4) (59.1)
All other - net 8.8 20.5
----------- ------------
Net cash provided by operating activities 222.0 175.7
----------- ------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (144.6) (154.3)
Timber and timberlands expenditures (63.9) (57.1)
Acquisition of Inpacel (Note 3) (58.1) ---
Purchase of investments (2.7) (20.9)
Proceeds from redemption of investments --- 20.9
Proceeds from the sale of newsprint operations (Note 5) 459.1 ---
Proceeds from sales of property, plant and equipment
and timber and timberlands 28.1 29.1
All other - net (2.4) (1.8)
----------- ------------
Net cash provided by (used in) investing activities 215.5 (184.1)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 441.0 102.7
Payments of long-term debt and short-term debt (902.9) (122.6)
Cash dividends paid (9.6) (9.6)
All other - net (2.1) 2.9
----------- ------------
Net cash provided by (used in) financing activities (473.6) (26.6)
----------- ------------
Decrease in cash and cash equivalents (36.1) (35.0)
Cash and Cash Equivalents:
Beginning of period 275.0 174.6
----------- ------------
End of period $ 238.9 $ 139.6
=========== ============
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest (net of capitalized amounts) $ 145.5 $ 122.9
Income taxes (net of refunds) 12.1 29.1
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
4
<PAGE>
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1998
Note 1
The unaudited information furnished in this report reflects all adjustments
which are, in the opinion of management, necessary to present fairly a statement
of the results for the interim periods reported. All such adjustments made were
of a normal recurring nature. Certain amounts for 1997 have been reclassified to
conform to the current year's presentation.
Note 2.
Other income (expense) - net for the three months and six months ended June 30,
1998 includes a gain of $11.6 million from the sale of certain timberlands.
Note 3.
On January 26, 1998, the company's Brazilian subsidiary acquired Inpacel and its
forestry affiliate for $75 million, before netting $17 million of cash and cash
equivalents owned by Inpacel and its affiliate, as well as outstanding debt of
$277 million and $34 million of other liabilities. The acquisition was accounted
for as a purchase.
Note 4.
The company occasionally enters into forward exchange contracts to hedge certain
assets that are denominated in foreign currencies. At June 30, 1998, the company
had forward exchange contracts covering approximately $15 million of investments
and accounts receivable, the deferred gains and losses on which were not
material. The contracts range in duration from 61 days to 90 days. The company
does not hold financial instruments for trading purposes.
Note 5.
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 will divest
several non-strategic product segments and 325,000 acres of timberlands. The
profit-improvement program includes a reduction in the company's world-wide
workforce in the businesses remaining after the divestitures by 11%, or
approximately 2,000 positions, by the end of 1999. In connection with this plan
to maximize total shareholder return, through June 30, 1998, the company had
spent approximately $18 million, principally 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 the acquisition
of Inpacel and certain operations in Maine) by 1,077 positions.
5
<PAGE>
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Results of operations for the product segments to be divested, as well as the
newsprint business which was sold on June 1, 1998, are as follows.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
- -------------------------------------------------------- -------------- ------------- ------------ -------------
(in millions of dollars)
<S> <C> <C> <C> <C>
Net sales $ 618.8 $ 634.4 $ 291.1 $ 321.4
Costs and expenses 615.1 697.3 287.8 348.0
-------------- ------------- ------------ -------------
Income (loss) from operations $ 3.7 $ (62.9) $ 3.3 $ (26.6)
============== ============= ============ =============
</TABLE>
The consolidated balance sheet includes the following amounts related to the
product segments to be divested, net of the asset impairment provision:
June 30 1998
- ------------------------------------------------- ------------
(in millions of dollars)
Current assets $ 176.7
Long-term assets (primarily property, plant
and equipment) 269.6
Current liabilities (55.1)
Long-term liabilities (0.9)
-------------
Net assets $ 390.3
=============
On June 1, 1998, the company sold its newsprint business, including related
working capital, and its Texas recycling centers to Donohue, Inc. for $459
million. No gain or loss from this sale was recorded. The company is continuing
to actively pursue the sale of all of its timberlands in the States of New York
and Vermont and part of its timberlands in the State of New Hampshire; its tray
plant in Belvidere, Illinois; and its mill in Deferiet, New York. These
transactions are expected to be completed by year-end. Thus far, the company has
not received offers which would justify the sale of its mill in Canton, North
Carolina, including its liquid packaging business, and its mill in Hamilton,
Ohio. The company is continuing to explore options to maximize their divestiture
values in the near term.
6
<PAGE>
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 6.
Statement of Financial Accounting Standards No. 130, effective in 1998, requires
the disclosure of comprehensive income to reflect changes in equity that result
from transactions and economic events from nonowner sources. Comprehensive
income for the periods presented below included 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.
Comprehensive income (unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
- ------------------------------------------------- ---------------------------- ----------------------------
(in millions of dollars) 1998 1997 1998 1997
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 51.1 $ (48.4) $ 32.1 $ (11.3)
Foreign currency translation
adjustments:
Cumulative tax effect of
changing the functional
currency for Brazilian
operations to the Brazilian Real (51.5) --- --- ---
Other foreign currency
translation adjustments (41.5) (4.3) (27.8) 1.5
-------------- ------------- ------------ -------------
Net foreign currency translation
adjustment (93.0) (4.3) (27.8) 1.5
-------------- ------------- ------------ -------------
Comprehensive income (loss) $ (41.9) $ (52.7) $ 4.3 $ (9.8)
============== ============= ============ =============
</TABLE>
Note 7.
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.
7
<PAGE>
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations.
- --------------
Results of Operations
- ---------------------
Overall Quarterly Results
The company reported net income in the second quarter of 1998 of $32 million or
$.33 per share, compared to last year's second quarter net loss of $11 million
or $.12 per share and last quarter's net income of $19 million or $.20 per
share. Results for the second quarter of 1998 included income of seven cents per
share due to the sale of certain timberlands. As discussed below, the
improvement from last year was principally due to significantly higher earnings
in the paper segment. The increase from last quarter was primarily due to
improved other (income) expense-net.
Significant Income Statement Line Item Changes for the Three Months Ended June
30, 1998
Net sales of $1.47 billion increased from $1.41 billion last year and were even
with last quarter. Gross profit was $187 million, compared to $129 million last
year and $184 million last quarter. Pre-tax income of $43 million improved from
a pre-tax loss of $26 million a year ago and pre-tax income of $25 million last
quarter. The improvements in net sales, gross profit and pre-tax income from the
year-ago quarter were mainly due to higher prices for most of the company's pulp
and paper grades, which more than offset lower results for the company's wood
products operations and, with respect to pre-tax income, higher interest
expense. The improvement in pre-tax income from last quarter was principally due
to more favorable other (income) expense-net.
The aggregate cost of products sold was approximately even with last year and
last quarter. A decline in paper shipments from last year and last quarter due
to the sale of the company's newsprint business on June 1, 1998, as discussed
below, was substantially offset by higher wood products shipments.
Selling, general and administrative expenses declined from last year and were
approximately even with last quarter. The decline from last year was mainly due
to the impact of stock price fluctuations on the value of stock-based
compensation.
Interest and debt expense increased from last year but was approximately even
with last quarter. The increase from last year was primarily due to increased
debt associated with the January 1998 acquisition of Industria de Papel Arapoti
S.A. ("Inpacel"), a coated groundwood papers company in Brazil, and its forestry
affiliate. In June 1998, approximately $380 million of the cash proceeds from
the sale of the newsprint business was used to pay down commercial paper and
short-term obligations.
8
<PAGE>
Other (income) expense - net improved from last year and last quarter, mainly
due to a $12 million gain from the sale of certain timberlands.
The effective tax rate for the second quarter of 1998 was approximately even
with the prior quarter but was lower than the rate associated with the tax
benefit for the year-ago quarter. The decrease from last year was mainly due to
the mix of earnings from the company's operations in North America and Brazil.
The tax rate applicable to North American operations is higher than the
Brazilian tax rate.
Year-to-Date Results
For the first six months, the company reported net income of $51 million or $.53
per share, compared to a net loss of $48 million or $.51 per share a year ago.
Paper Segment
For the company's paper segment, second quarter operating income was $84
million. This compared to income of $3 million a year ago and income of $89
million last quarter. Total paper, packaging and pulp shipments were 1,503,000
tons in the second quarter, compared to 1,560,000 tons a year ago and 1,536,000
tons last quarter. The decline in shipments was primarily attributable to the
sale of the company's newsprint business on June 1, 1998.
During the second quarter of 1998, the company's domestic paper operations were
reorganized into four businesses: coated papers, uncoated papers, kraft papers,
and paper distribution and pulp sales. The mills in the coated papers business
are in Bucksport, Maine; Quinnesec, Michigan; and Sartell, Minnesota; pulp sales
at Quinnesec also are included in the results of this business. The mills in the
uncoated papers business are in Pensacola, Florida and Courtland, Alabama; pulp
sales at Pensacola and Courtland and coated free sheet papers sales at Courtland
are also included in the results of this business. Kraft papers are manufactured
at the Roanoke Rapids, North Carolina mill.
In addition to the above businesses, the company's domestic pulp and paper
operations include the following facilities offered for sale by the company: the
mills at Canton, North Carolina, including the liquid packaging business;
Deferiet, New York; and Hamilton, Ohio.
Operating income for the coated papers business improved significantly from last
year and was approximately even with last quarter. The improvement from last
year was principally due to significantly higher prices for coated groundwood
papers and higher prices for coated free sheet papers. Compared to last quarter,
higher prices for coated groundwood and free sheet papers were offset by
scheduled maintenance outages at the Bucksport mill and the Quinnesec pulp mill.
The average price for coated groundwood papers of $958 per ton in the second
quarter of 1998 improved from $799 per ton last year and $941 per ton last
quarter. The average price for coated free sheet papers was $887 per ton this
quarter, compared to $861 per ton last year and $875 per ton last quarter.
Prices for northern bleached hardwood kraft pulp were approximately even with
last year and last quarter. Shipments of all pulp and paper grades were 340,000
tons, compared to 344,000 tons last year and 333,000 tons last quarter. Early in
the third quarter, pulp prices weakened somewhat.
9
<PAGE>
The small operating income for the uncoated papers business improved from the
operating loss last year, but was down substantially from last quarter. The
improvement from last year was mainly due to higher prices for uncoated free
sheet papers. The decline from last quarter was primarily due to lower prices
for uncoated free sheet papers. The average price for domestic uncoated free
sheet papers, the principal product of the uncoated papers business, was $669
per ton in the second quarter of this year, compared to $623 per ton in the
second quarter of 1997 and $698 per ton last quarter. The average price for
coated free sheet papers produced at the Courtland mill was $791 per ton this
quarter, compared to $789 per ton a year ago and $824 per ton last quarter. The
average price for southern market kraft pulp of $380 per ton in the second
quarter of this year improved from $369 per ton in the second quarter of 1997
and $341 per ton last quarter. Shipments of all pulp and paper grades for the
uncoated papers business were 391,000 tons compared to 406,000 tons last year
and 371,000 tons last quarter. In order to bring inventory levels for uncoated
free sheet papers in balance with current business conditions, the Courtland
mill plans to take three of its four uncoated paper machines and its entire
sheeting operation out of production for approximately seven days in the third
quarter.
Operating income for the kraft papers business improved significantly from last
year but declined from last quarter. The improvement from last year was
primarily due to higher linerboard prices. The decline from last quarter was
mainly due to lower prices for kraft papers and linerboard. Shipments of all
grades of 131,000 tons increased slightly from last year and last quarter. A
maintenance outage is scheduled at Roanoke Rapids in the third quarter. Prices
for kraft paper and linerboard continued to decline early in the third quarter.
Operating income at the Brazilian subsidiary, Champion Papel e Celulose Ltda.
("CPC"), improved from both last year and last quarter. The improvement from
last year was principally due to the operating income from Inpacel this year and
lower manufacturing costs, which more than offset lower domestic prices for
uncoated free sheet papers. The improvement from last quarter was primarily due
to higher prices and shipments of coated groundwood papers. The overall average
price for uncoated free sheet papers was $700 per ton this quarter, compared to
$714 per ton last year and $697 per ton last quarter. The average price of
coated groundwood papers for Inpacel was $905 per ton this quarter, compared to
$871 per ton last quarter. Uncoated free sheet papers shipments of 100,000 tons
were slightly higher than last year and last quarter. Coated groundwood
shipments were 43,000 tons this quarter and 30,000 tons for the two months in
the first quarter that Inpacel was owned by CPC.
The small operating income for the market pulp operations at the company's
Canadian subsidiary, Weldwood of Canada Limited ("Weldwood"), represented a
decline from last year's operating income but improved from the operating loss
last quarter. The decline from last year was mainly due to lower prices and
shipments of northern bleached softwood kraft ("NBSK") pulp. The improvement
from last quarter was principally due to higher NBSK pulp prices. The average
price for NBSK pulp was (U.S.) $388 per ton this quarter, compared to $398 per
ton last year and $360 per ton last quarter. Shipments were 143,000 tons this
quarter, compared to 159,000 tons last year and 144,000 tons last quarter. Early
in the third quarter, pulp prices weakened somewhat.
10
<PAGE>
For the operations to be divested by the company, including the newsprint
business which was sold on June 1, 1998, the operating income represented a
significant improvement from the operating loss of last year and an improvement
from the approximate break-even results last quarter. The improvement from last
year was primarily due to higher prices for uncoated free sheet papers, coated
groundwood papers and newsprint. The improvement from last quarter was
principally due to lower depreciation expense at the newsprint mills. Shipments
of all grades were 391,000 tons, compared to 477,000 tons last year and 468,000
tons last quarter. Lower shipments for the second quarter of 1998 were primarily
attributable to the sale of the company's two newsprint mills, which had an
annual capacity of 973,000 short tons of newsprint and specialty groundwood
papers. In order to bring inventory levels for uncoated free sheet papers in
balance with current business conditions, the Canton mill plans to take its
three paper machines out of production for approximately six days in the third
quarter.
Wood Products Segment
The company's wood products segment, which includes the wood-related operations
of Weldwood and CPC, reported second quarter income from operations of $17
million, compared to $40 million a year ago and $14 million last quarter. The
decline from last year was due to significantly lower lumber and plywood prices,
particularly in Canada. The improvement from last quarter was principally due to
increased shipments, lower manufacturing costs and higher lease income, which
more than offset lower prices for lumber and plywood.
For U.S. and Canadian operations overall, the average price for plywood was down
by 9% from last year and 2% from last quarter. The average price for lumber was
21% lower than last year and 5% lower than last quarter. Wood products shipments
increased from both last year and last quarter.
In order to bring inventory levels of lumber and plywood in balance with current
business conditions, Weldwood plans to take its five saw mills and two plywood
facilities in British Columbia out of production for two to four weeks in the
third quarter.
Foreign Operations
The company's major foreign operations, which are discussed above under their
respective business segment headings, are in Brazil and Canada. Net sales to
unaffiliated customers by CPC and Weldwood for the first six months of 1998 were
(U.S.) $227 million and $215 million, respectively, accounting for 8% and 7%,
respectively, of consolidated net sales of the company. Pre-tax income and net
income of CPC for the first six months of 1998 were $34 million and $36 million,
respectively. The pre-tax loss and net loss of Weldwood for the first six months
of 1998 were $13 million and $7 million, respectively.
Exports of pulp and paper by the company, including by its Brazilian and
Canadian operations, to the Asian countries that currently are experiencing
economic turmoil are not material. However, the
11
<PAGE>
company has been adversely affected by (i) a decline in exports of logs and wood
products by the company to those Asian markets and (ii) an increase in imports
of uncoated free sheet papers resulting from a shift in sales from those Asian
markets to North America by various paper producers.
Labor Contracts
A one-year extension of the existing labor contract was ratified at the
Deferiet, New York paper mill. The extension, through June 1999, may be
terminated by the company or the union on 10 days prior written notice.
At Weldwood, efforts to reach new labor agreements continue at the Hinton,
Alberta, pulp mill and wood products plant, and the joint venture pulp mill at
Quesnel, British Columbia, which are presently operating under the terms of
their expired contracts.
Financial Condition
- -------------------
General
The company's current ratio was 1.7 to 1 at June 30, 1998, compared to 1.5 to 1
at March 31, 1998 and 1.4 to 1 at year-end 1997. Total debt to total
capitalization of 44% at June 30, 1998 declined from 47% at March 31, 1998 and
45% at year-end 1997 as a result of the sale of the company's newsprint
business, a portion of the proceeds of which were used to repay debt.
Significant Balance Sheet Line Item Changes
The acquisition of Inpacel and its forestry affiliate in January 1998 was the
main reason for (i) the increases from December 31, 1997 in receivables-net and
other liabilities; and (ii) the decrease from December 31, 1997 in the deferred
income tax liability. The sale of the newsprint business on June 1, 1998 was the
principal reason for the decreases from December 31, 1997 in property, plant and
equipment and accumulated depreciation. Accounts payable and accrued liabilities
decreased from year-end 1997 primarily due to the timing of payments and the
sale of the newsprint business. Current installments of long-term debt decreased
from year-end 1997 primarily due to the timing of payments. 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
shareholders' equity. The weakening of the Canadian and Brazilian currencies
relative to the U.S. dollar resulted in a $41 million increase in cumulative
translation adjustment from December 31, 1997 in shareholders' equity.
For a discussion of changes in long-term debt (including current installments)
and cash and cash equivalents, see below.
12
<PAGE>
Cash Flows Statement - General
1998
- ----
In the first six months of 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 acquisition of Inpacel). The excess,
together with cash and cash equivalents, was used primarily to pay a portion of
the company's long-term debt (including current installments). Cash and cash
equivalents decreased by $36 million in the first six months to a total of $239
million, $139 million of which was held by the company's Canadian and Brazilian
subsidiaries. In the first six months, net long-term and short-term debt
payments were $462 million. Long-term debt (including current installments) and
short-term borrowings in the aggregate decreased by $204 million, as the
reduction in U.S. debt outstanding was partially offset by the $277 million of
debt of Inpacel outstanding at the time of its acquisition.
1997
- ----
In the first six months of 1997, 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 its financing
activities (principally debt payments and cash dividends). The difference was
financed through the use of cash and cash equivalents. Cash and cash equivalents
decreased by $35 million.
Cash Flows Statement - Operating Activities
For the first six months, net cash provided by operating activities of $222
million increased from $176 million a year ago. The increase was primarily due
to net income this year compared to a net loss last year, a smaller increase in
other liabilities, and lower income tax payments, partially offset by an
increase in receivables this year and the decrease in inventories last year.
Cash Flows Statement - Investing Activities
For the first six months, net cash provided by investing activities of $216
million compared with net cash used in investing activities of $184 million a
year ago. The improvement was mainly due to the sale of the company's newsprint
operations for $459 million, which was partially offset by the acquisition of
Inpacel for $75 million before netting $17 million of cash and cash equivalents
owned by Inpacel (as well as outstanding debt of $277 million).
Cash Flows Statement - Financing Activities
For the first six months, net cash used in financing activities of $474 million
increased from $27 million a year ago, primarily due to significantly higher net
payments of long-term debt (including current installments) this year.
13
<PAGE>
At June 30, 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 $303 million at March 31, 1998 and $345 million at year-end 1997. At
June 30, 1998 and December 31, 1997, no notes were outstanding under the
company's U.S. bank lines of credit. At March 31, 1998, $20 million of such
notes were outstanding. Domestically, at June 30, 1998, the company had unused
bank lines of credit of $1.2 billion. At June 30, 1998, Weldwood had unused bank
lines of credit of (U.S.) $123 million.
The annual principal payment requirements under the terms of all long-term
agreements for the period from July 1 through December 31, 1998 are $43 million
and for the years 1999 through 2002 are $234 million, $237 million, $238 million
and $38 million, respectively.
The company currently anticipates that capital spending will be $450 million or
less in 1998.
Divestiture Program
- -------------------
On June 1, 1998, the company sold its newsprint business, including related
working capital, and its Texas recycling centers to Donohue, Inc. for $459
million. The company is continuing to actively pursue the sale of all of its
timberlands in the States of New York and Vermont and part of its timberlands in
the State of New Hampshire; its tray plant in Belvidere, Illinois; and its mill
in Deferiet, New York. These transactions are expected to be completed by
year-end. Thus far, the company has not received offers which would justify the
sale of its mill in Canton, North Carolina, including its liquid packaging
business, and its mill in Hamilton, Ohio. The company is continuing to explore
options to maximize their divestiture values in the near term.
The Environment
- ---------------
As previously reported, the company is evaluating relocating the point of
discharge for its Pensacola, Florida mill's effluent due to potential
limitations on the assimilative capacity of the existing receiving body of
water. The results of the study are expected to be submitted to the Florida
Department of Environmental Protection ("FDEP") by September 30, 1998. Following
submission, the FDEP will make a decision concerning a possible new point of
discharge.
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.
14
<PAGE>
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.
Forward-Looking Statements
- --------------------------
Certain statements in this report 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 the 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 are discussed in the
company's Annual Report on Form 10-K.
15
<PAGE>
PART II. OTHER INFORMATION
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
(a) The Annual Meeting of Shareholders of the company was held on
May 21, 1998.
(b) N/A
(c) (i) Five nominees were elected to the Board of Directors at the
1998 Annual Meeting.
Robert A. Charpie - 84,469,005 votes were cast in favor of his
election and 1,532,377 votes were withheld.
H. Corbin Day - 83,621,902 votes were cast in favor of his
election and 2,379,480 votes were withheld.
Alice F. Emerson - 84,481,934 votes were cast in favor of her
election and 1,519,448 votes were withheld.
Allan E. Gotlieb - 84,469,499 votes were cast in favor of his
election and 1,531,883 votes were withheld.
Kenwood C. Nichols - 84,496,329 votes were cast in favor of his
election and 1,505,053 votes were withheld.
(ii) The shareholders approved the appointment of Arthur Andersen
LLP as the company's auditors for 1998. There were 85,843,770
votes cast in favor of the proposal, 83,019 votes cast against
the proposal and 74,593 abstentions.
(iii) The shareholders rejected a shareholder proposal concerning the
use of chlorine in the pulp-manufacturing process. There were
1,803,536 votes cast in favor of the proposal, 79,142,291 votes
cast against the proposal, 613,834 abstentions and 4,441,721
broker non-votes.
(iv) The shareholders rejected a shareholder proposal concerning
cumulative voting. There were 25,978,345 votes cast in favor of
the proposal, 49,101,293 votes cast against the proposal,
6,468,783 abstentions and 4,452,961 broker non-votes.
(d) N/A
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) See exhibit index following the signature page.
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the undersigned on behalf of the registrant as
duly authorized officers thereof and in their capacities as the chief
accounting officers of the registrant.
Champion International Corporation
----------------------------------
(Registrant)
August 12, 1998 /s/ John M. Nimons
Date: -------------------------- -----------------------------------
(Signature)
John M. Nimons
Vice President and Controller
August 12, 1998 /s/ Kenwood C. Nichols
Date: -------------------------- -----------------------------------
(Signature)
Kenwood C. Nichols
Vice Chairman and Executive Officer
17
<PAGE>
EXHIBIT INDEX
Each exhibit is listed according to the number assigned to it in the Exhibit
Table of Item 601 of Regulation S-K.
11- Calculation of Basic Earnings Per Common Share and Diluted Earnings per
Common Share (unaudited).
27- Financial Data Schedule (unaudited).
18
<PAGE>
EXHIBIT 11
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
Calculation of Basic Earnings (Loss) Per Common Share and
Diluted Earnings (Loss) Per Common Share (unaudited)
(in millions, except per share)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------------------------- ----------------------------------
June 30, June 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Basic earnings (loss) per common share:
Net income (loss) applicable to common stock $ 51.1 $ (48.4) $ 32.1 $ (11.3)
=============== =============== =============== ===============
Average number of common shares outstanding 96.2 95.6 96.2 95.7
=============== =============== =============== ===============
Basic earnings (loss) per share $ .53 $ (.51) $ .33 $ (.12)
=============== =============== =============== ===============
Diluted earnings (loss) per common share: (1)
Net income (loss) applicable to common stock $ 51.1 $ (48.4) $ 32.1 $ (11.3)
Add income effect, assuming conversion of
potentially dilutive securities --- --- --- ---
--------------- --------------- --------------- ---------------
Net income (loss) on a diluted basis $ 51.1 $ (48.4) $ 32.1 $ (11.3)
=============== =============== =============== ===============
Average number of common shares outstanding 96.2 95.6 96.2 95.7
Add common share effect, assuming conversion
of potentially dilutive securities .8 --- .8 ---
--------------- --------------- --------------- ---------------
Average number of common shares outstanding
on a diluted basis 97.0 95.6 97.0 95.7
=============== =============== =============== ===============
Diluted earnings (loss) per share $ .53 $ (.51) $ .33 $ (.12)
=============== =============== =============== ===============
</TABLE>
- -------------------------------
NOTE:
(1) The computation of diluted earnings per share assumes that the average
number of common shares outstanding during the period is increased by
dilutive common share equivalents and the conversion of securities having
a dilutive effect, and that net income applicable to common stock is
increased by dividends and after-tax interest on such securities.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE
30, 1998 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 239
<SECURITIES> 3
<RECEIVABLES> 652
<ALLOWANCES> 20
<INVENTORY> 445
<CURRENT-ASSETS> 1,453
<PP&E> 10,936<F1>
<DEPRECIATION> 4,142
<TOTAL-ASSETS> 8,710
<CURRENT-LIABILITIES> 855
<BONDS> 3,074
0
0
<COMMON> 56
<OTHER-SE> 3,111
<TOTAL-LIABILITY-AND-EQUITY> 8,710
<SALES> 2,951
<TOTAL-REVENUES> 2,951
<CGS> 2,580
<TOTAL-COSTS> 2,580
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135
<INCOME-PRETAX> 68
<INCOME-TAX> 17
<INCOME-CONTINUING> 51
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51
<EPS-PRIMARY> $0.53
<EPS-DILUTED> $0.53
<FN>
<F1>Includes timber and timberlands.
</FN>
</TABLE>
