<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 September 30, 1998
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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
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
New York 13-1427390
--------------------------------------------------- -----------------------
State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization
</TABLE>
One Champion Plaza, Stamford, Connecticut 06921
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(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 October 31, 1998
- ----------------------------------------- -------------------------------
Common stock, $.50 par value 95,582,627
<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>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- ----------------------------
1998 1997 1998 1997
-------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 4,308.8 $ 4,252.5 $ 1,358.0 $ 1,478.4
Costs and Expenses
Cost of products sold 3,761.1 3,850.9 1,181.6 1,292.9
Selling, general and administrative expenses 271.3 303.5 81.3 105.0
Interest and debt expenses 196.2 180.4 61.4 58.8
Other (income) expense - net (Note 2) (29.8) (27.3) (8.2) (8.5)
--------- --------- --------- ---------
Total costs and expenses 4,198.8 4,307.5 1,316.1 1,448.2
Income (Loss) Before Income Taxes 110.0 (55.0) 41.9 30.2
Income Taxes (Benefit) 27.6 (26.7) 10.6 10.0
--------- --------- --------- ---------
Net Income (Loss) 82.4 (28.3) 31.3 20.2
========= ========= ========= =========
Average Number of Common Shares Outstanding 96.0 95.7 95.7 95.9
========= ========= ========= =========
Earnings (Loss) Per Common Share (Exhibit 11):
Basic $ .86 $ (.30) $ .33 $ .21
========= ========= ========= =========
Diluted $ .85 $ (.30) $ .32 $ .21
========= ========= ========= =========
Cash dividends declared $ .15 $ .15 $ .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>
September 30,
1998 December 31,
ASSETS: (unaudited) 1997
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 260.1 $ 275.0
Short-term investments 5.5 --
Receivables - net 548.2 594.9
Inventories 477.3 451.1
Prepaid expenses 44.5 25.6
Deferred income taxes 95.4 101.4
-------- --------
Total Current Assets 1,431.0 1,448.0
-------- --------
Timber and timberlands, at cost - less cost of timber harvested 2,464.5 2,397.3
-------- --------
Property, plant and equipment, at cost 8,607.4 9,473.4
Less - Accumulated depreciation 4,234.8 4,673.3
-------- --------
4,372.6 4,800.1
-------- --------
Other assets and deferred charges 452.2 465.2
-------- --------
Total Assets $8,720.3 $9,110.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current installments of long-term debt $ 35.1 $ 143.7
Short-term borrowings 76.6 71.1
Accounts payable and accrued liabilities 722.4 794.2
Income taxes 18.6 10.5
-------- --------
Total Current Liabilities 852.7 1,019.5
-------- --------
Long-term debt 3,125.2 3,194.4
-------- --------
Other liabilities 718.4 693.1
-------- --------
Deferred income taxes 905.2 993.6
-------- --------
Shareholders' Equity:
Capital Shares:
Common (111,021,306 and 110,900,212 shares issued at
September 30, 1998 and December 31, 1997,
respectively) 55.5 55.5
Capital Surplus 1,704.3 1,697.2
Retained Earnings 2,240.3 2,172.5
-------- --------
4,000.1 3,925.2
Treasury shares, at cost (690.2) (657.9)
Cumulative translation adjustment (191.1) (57.3)
-------- --------
Total Shareholders' Equity 3,118.8 3,210.0
-------- --------
Total Liabilities and Shareholders' Equity $8,720.3 $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>
Nine Months Ended
September 30,
--------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 82.4 $ (28.3)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation expense 301.1 318.0
Cost of timber harvested 69.9 67.9
Net gain on sale of assets (18.0) (19.0)
(Increase) decrease in:
Receivables 52.4 (20.2)
Inventories (32.7) 43.2
Prepaid expenses 2.3 (1.7)
Increase (decrease) in:
Accounts payable and accrued liabilities (36.0) (21.1)
Income taxes (1.4) (16.0)
Other liabilities (3.8) 24.7
Deferred income taxes 1.6 (59.7)
All other - net (2.1) 41.5
-------- --------
Net cash provided by operating activities 415.7 329.3
-------- --------
Cash flows from investing activities:
Expenditures for property, plant and equipment (220.7) (237.4)
Timber and timberlands expenditures (97.7) (86.4)
Acquisitions of foreign operations (Note 3) (103.7) --
Purchase of investments (5.5) (22.1)
Proceeds from redemption of investments -- 20.9
Proceeds from sales of divested operations (Note 5) 481.6 --
Proceeds from sales of property, plant and equipment
and timber and timberlands 26.6 39.0
All other - net (0.8) (11.1)
-------- --------
Net cash provided by (used in) investing activities 79.8 (297.1)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 501.1 113.5
Payments of long-term and short-term debt (963.9) (204.3)
Cash dividends paid (14.7) (14.4)
Payments to acquire treasury stock (34.3) --
All other - net 1.4 13.2
-------- --------
Net cash used in financing activities (510.4) (92.0)
-------- --------
Decrease in cash and cash equivalents (14.9) (59.8)
Cash and Cash Equivalents:
Beginning of period 275.0 174.6
-------- --------
End of period $ 260.1 $ 114.8
======== ========
Supplemental cash flow disclosures: Cash paid during the period for:
Interest (net of capitalized amounts) $ 190.5 $ 177.1
Income taxes (net of refunds) 4.7 40.5
</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)
September 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 nine months ended September 30, 1998
includes a gain of $11.6 million from the sale of certain timberlands.
Note 3.
In 1998, the company's Brazilian subsidiary acquired Inpacel and its forestry
affiliate, and the company's Canadian subsidiary acquired Sunpine Forest
Products Ltd. The acquisitions, which were accounted for as purchases, included
cash payments, net of cash and cash equivalents owned by the acquired companies,
of $104 million, as well as outstanding debt of $333 million and $49 million of
other liabilities.
Note 4.
The company occasionally enters into forward exchange contracts to hedge certain
assets that are denominated in foreign currencies. At September 30, 1998, the
company had forward exchange contracts covering approximately $23 million of
investments and accounts receivable, the deferred gains and losses on which were
not material. The contracts range in duration from 15 days to 441 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. 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). Components of the
provision were: $658 million for asset impairment, $82 million for other asset
write-offs, $38 million for pension and postretirement enhancement and
curtailment losses, $42 million for other severance costs and $71 million for
other expenses, including
5
<PAGE>
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
selling costs, contract cancellations and other costs. Asset impairment was
based on estimated sales proceeds.
Through September 30, 1998, the company had spent approximately $17 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 Canadian and Brazilian acquisitions and certain
operations in Maine) by 1,373 positions. In addition, the company paid
approximately $11 million for other accrued costs.
Results of operations for the product segments divested and to be divested are
as follows.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------------- --------------------------
1998 1997 1998 1997
- ---------------------------------------------------------- --------- --------- --------- ---------
(millions of dollars)
<S> <C> <C> <C> <C>
Net sales $ 822.4 $ 971.8 $ 203.6 $ 337.4
Costs and expenses 828.9 1,054.6 212.0 357.3
--------- --------- --------- ---------
Income (loss) from operations $ (6.5) $ (82.8) $ (8.4) $ (19.9)
========= ========= ========= =========
</TABLE>
The consolidated balance sheet includes the following amounts related to the
product segments to be divested, net of the asset impairment provision:
September 30 1998
- --------------------------------------------------------------- -------
(in millions of dollars)
Current assets $ 167.7
Long-term assets (primarily property, plant
and equipment) 238.0
Current liabilities (50.1)
Long-term liabilities (0.9)
-------
Net assets $ 354.7
=======
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. On September 14, 1998, the company sold its tray plant, including
related working capital, to Tenneco, Inc. for $22.5 million. No gains or losses
from these sales were 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 mill in Canton, North
Carolina, including its liquid packaging business; its mill in Hamilton, Ohio;
and its mill in Deferiet, New York.
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>
Nine Months Ended Three Months Ended
September 30, September 30,
- ---------------------------------------------------------- ---------------------------- --------------------------
(in millions of dollars) 1998 1997 1998 1997
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 82.4 $ (28.3) $ 31.3 $ 20.2
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 (82.3) (4.3) (40.8) --
--------- --------- --------- ---------
Net foreign currency translation
adjustment (133.8) (4.3) (40.8) --
--------- --------- --------- ---------
Comprehensive income (loss) $ (51.4) $ (32.6) $ (9.5) $ 20.2
========= ========= ========= =========
</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 third quarter of 1998 of $31 million or
$.32 per share, diluted, compared to last year's third quarter net income of $20
million or $.21 per share and last quarter's net income of $32 million or $.33
per share. As discussed below, the improvement from last year was principally
due to higher earnings in the wood products segment and lower selling, general
and administrative expenses, which more than offset lower earnings in the paper
segment. Compared to last quarter, higher earnings in the wood products segment
substantially offset lower earnings in the paper segment and less favorable
other income (expense) - net.
The company, especially in its paper segment, continues to be adversely affected
by the economic turmoil in many countries, particularly in Asia. Exports of pulp
and paper by the company, including by 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, has
caused a significant decline in North American paper prices. In addition, the
company has experienced a decline in exports of logs and wood products to the
affected countries. The company believes that the continuing economic turmoil in
many countries together with the seasonal slowness of the fourth quarter most
likely will result in continuing weakness in pulp and paper markets for at least
the next few months.
Significant Income Statement Line Item Changes for the Three Months Ended
September 30, 1998
Net sales of $1.36 billion declined from $1.48 billion last year and $1.47
billion last quarter. Gross profit was $176 million, compared to $186 million
last year and $187 million last quarter. Pre-tax income of $42 million compared
to $30 million a year ago and $43 million last quarter. The declines in net
sales and gross profit from last year and last quarter were mainly due to (i)
the June 1, 1998 sale of the company's newsprint business, (ii) market-related
outages at the company's Canton, North Carolina and Courtland, Alabama pulp and
paper mills and (iii) lower prices for coated and uncoated free sheet papers and
pulp, all of which more than offset improvements in the company's wood products
operations. The improvement in pre-tax income from the year-ago quarter was
primarily due to improved results for the company's wood products operations and
lower selling, general and administrative expenses.
The aggregate cost of products sold declined from last year and last quarter,
principally due to lower paper shipments resulting from the sale of the
company's newsprint business.
8
<PAGE>
Selling, general and administrative expenses declined from last year and last
quarter. The declines were mainly due to the impact of stock price fluctuations
on the value of stock-based compensation and corporate and sales staff
reductions resulting from the company's profit-improvement program.
Interest and debt expense increased slightly from last year but declined from
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. The decline from last quarter was principally due to the use of
approximately $380 million of the cash proceeds from the June 1998 sale of the
newsprint business to pay down commercial paper and short-term obligations.
Other (income) expense - net was approximately even with last year but declined
from last quarter, mainly due to a $12 million gain last quarter from the sale
of certain timberlands.
The effective tax rate for the third quarter of 1998 was approximately even with
the prior quarter but was lower than the year-ago quarter. The decrease from
last year was primarily 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 nine months, the company reported net income of $82 million or
$.85 per share, diluted, compared to a net loss of $28 million or $.30 per share
a year ago.
Paper Segment
For the company's paper segment, third quarter operating income was $60 million.
This compared to income of $72 million a year ago and $84 million last quarter.
Total paper, packaging and pulp shipments were 1,325,000 tons in the third
quarter, compared to 1,599,000 tons a year ago and 1,502,000 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.
9
<PAGE>
Operating income for the coated papers business improved 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,
which was partially offset by lower prices for coated free sheet papers and pulp
and lower overall shipments. Compared to last quarter, lower prices for coated
groundwood and free sheet papers and pulp were offset by the impact of scheduled
maintenance outages during the second quarter at the Bucksport mill and the
Quinnesec pulp mill. The average price for coated groundwood papers was $936 per
ton in the third quarter of 1998, compared to $842 per ton last year and $958
per ton last quarter. The average price for coated free sheet papers was $863
per ton this quarter, compared to $907 per ton last year and $887 per ton last
quarter. Prices for northern bleached hardwood kraft pulp declined from last
year and last quarter. Shipments of all pulp and paper grades for the coated
papers business were 328,000 tons, compared to 355,000 tons last year and
340,000 tons last quarter. Early in the fourth quarter, prices for all pulp and
paper grades continued to weaken.
The operating loss for the uncoated papers business represented a decline from
the modest operating income of last year and the slight operating income of last
quarter. The declines were mainly due to lower prices for uncoated free sheet
papers and the impact of a market-related outage at the Courtland mill. The
average price for domestic uncoated free sheet papers, the principal product of
the uncoated papers business, of $615 per ton in the third quarter of this year
declined from $685 per ton in the third quarter of 1997 and $669 per ton last
quarter. The average price for coated free sheet papers produced at the
Courtland mill of $768 per ton this quarter declined from $835 per ton a year
ago and $791 per ton last quarter. The average price for southern market kraft
pulp of $346 per ton in the third quarter of this year declined from $414 per
ton in the third quarter of 1997 and $380 per ton last quarter. Shipments of all
pulp and paper grades for the uncoated papers business were 393,000 tons,
compared to 410,000 tons last year and 391,000 tons last quarter. Prices for all
pulp and paper grades continued to decline early in the fourth quarter. In order
to reduce inventory levels resulting from weak markets, the company plans to
reduce production in the fourth quarter by approximately 9,000 tons of pulp and
7,000 tons of uncoated free sheet papers.
The approximately break-even results for the kraft papers business were about
the same as last year but declined significantly from the operating income of
last quarter. Compared to the year-ago quarter, prices were higher for
linerboard and lower for kraft papers. The decline from last quarter was
primarily due to lower prices and shipments for kraft papers and linerboard.
Shipments of all grades of 125,000 tons declined slightly from last year and
last quarter. Prices for kraft paper and linerboard continued to decline early
in the fourth quarter. A maintenance outage is scheduled at Roanoke Rapids in
the fourth quarter.
Operating income at the Brazilian subsidiary, Champion Papel e Celulose Ltda.
("CPC"), improved from last year and was approximately even with last quarter.
The improvement from last year was principally due to the operating income from
Inpacel this year and lower manufacturing costs. The overall average price for
uncoated free sheet papers was $714 per ton this quarter, compared to $715 per
ton last year and $700 per ton last quarter. The average price of coated
groundwood papers for Inpacel was $847 per ton this quarter, compared to $905
per ton last quarter. Uncoated free sheet papers shipments of 99,000 tons were
approximately even with last year and last quarter. Coated groundwood papers
shipments of 39,000 tons this quarter declined from 43,000 tons last quarter.
10
<PAGE>
Operating income for the market pulp operations at the company's Canadian
subsidiary, Weldwood of Canada Limited ("Weldwood"), declined from last year but
improved from last quarter's approximately break-even results. The decline from
last year was mainly due to the lower price of and lower shipments of northern
bleached softwood kraft ("NBSK") pulp. The improvement from last quarter was
primarily due to the impact of scheduled maintenance outages during the second
quarter, which more than offset the lower price of NBSK pulp. The average price
for NBSK pulp of (U.S.) $360 per ton this quarter declined from $440 per ton
last year and $388 per ton last quarter. Shipments were 148,000 tons this
quarter, compared to 167,000 tons last year and 143,000 tons last quarter. Early
in the fourth quarter, pulp prices continued to weaken. In order to reduce
inventory levels resulting from weak markets, the Hinton pulp mill took ten days
of downtime in late October and early November, reducing production by
approximately 14,000 tons.
For the operations to be divested by the company, including the newsprint
business which was sold on June 1, 1998, the operating loss represented an
improvement from the operating loss of last year but a decline from the
operating income of last quarter. The improvement from last year was principally
due to higher prices for coated and uncoated groundwood papers produced at the
Deferiet mill and the operating loss last year at the newsprint business. The
decline from last quarter was mainly due to lower prices for uncoated free sheet
papers produced at the Canton mill, a market-related outage at the Canton mill
and the operating profit last quarter at the newsprint business. Shipments of
all grades were 226,000 tons this quarter, compared to 495,000 tons last year
and 391,000 tons last quarter. Lower shipments this quarter 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. Prices for all major grades continued to decline early in the fourth
quarter.
Wood Products Segment
The company's wood products segment, which includes the wood-related operations
of Weldwood and CPC, reported third quarter income from operations of $43
million, compared to $30 million a year ago and $17 million last quarter. The
improvement from last year was due to higher lumber and plywood shipments, lower
purchased wood costs in Canada and increased West Coast log sales, which more
than offset lower lumber prices. The improvement from last quarter was primarily
due to higher plywood prices, lower purchased wood costs in Canada and increased
West Coast log sales, which more than offset lower lumber shipments.
For U.S. and Canadian operations overall, the average price for plywood was
approximately even with last year and up 9% from last quarter. The average price
for lumber was 14% lower than last year and approximately even with last
quarter. Wood products shipments increased from last year but declined from last
quarter. Weldwood took market-related downtime at its five sawmills and two
plywood facilities in British Columbia during the third quarter. Early in the
fourth quarter, prices for lumber and plywood weakened somewhat.
11
<PAGE>
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 (including Inpacel) and Weldwood for the first
nine months of 1998 were (U.S.) $337 million and $253 million, respectively,
accounting for 8% and 6%, respectively, of consolidated net sales of the
company. Pre-tax income and net income of CPC (including Inpacel) for the first
nine months of 1998 were $56 million and $57 million, respectively, accounting
for 51% and 70%, respectively, of consolidated pre-tax income and net income of
the company. Weldwood recorded approximately break-even results for the first
nine months of 1998.
In response to the economic turmoil in many countries, particularly in Asia, the
government of Brazil has proposed stringent economic austerity measures intended
to support the Brazilian currency and reduce the budget deficit. These actions
include increases in interest rates and certain taxes and limitations on
government spending. If implemented, the austerity measures could result in an
economic slowdown in Brazil, with consequent adverse effects on the company's
Brazilian operations. The company is not yet in a position to determine the
extent of any such adverse effects on its Brazilian operations.
The company does not anticipate that the planned conversion to a common European
currency, the euro, by eleven of the fifteen members of the European Union on
January 1, 1999 will significantly impact the company's competitive position in
Europe or require significant modifications to its business-information systems.
For the first nine months of 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
An eighteen-month extension of the existing labor contract was ratified at the
Canton, North Carolina paper mill. The extension runs through February 2000.
At Weldwood, a new six-year labor contract is in effect at the joint venture
pulp mill at Quesnel, British Columbia. Efforts to reach a new labor agreement
continue at the Hinton, Alberta, pulp mill and wood products plant, which is
presently operating under the terms of its expired contract.
Financial Condition
General
The company's current ratio was 1.7 to 1 at September 30, 1998, compared to 1.7
to 1 at June 30, 1998 and 1.4 to 1 at year-end 1997. Total debt to total
capitalization was 45% at September 30, 1998, compared to 44% at June 30, 1998
and 45% at year-end 1997.
12
<PAGE>
Significant Balance Sheet Line Item Changes for the Nine Months Ended September
30, 1998
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 increased from December 31, 1997 primarily due to the acquisition of
Sunpine Forest Products Ltd. ("Sunpine"). The sale of the newsprint business on
June 1, 1998 was the primary reason for the decreases from December 31, 1997 in
property, plant and equipment and accumulated depreciation. Current installments
of long-term debt decreased from year-end 1997 primarily due to the timing of
payments. Accounts payable and accrued liabilities decreased from year-end 1997
mainly due to the timing of payments and the sale of the newsprint business. The
acquisition of Inpacel and its forestry affiliate in January 1998 was the
principal reason for the increase from December 31, 1997 in other liabilities
and the decrease from December 31, 1997 in the deferred income tax liability.
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 $82 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.
Cash Flows Statement - General
In the first nine 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 acquisitions). 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 $15 million in the first nine months to a total of $260 million,
$114 million of which was held by the company's Brazilian subsidiary. In the
first nine months, net long-term and short-term debt payments were $463 million.
Long-term debt (including current installments) and short-term borrowings in the
aggregate decreased by $172 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. Sunpine, whose
operations are in Alberta, Canada, was acquired in September 1998. Its
facilities include a sawmill, a lumber-treating operation, 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 the first nine 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 $60 million to a total of $115 million.
13
<PAGE>
Cash Flows Statement - Operating Activities
For the first nine months of 1998, net cash provided by operating activities of
$416 million increased from $329 million a year ago. The increase was primarily
due to net income this year compared to a net loss last year, a decrease in
receivables this year, and lower income tax payments, partially offset by an
increase in inventories this year and higher non-cash expenses for amortization
and stock-based compensation last year.
Cash Flows Statement - Investing Activities
For the first nine months of 1998, net cash provided by investing activities of
$80 million compared with net cash used in investing activities of $297 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 net cash
payments of $104 million in connection with the acquisitions of Inpacel and
Sunpine (as well as outstanding debt of $333 million and $49 million of other
liabilities).
Cash Flows Statement - Financing Activities
For the first nine months of 1998, net cash used in financing activities of $510
million increased from $92 million a year ago, primarily due to significantly
higher net payments of long-term debt (including current installments) this
year.
At September 30, 1998 and 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 $345 million at year-end 1997. At
September 30, 1998, June 30, 1998 and December 31, 1997, no notes were
outstanding under the company's U.S. bank lines of credit. Domestically, at
September 30, 1998, the company had unused bank lines of credit of $1.2 billion.
At September 30, 1998, Weldwood had unused bank lines of credit of (U.S.) $106
million.
The annual principal payment requirements under the terms of all long-term
agreements for the period from October 1 through December 31, 1998 are $5
million and for the years 1999 through 2002 are $270 million, $239 million, $239
million and $39 million, respectively.
The company currently anticipates that capital spending will be $450 million or
less in 1998.
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. 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 mill in Canton, North Carolina, including its liquid
packaging business; its mill in Hamilton, Ohio; and its mill in Deferiet, New
York.
14
<PAGE>
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 and
analysis stages are completed and the programming and testing stages are
substantially completed. The company expects to conclude the programming stage
by the end of 1998 and to finish testing by mid-1999.
With respect to the process control-systems, the planning stage is completed and
the inventory stage is virtually completed. The company expects to substantially
conclude the analysis and programming stages by the end of 1998 and 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.
15
<PAGE>
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 $8 million had been expended as of September 30, 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
might have 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 will consider 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 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.
16
<PAGE>
Contingency Plans
To date, the company's Year 2000 efforts have been devoted primarily to the
readiness program described above. The company has not yet developed contingency
plans to address and mitigate the potential risks associated with the most
reasonably likely worst-case scenario. The company 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.
The Environment
In September 1998, the United States Environmental Protection Agency (the "EPA")
issued final regulations requiring a 60% reduction in Nitrogen Oxide (NOx)
emissions in 22 states. By September 1999, the states are required to submit
plans for reducing NOx emissions from industrial sources within those states 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.
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.
17
<PAGE>
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. Without limiting the generality of the
foregoing, the disclosure 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
<PAGE>
PART II. OTHER INFORMATION
CHAMPION INTERNATIONAL CORPORATION AND SUBSIDIARIES
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.
19
<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)
Date: November 12, 1998 /s/ John M. Nimons
--------------------------- --------------------------
(Signature)
John M. Nimons
Vice President and Controller
Date: November 12, 1998 /s/ Kenwood C. Nichols
---------------------------- ---------------------------
(Signature)
Kenwood C. Nichols
Vice Chairman and Executive
Officer
20
<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.
10 -Amendment dated September 30, 1998 to Agreement dated October
18, 1990 between the Company and Mr. MacArthur.
11 -Calculation of Basic Earnings Per Common Share and Diluted
Earnings per Common Share (unaudited).
27 -Financial Data Schedule (unaudited).
21
<PAGE>
EXHIBIT 10
Champion International Corporation
One Champion Plaza
Stamford, CT 06921
September 30, 1998
Mr. Burton G. MacArthur, Jr.
1 Surf Road
Westport, CT 06880
Re: Special Provisions Relating to
Your Termination of Employment
Dear Twig:
This letter sets forth certain special provisions relating to your
termination of employment at the close of business today.
I.
Reference is made to the Non-Statutory Stock Option Agreements between you
and Champion International Corporation (the "Company") dated March 19, 1997 (the
1997 Option Agreement) and April 15, 1998 (the "1998 Option Agreement").
The 1998 Option Agreement is hereby amended to vest as of the date hereof
the stock option granted thereunder. The date on which such stock option becomes
exercisable shall remain April 15, 1999.
Each of the 1997 Option Agreement and 1998 Option Agreement (each an Option
Agreement) is hereby amended to include the following provisions, provided that
the stock option granted under the 1998 Option Agreement may not be exercised
before April 15, 1999:
(1) You shall have the right, at any time until the expiration date of the
stock option granted under such Option Agreement, to exercise the
unexercised portion thereof.
<PAGE>
Page 2
(2) If you shall die while the stock option granted under such Option
Agreement is exercisable pursuant to clause (1) immediately above, the
person or persons to whom such stock option shall have been transferred
by will or the laws of descent and distribution (including your estate
during the period of administration) shall have the right, at any time
until the expiration date of such stock option, to exercise the
unexercised portion thereof.
This letter agreement constitutes an amendment of each of the
Option Agreements. Any provisions of the Option Agreements that are
inconsistent with the provisions of this letter agreement are hereby
superseded by the provisions of this letter agreement, but the Option
Agreements in all other respects shall remain in full force and effect
without change.
II.
The Compensation and Stock Option Committee (the "Committee") of the Board
of Directors of the Company, at its meeting in January 1999, shall determine the
amount of annual bonus, if any, that would have been paid to you for 1998 if you
had remained in the Company's employment for all of 1998. In making this
determination, the Committee (i) shall apply the performance criteria that it
has adopted for the 1998 annual bonus for executive officers and (ii) shall
assume that you served as an Executive Vice President for one-third of the year
and as a Senior Vice President for two-thirds of the year. If the Committee
determines that such an annual bonus would have been paid to you, then the
Company shall pay to you an amount equal to 75% of such annual bonus.
III.
In consideration of the special benefits provided by the Company set forth
above, you agree that, without the Company's prior written consent, you shall
not compete, directly or indirectly, with the Company or any of its subsidiaries
or affiliates, including without limitation by entering into employment or
consulting arrangements with any entity that engages in such competition, for a
period of two years from the date hereof. This provision shall supersede
paragraph 3(e) of the Agreement dated October 18, 1990 between the Company and
you, as amended (the "Severance Agreement"), but the Severance Agreement in all
other respects shall remain in full force and effect without change.
<PAGE>
Page 3
IV.
Please confirm your consent to the provisions of this letter agreement by
countersigning and retaining one copy and by countersigning the other copy and
returning it, whereupon it will constitute a binding agreement between you and
the Company.
CHAMPION INTERNATIONAL CORPORATION
By /s/ Richard E. Olson
-------------------------------------
Chairman and Chief Executive Officer
ATTEST:
/s/ Lawrence A. Fox
- -------------------------------
Vice President and Secretary
CONFIRMED AND AGREED TO:
/s/ Burton G. MacArthur, Jr.
----------------------------
Burton G. MacArthur, Jr.
<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>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- ----------------------------
1998 1997 1998 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Primary earnings (loss) per common share:
Net income (loss) applicable to common stock $ 82.4 $ (28.3) $ 31.3 $ 20.2
========= ========= ========= =========
Average number of common shares outstanding 96.0 95.7 95.7 95.9
========= ========= ========= =========
Basic earnings (loss) per share $ .86 $ (.30) $ .33 $ .21
========= ========= ========= =========
Diluted earnings (loss) per common share: (1)
Net income (loss) applicable to common stock $ 82.4 $ (28.3) $ 31.3 $ 20.2
Add income effect, assuming conversion of
potentially dilutive securities -- -- -- --
--------- --------- --------- ---------
Net income (loss) on a diluted basis $ 82.4 $ (28.3) $ 31.3 $ 20.2
========= ========= ========= =========
Average number of common shares outstanding 96.0 95.7 95.7 95.9
Add common share effect, assuming conversion
of potentially dilutive securities .8 -- .7 --
--------- --------- --------- ---------
Average number of common shares outstanding
on a diluted basis 96.8 95.7 96.4 95.9
========= ========= ========= =========
Diluted earnings (loss) per share $ .85 $ (.30) $ .32 $ .21
========= ========= ========= =========
</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.
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 260
<SECURITIES> 6
<RECEIVABLES> 586
<ALLOWANCES> 38
<INVENTORY> 477
<CURRENT-ASSETS> 1,431
<PP&E> 11,072<F1>
<DEPRECIATION> 4,235
<TOTAL-ASSETS> 8,720
<CURRENT-LIABILITIES> 853
<BONDS> 3,125
0
0
<COMMON> 56
<OTHER-SE> 3,063
<TOTAL-LIABILITY-AND-EQUITY> 8,720
<SALES> 4,309
<TOTAL-REVENUES> 4,309
<CGS> 3,761
<TOTAL-COSTS> 3,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 196
<INCOME-PRETAX> 110
<INCOME-TAX> 28
<INCOME-CONTINUING> 82
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.85
<FN>
<F1>Includes timber and timberlands.
</FN>
</TABLE>
